[Federal Register Volume 63, Number 6 (Friday, January 9, 1998)]
[Proposed Rules]
[Pages 1659-1728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-282]
Federal Register / Vol. 63, No. 6 / Friday, January 9, 1998 /
Proposed Rules
[[Page 1659]]
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Parts 411, 424, 435, and 455
[HCFA-1809-P]
RIN 0938-AG80
Medicare and Medicaid Programs; Physicians' Referrals to Health
Care Entities With Which They Have Financial Relationships
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would incorporate into regulations the
provisions of sections 1877 and 1903(s) of the Social Security Act.
Under section 1877, if a physician or a member of a physician's
immediate family has a financial relationship with a health care
entity, the physician may not make referrals to that entity for the
furnishing of designated health services under the Medicare program,
unless certain exceptions apply. The following services are designated
health services:
Clinical laboratory services.
Physical therapy services.
Occupational therapy services.
Radiology services, including magnetic resonance imaging,
computerized axial tomography scans, and ultrasound services.
Radiation therapy services and supplies.
Durable medical equipment and supplies.
Parenteral and enteral nutrients, equipment, and supplies.
Prosthetics, orthotics, and prosthetic devices and
supplies.
Home health services.
Outpatient prescription drugs.
Inpatient and outpatient hospital services.
In addition, section 1877 provides that an entity may not present
or cause to be presented a Medicare claim or bill to any individual,
third party payer, or other entity for designated health services
furnished under a prohibited referral, nor may the Secretary make
payment for a designated health service furnished under a prohibited
referral.
Section 1903(s) of the Social Security Act extended aspects of the
referral prohibition to the Medicaid program. It denies payment under
the Medicaid program to a State for certain expenditures for designated
health services. Payment would be denied if the services are furnished
to an individual on the basis of a physician referral that would result
in the denial of payment for the services under Medicare if Medicare
covered the services to the same extent and under the same terms and
conditions as under the State plan.
This proposed rule incorporates these statutory provisions into the
Medicare and Medicaid regulations and interprets certain aspects of the
law. The proposed rule is based on the provisions of section 1903(s)
and section 1877 of the Social Security Act, as amended by section
13562 of the Omnibus Budget Reconciliation Act of 1993, and by section
152 of the Social Security Act Amendments of 1994.
DATES: Comments will be considered if we receive them at the
appropriate address, as provided below, no later than 5 p.m. on March
10, 1998. We will also consider comments that we received in response
to the final rule with comment period, ``Physician Financial
Relationships With, and Referrals to, Health Care Entities That Furnish
Clinical Laboratory Services and Financial Relationship Reporting
Requirements,'' which we published in the Federal Register on August
14, 1995 (60 FR 41914).
ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: HCFA-1809-P, P.O. Box 26688,
Baltimore, MD 21207.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses:
Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Comments may also be submitted electronically to the following e-
mail address: hcfa1809p.hcfa.gov. E-mail comments must include the full
name and address of the sender and must be submitted to the referenced
address in order to be considered. All comments must be incorporated in
the e-mail message because we may not be able to access attachments.
Because of staffing and resource limitations, we cannot accept comments
by facsimile (FAX) transmission. In commenting, please refer to file
code HCFA-1809-P. Comments received timely will be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, in Room 309-G of the
Department's offices at 200 Independence Avenue, SW., Washington, DC,
on Monday through Friday of each week from 8:30 a.m. to 5 p.m. (phone:
(202) 690-7890).
Copies: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
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This Federal Register document is also available from the Federal
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Government Printing Office. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web; the Superintendent of Documents home page address
is http://www.access.gpo.gov/su_docs/, by using local WAIS client
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(no password required). Dial-in users should use communications
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guest (no password required).
FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer (410) 786-4620.
SUPPLEMENTARY INFORMATION: To assist readers in referencing sections
contained in this proposed rule, we are providing the following table
of contents:
Table of Contents
I. Background
A. Problems Associated with Physician Self-referrals
B. Legislation Designed to Address Self-referrals and Similar
Practices
1. Legislative history of section 1877
2. Recent provisions and how they relate to each other
C. HCFA and OIG Regulations Relating to Section 1877
II. Sections 1877 and 1903(s) of the Act and the Provisions of This
Proposed Rule
A. Reflecting the Statutory Changes in Section 1877
1. General prohibition
2. Definitions
a. Referral, referring physician
[[Page 1660]]
b. Designated health services
c. Financial relationship
d. Compensation arrangement, remuneration
3. General Exceptions to the Prohibition on Physician Referrals
a. Exception--physician services
b. Exception--in-office ancillary services
c. Exception--certain prepaid health plans
d. Other exceptions
4. Exceptions That Apply Only to Certain Ownership or Investment
Interests
a. Exception--certain investment securities and shares
b. Exception--ownership or investment interest in certain health
care facilities
5. Exceptions That Apply Only to Certain Compensation
Arrangements
a. Exception--rental of office space
b. Exception--rental of equipment
c. Exception--bona fide employment relationship
d. Exception--personal service arrangements
e. Exception--remuneration unrelated to the provision of
designated health services
f. Exception--physician recruitment
g. Exception--isolated transaction
h. Exception--certain group practice arrangements with a
hospital
i. Exception--payments by a physician for items and services
6. Requirements Related to the ``Substantially All'' Test
7. Reporting Requirements
8. Sanctions
9. Additional Definitions
a. ``Clinical laboratory services''
b. ``Entity''
c. ``Hospital''
d. ``HPSA''
e. ``Immediate family member'' or ``member of a physician's
immediate family''
f. ``Laboratory''
g. ``Plan of care''
10. Conforming Changes
11. Editorial Changes
B. Applying The Referral Prohibition to the Medicaid Program:
Section 1903(s) of the Act and the Provisions of this Proposed Rule
III. Interpretations of Sections 1877 and 1903(s) of the Act
A. Definitions
1. Designated health services
a. Clinical laboratory services
b. Physical therapy services (including speech-language
pathology services)
c. Occupational therapy services
d. Radiology services, including magnetic resonance imaging,
computerized axial tomography scans, ultrasound services, and
radiation therapy services and supplies
e. Durable medical equipment and supplies
f. Parenteral and enteral nutrients, equipment, and supplies
g. Prosthetics, orthotics, and prosthetic devices
h. Home health services
i. Outpatient prescription drugs
j. Inpatient hospital services
k. Outpatient hospital services
2. Direct supervision
3. Entity
4. Fair market value
5. Financial relationship
6. Group practice
7. Referral
8. Remuneration
B. General Prohibition on Referrals
C. General Exceptions That Apply to Ownership or Investment
Interests and to Compensation Arrangements
1. Exception for physician services
2. Exception for in-office ancillary services
a. The site requirement
b. The billing requirement
c. Designated health services that do not trigger the in-office
exception
3. Exception for services provided under prepaid health plans
a. Physicians, suppliers, and providers that contract with
prepaid organizations
b. Managed care organizations under the Medicaid program
c. Evolving structures of integrated delivery and other health
care delivery systems
d. Designated health services furnished under a demonstration
project or waiver
D. Exceptions That Apply Only to Ownership or Investment
Interests
1. Exception for ownership in publicly traded securities
2. Exception for hospital ownership
E. Exceptions That Apply Only to Compensation Arrangements
1. A new exception for all compensation arrangements that meet
certain standards
2. A new exception for certain forms of ``de minimis''
compensation
3. The ``volume or value of referrals'' standard
4. The commercial reasonableness standard
5. The Secretary's authority to create additional requirements
6. Exception for bona fide employment relationships
7. Exception for personal services arrangements
8. Exception for remuneration unrelated to the provision of
designated health services
9. Exception for a hospital's payments for physician recruitment
10. Exception for certain group practice arrangements with a
hospital
11. Exception for payments by a physician for items and services
F. The Reporting Requirements
1. Which financial relationships must be reported
2. What entities outside the United States must report
G. How the Referral Prohibition Applies to the Medicaid Program
1. Who qualifies as a ``physician'' for purposes of section
1903(s)
2. How the referral prohibition and sanctions affect Medicaid
providers
3. How the referral rules apply when Medicaid-covered designated
health services differ from the services covered under Medicare
4. How the reporting requirements apply under the Medicaid
program
IV. Our Responses to Questions About the Law
A. Definitions
1. Compensation arrangement
What is an ``indirect'' compensation arrangement?
Which exceptions apply in indirect situations?
2. Entity
What are the characteristics of an ``entity'' that provides for
the furnishing of designated health services?
When is an entity furnishing, or providing for the furnishing
of, designated health services?
3. Financial relationship
How do equity and debt qualify as ownership?
Is membership in a nonprofit corporation an ownership or
investment interest?
Do stock options and nonvested interests constitute ownership?
4. Group practice
What is the ``full range of services'' test?
5. Immediate family member or member of a physician's immediate
family
How does the prohibition affect a physician's referrals to
immediate family members?
If one member of a group practice cannot make a referral to an
entity, are all other group practice physicians also precluded?
6. Remuneration
Do payments qualify as remuneration only if they result in a net
benefit?
B. General prohibition--What constitutes a prohibited referral
Does the prohibition apply only if a physician refers directly
to a particular related entity?
When is the owner of a designated health services provider
considered as equivalent to that provider?
Has a physician made a referral to a particular entity if
another individual directs the patient there?
How will HCFA interpret situations in which it is not clear
whether a physician has referred to a particular entity?
C. General Exceptions That Apply to Ownership or Investment
Interests and to Compensation Arrangements
1. The in-office ancillary exception
Can a physician supply crutches as in-office ancillary services?
2. Exception for services furnished by organizations operating
under prepaid plans.
Can a physician refer non-enrollees to a related prepaid
organization or to its physicians and providers?
3. Other permissible exceptions for financial relationships that
do not pose a risk of program or patient abuse.
Should situations that meet a safe harbor under the anti-
kickback statute be automatically excepted?
D. Exceptions That Apply Only to Ownership or Investment
Interests
1. Exception for ownership in publicly traded securities or
mutual funds
Does the exception for publicly traded securities apply to stock
options?
2. Exception for services provided by a hospital in which a
physician or family member has an interest
Can a physician or family member own an interest in a chain of
hospitals?
[[Page 1661]]
E. Exceptions That Apply Only to Compensation Arrangements
1. Compensation arrangements in general
Can a lease or arrangement for items or services have a
termination clause?
Will a physician's referrals be prohibited if an entity pays for
certain incidental benefits?
2. Exception for agreements involving the rental of office space
or equipment
Can a lessee sublet office space or equipment?
Does the lease exception apply to any kind of lease covering
space or equipment?
Can a lease provide for payment based on how often the equipment
is used?
3. Exception for personal services arrangements
How does the physician incentive plan exception apply when an
enrolling entity contracts with a group practice?
V. Regulatory Impact Statement
A. Background
B. Anticipated Effects and Alternatives Considered
1. Physicians
2. Entities, including hospitals
C. Conclusion
VI. Collection of Information Requirements
VII. Response to Comments
I. Background
A. Problems Associated With Physician Self-referrals
When a patient seeks medical care, his or her physician has a major
role in determining the kind and amount of health care services the
patient will receive. Having a financial interest in an entity that
furnishes these services can affect a physician's decision about what
medical care to furnish a patient and who should furnish the care. In
fact, numerous studies have raised serious concerns about the referral
patterns of physicians who make self-referrals (referrals to entities
with which they or their family members have financial relationships).
In June 1988, Congress mandated that the Office of Inspector
General (OIG) of the Department of Health and Human Services conduct a
study on physician ownership of and compensation from health care
entities to which the physicians make referrals. The OIG reported that
patients of referring physicians who owned or invested in independent
clinical laboratories received 45 percent more laboratory services than
all Medicare patients in general. The OIG found similar effects on
utilization associated with the existence of compensation arrangements
between laboratories and physicians. Patients of these physicians used
32 percent more laboratory services than all Medicare patients in
general. (``Financial Arrangements Between Physicians and Health Care
Businesses: Report to Congress,'' Office of Inspector General, DHHS,
pages 18 and 21 (May 1989)). Based in part on the results of this
study, Congress enacted, in November of 1989, section 1877 of the
Social Security Act (the Act). (Unless otherwise indicated, references
to sections of the law below are to sections of the Act.) We discuss
section 1877 in detail below.
Subsequent studies have supported the OIG findings on self-
referrals. The studies indicate that other types of services are also
associated with higher utilization and increased costs. For example, in
1991 the Florida Cost Containment Board (the Board) analyzed the effect
of joint venture arrangements on the following aspects of health care:
access, costs, charges, utilization, and quality. A joint venture was
defined as any ownership or investment interest or compensation
arrangement involving physicians (or any health care professionals who
make referrals) and an entity providing health care goods or services.
The Board found that doctor-owned clinical laboratories, diagnostic
imaging centers, and physical therapy and rehabilitation centers
performed more procedures on a per-patient basis and charged higher
prices than nondoctor-affiliated facilities. The Board concluded that
there might be referral problems or the results did not allow clear
conclusions for ambulatory surgical centers, durable medical equipment
suppliers, home health agencies, and radiation therapy centers. The
study revealed that little or no impact existed for acute care
hospitals and nursing homes. (``Joint Ventures Among Health Care
Providers in Florida,'' State of Florida Health Care Cost Containment
Board (Sept. 1991)).
Additionally, in 1994, the General Accounting Office (GAO) released
an analysis of 2.4 million diagnostic imaging services ordered by
17,900 physicians in the State of Florida. The GAO found that Florida
physicians with a financial interest in joint venture imaging centers
had higher referral rates for almost all types of imaging services than
other Florida physicians. The differences in the referral rates were
greatest for costly high-technology imaging services. For example,
owners of joint ventures ordered 54 percent more magnetic resonance
imaging scans for patients than did non-owners.
The GAO study also found that Florida physicians, group practices,
or other practice affiliations with imaging facilities in their own
offices ordered imaging tests more frequently than physicians who
referred their patients to imaging facilities outside their practices.
The in-practice imaging rates were about 3 times higher for magnetic
resonance imaging scans; about 2 times higher for computed tomograph
scans; 4.5 to 5.1 times higher for ultrasound, echocardiography, and
diagnostic nuclear medicine imaging; and about 2 times higher for
complex and simple X-rays. (GAO Report, ``Medicare: Referrals to
Physician-owned Imaging Facilities Warrant HCFA's Scrutiny,'' No. B-
253835; pages 2, 3, and 10, October 1994.)
Several other studies, appearing in the New England Journal of
Medicine and the Journal of the American Medical Association, have
found increased utilization for a variety of services when the
physicians have a financial relationship with the entity to which they
refer their patients. (See, for example, Bruce J. Hillman, M.D., and
others, ``Physicians' Utilization and Charges for Outpatient Diagnostic
Imaging in a Medicare Population,'' Journal of the American Medical
Association, Vol. 268, No. 15 (Oct. 21, 1992), pp. 2050-2054; Hemenway
D., Killen A., and others, ``Physicians' Responses to Financial
Incentives--Evidence From a For-profit Ambulatory Care Center,'' New
England Journal of Medicine, Vol. 322, No. 15 (April 12, 1990), pp.
1059-1063; Alex Swedlow and others, ``Increased Costs and Rates of Use
in the California Workers' Compensation System as a Result of Self
Referral by Physicians,'' New England Journal of Medicine, Vol. 327,
No. 21 (Nov. 19, 1992), pp. 1502-1506.)
B. Legislation Designed to Address Self-referrals and Similar Practices
1. Legislative History of Section 1877
Section 6204 of the Omnibus Budget Reconciliation Act of 1989 (OBRA
'89), Public Law 101-239, enacted on December 19, 1989, added section
1877 to the Social Security Act. In general, section 1877 as it read
under OBRA '89 provided that, if a physician (or an immediate family
member of a physician) had a financial relationship with a clinical
laboratory, that physician could not make a referral to the laboratory
entity for the furnishing of clinical laboratory services for which
Medicare might otherwise pay. (For the sake of brevity, whenever we
refer to ``immediate family member'' or ``family member,'' this means
``a member of the physician's immediate family.'') It also provided
that the laboratory could not present or cause to be presented a
Medicare claim or bill to any individual, third party payer, or other
entity for clinical laboratory services furnished under the prohibited
referral. Additionally, it required a refund of any
[[Page 1662]]
amount collected from an individual as a result of a billing for an
item or service furnished under a prohibited referral.
The statute defined ``financial relationship'' as an ownership or
investment interest in the entity or a compensation arrangement between
the physician (or immediate family member) and the entity. The statute
provided a number of exceptions to the prohibition. Some of these
exceptions applied to both ownership/investment interests and
compensation arrangements, while other exceptions applied to only one
or the other of these. Additionally, the statute imposed reporting
requirements and provided for sanctions.
Section 4207(e) of the Omnibus Budget Reconciliation Act of 1990
(OBRA '90), Public Law 101-508, enacted on November 5, 1990, amended
certain provisions of section 1877 to clarify definitions and reporting
requirements relating to physician ownership and referral and to
provide an additional exception to the prohibition.
Section 13562 of the Omnibus Budget Reconciliation Act of 1993
(OBRA '93), Public Law 103-66, enacted on August 10, 1993, extensively
revised section 1877. It modified the prior law to apply to referrals
for ten ``designated health services'' in addition to clinical
laboratory services, modified some exceptions, and added new ones.
Section 152 of the Social Security Act Amendments of 1994 (SSA '94),
Public Law 103-432, enacted on October 31, 1994, amended the list of
designated services, effective January 1, 1995. (Section II of this
preamble contains a listing of the designated health services.) It also
changed the reporting requirements in section 1877(f) and amended some
of the effective dates of the OBRA '93 provisions.
Section 13624 of OBRA '93 extended aspects of the referral
prohibition to the Medicaid program. It amended section 1903 of the Act
by adding a new paragraph (s). This provision denies Federal financial
participation (FFP) payment under the Medicaid program to a State for
certain expenditures for designated health services. A State cannot
receive FFP for designated health services furnished to an individual
on the basis of a physician referral that would result in a denial of
payment under the Medicare program if Medicare covered the services to
the same extent and under the same terms and conditions as under the
State Medicaid plan. Section 13624 also specified that the reporting
requirements of section 1877(f) and the civil money penalty provision
of section 1877(g)(5) (which relates to reporting) apply to a provider
of a designated health service for which payment may be made under
Medicaid in the same manner as they apply to a provider of a designated
health service for which payment may be made under Medicare.
We describe the provisions of section 1877, as amended, in detail
in part A of section II of this preamble. We discuss section 1903(s) in
part B of section II.
2. Recent Provisions and How They Relate to Each Other
Congress has enacted into law several provisions governing
financial relationships between entities furnishing health care
services and those health care professionals who refer patients to
them. For example, the ``anti-kickback statute'' provides criminal
penalties for individuals or entities that knowingly and willfully
offer, pay, solicit, or receive remuneration to induce the furnishing
of items or services covered by Medicare or State health care programs
(including Medicaid, and any State program receiving funds under titles
V or XX of the Act). (This provision was originally enacted in 1972 as
part of the Social Security Amendments of 1972, Public Law 92-603. It
was revised in 1977 (in Public Law 95-142) to read as it does today. It
was subsequently recodified by the Medicare and Medicaid Program
Patient Protection Act of 1987 (Public Law 100-93). It currently
appears at 42 U.S.C. 1320a-7b(b)(2) and section 1128B(b) of the Social
Security Act.)
Both the anti-kickback statute and section 1877 address Congress'
concern that health care decisionmaking can be unduly influenced by a
profit motive. When physicians have a financial incentive to refer,
this incentive can affect utilization, patient choice, and competition.
Physicians can overutilize by ordering items and services for patients
that, absent a profit motive, they would not have ordered. A patient's
choice can be affected when physicians steer patients to less
convenient, lower quality, or more expensive providers of health care,
just because the physicians are sharing profits with, or receiving
remuneration from, the providers. And lastly, where referrals are
controlled by those sharing profits or receiving remuneration, the
medical marketplace suffers since new competitors can no longer win
business with superior quality, service, or price. Although the
purposes behind the anti-kickback statute and section 1877 are similar,
it is important to analyze them separately. In other words, to operate
lawfully under Medicare and Medicaid, one must comply with both
statutes.
Anti-kickback statute: The anti-kickback statute is a criminal
statute that applies to those who knowingly and willfully offer, pay,
solicit, or receive remuneration to induce the furnishing of items or
services under Medicare or State health care programs (including
Medicaid). The offense is classified as a felony and is punishable by
fines of up to $25,000 and imprisonment for up to 5 years. Violation of
the statute is also a basis for exclusion from Medicare and Medicaid.
Since the statute on its face is very broad, a number of health
care entities expressed concern after its enactment that many
relatively innocuous, or even beneficial, commercial arrangements are
technically covered by the statute and can therefore lead to criminal
prosecution. Congress addressed this fact by enacting section 14 of the
Medicare and Medicaid Patient and Program Protection Act of 1987. This
provision requires the Department of Health and Human Services to issue
``safe harbors,'' specifying those payment practices that will not be
subject to criminal prosecution under the anti-kickback statute and
will not provide a basis for an exclusion. The safe harbors are not
mandatory in the sense that one is required to fit into a safe harbor.
The safe harbors exist to provide absolute immunity to those
arrangements.
Section 1877: Section 1877 prohibits physicians from referring
Medicare patients to certain entities for designated health services if
the physician (or an immediate family member) has a financial
relationship with the entity, unless the relationship fits into an
exception. Certain aspects of section 1877 also affect Medicaid
referrals. While there are other remedies, section 1877 is primarily a
payment ban that is effective regardless of intent. Many of the
exceptions in section 1877 are similar to the safe harbors under the
anti-kickback statute, such as exceptions for certain employees,
personal service arrangements, and space and equipment rentals. The
exceptions are different in the sense that, under section 1877, a
physician is required to meet an exception if the physician wants to
make an otherwise prohibited referral, while under the anti-kickback
statute, a health care provider is not required to meet a safe harbor.
That is, if a provider meets a safe harbor, it is automatically
protected from prosecution. If a provider does not meet a safe harbor,
it may still be in compliance with the anti-kickback statute and
therefore be safe from prosecution, but that
[[Page 1663]]
determination would be based on a case-by-case assessment of the facts.
C. HCFA and OIG Regulations Relating to Section 1877
On December 3, 1991, we issued an interim final rule with comment
period (56 FR 61374) setting forth the reporting requirements under
section 1877(f). On March 11, 1992, we published a proposed rule (57 FR
8588) setting forth the self-referral prohibition and exceptions to the
prohibition in section 1877, as these provisions were amended by OBRA
'90, and as they relate to referrals for clinical laboratory services.
On October 20, 1993, the OIG published a proposed rule (58 FR
54096) that would set forth in regulations the penalty provisions
specified in sections 1877(g)(3) and (g)(4). The final rule with
comment period implementing the civil money penalty provisions was
published on March 31, 1995 (60 FR 16580).
On August 14, 1995, we published a final rule with comment period
in the Federal Register (60 FR 41914) that incorporated into
regulations the provisions of section 1877 that relate to the
prohibition on physician referrals for clinical laboratory services.
The August 1995 final rule contains revisions to the March 11, 1992
proposal based on comments submitted by the public. Further, it
incorporates the amendments and exceptions created by OBRA '93 and the
amendments in SSA '94 that relate to referrals for clinical laboratory
services.
The final rule addresses only those changes that had a retroactive
effective date of January 1, 1992; it does not incorporate those
modifications made to section 1877 that became effective for referrals
made after December 31, 1994. (Even though the August 1995 final rule
incorporates OBRA '93 and SSA '94 provisions, it generally only
reiterates them without interpreting them. We interpreted the new
provisions only in a few instances in which it was necessary to do so
in order to implement the statute at all.) The final rule also responds
to comments received on the December 1991 interim final rule covering
the reporting requirements. In addition, it revises the regulations
established by that rule to incorporate the amendments to section
1877(f) made by SSA '94, to apply to any future reporting that we
require.
II. Sections 1877 and 1903(s) of the Act and the Provisions of This
Proposed Rule
Many of the provisions covered below are discussed in detail in the
preamble of either the March 1992 proposed rule or the August 1995
final rule in the context of referrals for clinical laboratory
services. We are proposing, as discussed below, to leave a number of
these provisions unchanged except to apply them to the additional
designated health services. Readers who desire more background
information on these provisions are referred to the earlier documents.
We are also proposing to amend the provisions of the August 1995
final regulation to reflect other changes in section 1877 that were
enacted in OBRA '93 or in SSA '94 and became effective on January 1,
1995. In part A of this section, we discuss how we have altered the
final regulation to apply it to the additional designated health
services, and to reflect the statutory changes in section 1877 that
took effect on January 1, 1995. Part B of this section covers the
changes made by section 13624 of OBRA '93 to the Medicaid program in
section 1903(s) of the Act. Section 13624 applies aspects of the
referral prohibition to the Medicaid program for referrals made on or
after December 31, 1994. We discuss in part B how we propose to amend
the Medicaid regulations to reflect the statutory changes.
In section III of this preamble we discuss in detail how we propose
to interpret any provisions in sections 1877 and 1903(s) that we
believe are ambiguous, incomplete, or that provide the Secretary with
discretion. We also discuss policy changes or clarifications we propose
to make to the August 1995 rule. In section IV, we present some of the
most common questions concerning physician referrals that we received
from the health care community. We include in section IV our
interpretations of how the law applies in the situations described to
us.
A. Reflecting the Statutory Changes in Section 1877
1. General Prohibition
With certain exceptions, section 1877(a)(1)(A) prohibits a
physician from making a referral to an entity for the furnishing of
designated health services, for which Medicare may otherwise pay, if
the physician (or an immediate family member) has a financial
relationship with that entity. This provision as it related to clinical
laboratory services was incorporated into our regulations at
Sec. 411.353(a) by the August 1995 final rule. We would revise
Sec. 411.353(a) to apply the prohibition to referrals for designated
health services.
Section 1877(a)(1)(B) prohibits an entity from presenting, or
causing to be presented, either a Medicare claim or a bill to any
individual, third party payor, or other entity for designated health
services furnished under a prohibited referral. This provision, with
regard to clinical laboratory services, was incorporated into our
regulations at Sec. 411.353(b) by the August 1995 final rule. We would
revise Sec. 411.353(b) to apply it to claims or bills for any of the
designated health services.
2. Definitions
For purposes of section 1877, the statute provides definitions of a
number of terms. Because they are important to understanding the
general prohibition set forth above, we discuss certain of these
definitions immediately below. The statutory definitions of other terms
are presented elsewhere in this preamble when relevant.
a. Referral, referring physician
As defined by section 1877(h)(5), a ``referral'' means the
following:
The request by a physician for an item or service for
which payment may be made under Medicare Part B, including the request
by a physician for a consultation with another physician (and any test
or procedure ordered by, or to be performed by (or under the
supervision of) that other physician).
The request or establishment of a plan of care by a
physician that includes the furnishing of designated health services.
Section 1877(h)(5)(C), however, provides an exception to this
definition in the case of a request by a pathologist for clinical
diagnostic laboratory tests and pathological examination services, (and
as added by OBRA '93) a request by a radiologist for diagnostic
radiology services, and a request by a radiation oncologist for
radiation therapy if the services are furnished by (or under the
supervision of) the pathologist, radiologist, or radiation oncologist,
respectively, as a result of a consultation requested by another
physician.
The August 1995 final rule incorporated section 1877(h)(5), with
regard to clinical laboratory services, into our regulations by
defining ``referral'' at Sec. 411.351. We interpreted a referral as the
request by a physician for, or the ordering of, any item or service
covered under Medicare Part B. We interpreted the referral for other
items or services as a request by a physician that includes the
provision of laboratory services or the establishment of a plan of care
by a physician that includes the provision of laboratory services. We
also included the statutory exception for certain clinical diagnostic
laboratory tests and pathological examination services requested by a
pathologist.
[[Page 1664]]
This proposed rule would revise the definition of ``referral'' to
apply it to referrals for designated health services. In accordance
with section 1877(h)(5)(C), we would also add the exception to the
definition described above relating to a request by a radiologist for
diagnostic radiology services and a request by a radiation oncologist
for radiation therapy. In addition, we would make a technical change in
this section. We would remove the phrase ``any item or service'' and
replace it with the phrase ``any service.'' Because the term
``services'' is defined in our regulations (at Sec. 400.202) to include
``items,'' the phrase ``any item or service'' contains a redundancy.
Hereinafter, unless we specifically state otherwise, we use the term
``service(s)'' as including ``item(s).'' We have also made several
other changes to the definition that are discussed in section III of
this preamble.
Also, in accordance with section 1877(h)(5), the August 1995 final
rule at Sec. 411.351 defined ``referring physician'' as a physician (or
group practice) who makes a referral as defined in Sec. 411.351. This
proposed rule would retain this definition, but with one amendment that
is described in section IV.A.5 of this preamble.
b. Designated health services
Section 1877(h)(6) defines ``designated health services'' as any of
the following services:
Clinical laboratory services.
Physical therapy services.
Occupational therapy services.
Radiology services, including magnetic resonance imaging,
computerized axial tomography scans, and ultrasound services.
Radiation therapy services and supplies.
Durable medical equipment and supplies.
Parenteral and enteral nutrients, equipment, and supplies.
Prosthetics, orthotics, and prosthetic devices and
supplies.
Home health services.
Outpatient prescription drugs.
Inpatient and outpatient hospital services.
This proposed rule would incorporate this definition of
``designated health services'' into our regulations at Sec. 411.351,
except that, for purposes of definition, we would combine radiology
services and radiation therapy services and supplies. Also, we propose
to define each of these designated health services in Sec. 411.351. We
explain our definitions and interpretations in section III of this
preamble.
c. Financial relationship
Section 1877(a)(2) describes a financial relationship between a
physician (or an immediate family member) and an entity as being an
ownership or investment interest in the entity or a compensation
arrangement between a physician (or immediate family member) and the
entity. (We discuss compensation arrangements in the next section). The
statute provides that an ownership or investment interest may be
established through equity, debt, or other means. The statute further
specifies that an ownership or investment interest includes an interest
in an entity that holds an ownership or investment interest in any
entity furnishing designated health services.
The August 1995 final rule incorporated this definition into our
regulations, with regard to clinical laboratory services, at
Sec. 411.351. That section specifies that a financial relationship
includes an interest in an entity that holds an ownership or investment
interest in any entity providing laboratory services. This proposed
rule would revise the definition to specify that a financial
relationship includes an interest in an entity that holds an ownership
or investment interest in any entity providing designated health
services. We have also made certain other changes described in section
III of this preamble.
d. Compensation arrangement, remuneration
Section 1877(h)(1)(A) defines a ``compensation arrangement'' as any
arrangement involving any remuneration between a physician (or
immediate family member) and an entity, other than an arrangement
involving only remuneration described in section 1877(h)(1)(C). Section
1877(h)(1)(B) defines ``remuneration'' to include ``any remuneration,
directly or indirectly, overtly or covertly, in cash or in kind.''
Section 1877(h)(1)(C) provides that a compensation arrangement does not
include the following types of remuneration:
The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
The provision of items, devices, or supplies that are used
solely to--
+ Collect, transport, process, or store specimens for the entity
providing the item, device, or supply; or
+ Order or communicate the results of tests or procedures for the
entity.
A payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual
who is covered by a policy with the insurer or by the self-insured
plan, if--
+ The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
plan and the physician;
+ The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual;
+ The amount of the payment is set in advance, does not exceed fair
market value, and is not determined in a manner that takes into account
directly or indirectly the volume or value of any referrals; and
+ The payment meets any other requirements the Secretary may impose
by regulation as needed to protect against Medicare program or patient
abuse.
The above definitions of a ``compensation arrangement'' and
``remuneration'' were incorporated into our regulations at Sec. 411.351
by the August 1995 final rule. In the definition of ``compensation
arrangement,'' we clarified that such an arrangement could be either
direct or indirect. This proposed rule would retain that definition.
Also, because the statute defines ``remuneration'' only by referring to
how the remuneration might be made (for example, in cash or in kind),
we interpreted remuneration to mean any payment, discount, forgiveness
of debt, or other benefit. This proposed rule would retain the
definition of ``remuneration,'' with one change. We will consider that
payments made by an insurer to a physician are not ``remuneration'' if
they meet the requirements in the statute, and if the amount of the
payment does not take into account directly or indirectly other
business generated between the parties. We explain this change in
section III.E.3 of this preamble.
3. General Exceptions to the Prohibition on Physician Referrals
Section 1877(b) provides for general exceptions to the prohibition
on referrals. (General exceptions are exceptions that apply to both
ownership/investment interests and compensation arrangements.)
Because the first two of these exceptions apply to a ``group
practice,'' we begin with a discussion of ``group practice'' as defined
in section 1877. A ``group practice,'' as defined in section
1877(h)(4), is a group of two or more physicians legally organized as a
[[Page 1665]]
partnership, professional corporation, foundation, not-for-profit
corporation, faculty practice plan, or similar association, that meets
the following conditions:
Each physician member of the group furnishes substantially
the full range of services that the physician routinely furnishes,
including medical care, consultation, diagnosis, or treatment, through
the joint use of shared office space, facilities, equipment, and
personnel.
Substantially all of the services of the physician members
of the group are furnished through the group, are billed under a
billing number assigned to the group, and amounts so received are
treated as receipts of the group (the ``substantially all'' test, which
we discuss below). (The predecessor provision, that is, the provision
as it read before January 1, 1995, required that the services be billed
in the name of the group (not that they be billed under a billing
number assigned to the group).)
The overhead expenses of and the income from the practice
are distributed in accordance with methods previously determined.
Except for profits and productivity bonuses that meet the
conditions described below, no physician member of the group directly
or indirectly receives compensation based on the volume or value of
referrals by the physician. (Added by OBRA '93 to be effective January
1, 1995.)
Members of the group personally conduct at least 75
percent of the physician-patient encounters of the group practice.
(Added by OBRA '93 to be effective January 1, 1995.)
The group practice complies with all other standards
established by the Secretary in regulations.
With regard to the above definition, section 1877(h)(4)(B)
establishes the following ``Special Rules'':
A physician in a group practice may be paid a share of the
overall profits of the group, or a productivity bonus based on services
personally performed or services incident to the personally performed
services, so long as the share or bonus is not determined in any manner
that is directly related to the volume or value of referrals by the
physician. (Added by OBRA '93 to be effective for referrals made on or
after January 1, 1995.)
In the case of a faculty practice plan associated with a
hospital, institution of higher education, or medical school with an
approved medical residency training program in which physician members
may furnish a variety of different specialty services and furnish
professional services both within and outside the group, as well as
perform other tasks such as research, the conditions contained in the
definition of ``group practice'' apply only with respect to the
services furnished within the faculty practice plan.
Our August 1995 final rule established a definition of ``group
practice'' at Sec. 411.351 based on the statute as it read effective
January 1, 1992. In implementing the statute, we interpreted the
provision requiring that ``substantially all'' of the services of the
physician members be furnished through the group as meaning 75 percent
of the patient care services of the group practice. (We discuss
additional requirements and definitions related to the ``substantially
all'' test in section II.A.6. of this preamble.) As stated above, OBRA
'93 made certain revisions to the definition of a group practice,
effective January 1, 1995. This proposed rule would revise the
definition of ``group practice'' at Sec. 411.351 to conform with the
changes made by OBRA '93. Therefore we would do the following:
Remove the requirement that substantially all of the
services must be billed in the name of the group. We would specify,
instead, that substantially all of the services must be billed under a
billing number assigned to the group.
Add the above provisions restricting payments made to
physicians based on volume or value of referrals, with the exception
for profits and productivity bonuses.
Add that members of the group must personally conduct at
least 75 percent of the physician-patient encounters of the group
practice.
In addition, for reasons explained in the August 1995 final rule,
the definition would continue to provide that the ``substantially all''
test does not apply to any group practice that is located solely in a
health professional shortage area (HPSA). Also, for group practices
located outside of a HPSA, any time spent by group practice members
providing services in a HPSA should not be used to calculate whether
the group practice located outside the HPSA has met the ``substantially
all'' test. We have also made several other changes to the definition
of a group practice, which are discussed later in this preamble.
a. Exception--physician services
Section 1877(b)(1) specifies that the prohibition does not apply to
services furnished on a referral basis if the services are physician
services, as defined in section 1861(q), furnished personally by (or
under the personal supervision of) another physician in the same group
practice as the referring physician. Our August 1995 final rule
incorporated this provision at Sec. 411.355(a), covering physician
services as we have defined them at Sec. 410.20(a). This proposed rule
retains Sec. 411.355(a).
b. Exception--in-office ancillary services
Section 1877(b)(2) specifies that the prohibition does not apply to
referrals for certain in-office ancillary services. We consider in-
office ancillary services to be all designated health services that can
be provided in an in-office setting, except durable medical equipment
(excluding infusion pumps) and parenteral and enteral nutrients,
equipment, and supplies. (In other words, referrals for infusion pumps
can qualify for the exception. However, the exception does not apply to
referrals for the in-office provision of other durable medical
equipment and parenteral and enteral nutrients, equipment, and
supplies.) To qualify for the exception, an ownership or investment
interest in the services must meet any requirements the Secretary sets
forth in regulations to protect against Medicare program or patient
abuse. Additionally, the ancillary services must meet the following
requirements:
The services must be furnished personally by the referring
physician, a physician who is a member of the same group practice as
the referring physician, or an individual who is directly supervised by
the physician or by another physician in the group practice. Also, the
services must be furnished in either of the following:
+ A building in which the referring physician (or another physician
who is a member of the same group practice) furnishes physician
services unrelated to the furnishing of designated health services.
(The predecessor provision read ``* * * unrelated to the furnishing of
clinical laboratory services.'')
+ In the case of a referring physician who is a member of a group
practice, in another building that is used by the group practice for
either of the following:
++ Furnishing some or all of the group's clinical laboratory
services.
++ The centralized provision of the group's designated health
services (other than clinical laboratory services). (This provision,
which was added by OBRA '93, became effective January 1, 1995.) Note
that OBRA '93 also contains an undesignated paragraph following this
provision that reads as follows: ``unless the Secretary determines
other terms and conditions under which the
[[Page 1666]]
provision of such services does not present a risk of program or
patient abuse, * * *.'' As discussed in the August 1995 final rule, it
is our interpretation that this paragraph is intended to provide for
the possibility of our liberalizing the conditions described in section
1877(b)(2)(A)(ii)(II); that is, the conditions concerning the provision
of services in ``another building'' that is used by a group practice.
The ancillary services must be billed by one of the
following:
+ The physician performing or supervising the services.
+ A group practice of which the physician is a member under a
billing number assigned to the group practice. (Prior to January 1,
1995, this provision did not require that the services be billed under
a group practice's billing number.)
+ An entity that is wholly owned by the physician or group
practice.
The August 1995 final rule incorporated into our regulations an in-
office ancillary services exception that was based on the statutory
provision, as it was in effect on January 1, 1992, at Sec. 411.355(b).
This proposed rule would revise Sec. 411.355(b) to conform it to the
current statutory provision. That is, it would--
Specify that the exception does not apply to durable
medical equipment (other than infusion pumps) or to parenteral and
enteral nutrients, equipment, and supplies; and
Revise paragraph (b)(2) of Sec. 411.355 to require that
the services be furnished in one of the following locations:
+ A building in which the referring physician (or another physician
who is a member of the same group practice) furnishes physician
services unrelated to the furnishing of designated health services.
+ A building that is used by the group practice for the provision
of some or all of the group's clinical laboratory services.
+ A building that is used by the group practice for the centralized
provision of the group's designated health services (other than
clinical laboratory services).
Indicate that when a group practice bills for ancillary
services, the services must be billed under a billing number assigned
to the group practice.
We have also made several other changes to the in-office ancillary
services exception that we discuss in section III of this preamble.
For purposes of the in-office ancillary services exception, the
August 1995 final rule also defined ``direct supervision'' at
Sec. 411.351. The rule defines this term as supervision by a physician
who is present in the office suite and immediately available to provide
assistance and direction throughout the time services are being
performed. This proposed rule would retain that definition, with
several changes that are meant to clarify the meaning of the term
``present in the office suite.'' We discuss these changes in section
III of this preamble.
c. Exception--certain prepaid health plans
Section 1877(b)(3) specifies that the prohibition on referrals does
not apply to services furnished by certain prepaid health plans. To
qualify for the exception, the services must be furnished by a
Federally-qualified health maintenance organization (within the meaning
of section 1310(d) of the Public Health Services Act) to its enrollees
or by a prepaid health care organization to its enrollees under a
contract or agreement with Medicare under one of the following
statutory authorities:
Section 1876, which authorizes us to enter into contracts
with health maintenance organizations and competitive medical plans to
furnish covered items and services on a risk-sharing or reasonable cost
basis.
Section 1833(a)(1)(A), which authorizes payment for
Medicare Part B services to prepaid health plans on a reasonable cost
basis.
Section 402(a) of the Social Security Amendments of 1967
or section 222(a) of the Social Security Amendments of 1972, both of
which authorize us to conduct demonstration projects involving payments
on a prepaid basis.
The August 1995 final rule incorporated section 1877(b)(3) into our
regulations at Sec. 411.355(c). We are proposing to set forth at
Sec. 435.1012(b) an exception for services provided by organizations
analogous to those cited above to enrollees under the Medicaid program.
We discuss this proposal in section III of this preamble.
d. Other exceptions
Effective January 1, 1995, section 1877(b)(4) authorizes the
Secretary to provide in regulations for additional exceptions for
financial relationships, beyond those specified in the statute, if she
determines that they do not pose a risk of Medicare program or patient
abuse. The Secretary determined, based on the rationale explained in
the August 1995 final rule, that referrals for certain clinical
laboratory services furnished in an ambulatory surgical center or end
stage renal disease facility, or by a hospice do not pose a risk of
Medicare program or patient abuse. The Secretary found no risk of abuse
when payments for these services are included in the ambulatory
surgical center payment rate, the end stage renal disease composite
payment rate, or as part of the hospice payment rate, respectively.
Therefore, the August 1995 final rule incorporated an exception for
those services into our regulations at Sec. 411.355(d). This proposed
rule would retain that provision, with a change discussed below.
Because this proposed rule covers 10 additional designated health
services, this exception would now apply to any of the designated
health services provided in the same manner.
As we noted in the August 1995 final rule, we excepted the listed
services because they are furnished as part of a composite rate that
cannot vary in response to utilization. We are amending Sec. 411.355(d)
to allow the Secretary to except services furnished under other payment
rates that the Secretary determines provide no financial incentive for
either underutilization or overutilization, or any other risk of
program or patient abuse. We are specifically soliciting comments on
whether there are analogous composite rates under the Medicaid program
that are similarly guaranteed not to result in program or patient
abuse. Commenters who are interested in this issue should demonstrate
why they believe a particular kind of service should qualify for the
exception.
4. Exceptions That Apply Only to Certain Ownership or Investment
Interests
The statute also provides that certain ownership or investment
interests do not constitute a ``financial relationship'' for purposes
of the section 1877 prohibition on referrals.
a. Exception--certain investment securities and shares
Under section 1877(c), the prohibition on referrals does not apply
in the case of ownership by a physician (or immediate family member) of
the following:
Investment securities (including shares or bonds,
debentures, notes, or other debt instruments) that may be purchased on
terms generally available to the public and that are--
Securities listed on the New York Stock Exchange, the
American Stock Exchange, or any regional exchange in which quotations
are published on a daily basis, or foreign securities listed on a
recognized foreign, national, or regional exchange in which quotations
are published on a daily basis, or
[[Page 1667]]
Securities traded under an automated interdealer quotation
system operated by the National Association of Securities Dealers, and
In a corporation that had, at the end of the corporation's
most recent fiscal year or on average during the previous 3 fiscal
years, stockholder equity exceeding $75 million. (OBRA '93 also
included, until January 1, 1995, securities in a corporation that, at
the end of the corporation's most recent fiscal year, had total assets
exceeding $100 million.)
Ownership of shares in a regulated investment company as
defined in section 851(a) of the Internal Revenue Code of 1986 if the
company had, at the end of the company's most recent fiscal year or on
average during the previous 3 fiscal years, total assets exceeding $75
million.
The August 1995 final rule incorporated the above provision into
our regulations at Secs. 411.356 (a) and (b). This proposed rule would
remove from Sec. 411.356(a) that portion of the provision that expired
on January 1, 1995, and would make certain other changes described in
section III of this preamble.
b. Exception--ownership or investment interest in certain health care
facilities
Section 1877(d) provides additional exceptions to the prohibition
on physician referrals for certain designated health services furnished
by three types of facilities if the physician (or immediate family
member) has an ownership or investment interest in the facilities:
Designated health services furnished by a hospital located
in Puerto Rico.
Designated health services furnished in a rural area by an
entity if substantially all of the designated health services furnished
by the entity are furnished to individuals residing in a rural area. A
``rural area'' is defined in section 1886(d)(2)(D) as meaning an area
outside of a Metropolitan Statistical Area. (Until January 1, 1995,
this provision read as follows: ``In the case of clinical laboratory
services if the laboratory furnishing the services is in a rural area
(as defined in section 1886(d)(2)(D)).'')
Designated health services furnished by a hospital outside
of Puerto Rico if the referring physician is authorized to perform
services at the hospital and the ownership or investment interest is in
the hospital itself (and not merely in a subdivision of the hospital).
The August 1995 final rule incorporated section 1877(d), as it
related to clinical laboratory services, into our regulations at
Sec. 411.356(c). In establishing the rural provider exception in the
regulations, we required that referred laboratory testing be performed
on the premises of the rural laboratory (if not performed on the
premises, the laboratory performing the testing was required to bill
the Medicare program directly). As described in the preamble to the
proposed rule covering referrals for clinical laboratory services (57
FR 8598 (March 11, 1992)), we believe that Congress included this
exception in order to benefit Medicare beneficiaries who live in rural
areas where laboratories may not be available without the financial
support of local physicians. We included the additional requirement to
prevent situations in which physicians who own an urban laboratory set
up a storefront or ``shell'' laboratory with a rural address in order
to use the rural exception. In this scenario, the urban owner could
make referrals to the rural laboratory, which would in turn refer the
tests to the physician's urban laboratory. Alternatively, urban
laboratories with physician owners could set up rural laboratories for
the purpose of performing tests referred by the physician owners for
their urban patients.
Because section 1877(d)(2) has been amended to apply only to
designated health services that are actually furnished in a rural area
(they cannot be transferred to an urban provider), and only by
providers that provide designated health services to a predominantly
rural population, we no longer believe that the extra requirement is
necessary. We are therefore proposing to remove it from
Sec. 410.356(c).
The August 1995 final regulation adopted the OBRA '93 standard that
substantially all of the designated health services furnished by the
rural entity are furnished to individuals residing in a rural area. We
interpreted ``substantially all'' as meaning at least 75 percent of the
services. In addition, Sec. 411.356(c) provided an exception, until
January 1, 1995, for an ownership or investment interest in a hospital
if the physician's ownership or investment interest does not relate
(directly or indirectly) to the furnishing of clinical laboratory
services. This exception was based on section 1877(b)(4) as it read
under OBRA '90. OBRA '93, as amended by SSA '94, retained this
provision only until January 1, 1995.
This proposed rule would revise Sec. 411.356(c) to reflect the
statutory provision as it became effective on January 1, 1995 and to
apply Sec. 411.356(c) to entities providing any of the designated
health services. We would change the requirement that a rural entity be
located in a rural area to instead except referrals for designated
health services furnished in a rural area by an entity that furnishes
substantially all of its designated health services to individuals
residing in a rural area. We would continue to interpret
``substantially all'' as being at least 75 percent of the services
furnished by the entity. In addition, this proposed rule would remove
the exception that expired on January 1, 1995.
5. Exceptions That Apply Only to Certain Compensation Arrangements
Section 1877(e) provides that certain compensation arrangements are
not considered a ``financial relationship'' for purposes of the
prohibition on physician referrals.
a. Exception--rental of office space
Section 1877(e)(1)(A) provides an exception for payments made by a
lessee to a lessor for the use of premises if the following conditions
are met:
The lease is in writing, signed by the parties, and
specifies the premises covered by the lease.
The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
rental or lease. Also, the space is used exclusively by the lessee when
being used by the lessee, except that the lessee may make payments for
the use of space consisting of common areas under certain conditions.
That is, acceptable payments for common areas cannot exceed the
lessee's pro rata share of expenses for that space based upon the ratio
of the space used exclusively by the lessee to the total amount of
space (other than common areas) occupied by all persons using the
common areas.
The lease provides for a term of rental or lease of at
least 1 year.
The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
The lease would be commercially reasonable even if no
referrals were made between the parties.
The lease meets any other requirements the Secretary may
impose by regulation, as needed to protest against Medicare program or
patient abuse.
``Fair market value'' is defined by section 1877(h)(3) as the value
in arm's-length transactions, consistent with the general value market,
and, with respect
[[Page 1668]]
to rentals or leases, the value of rental property for general
commercial purposes (not taking into account its intended use) and, in
the case of a lease of space by a lessor that is a potential source of
patient referrals to the lessee, not adjusted to reflect the additional
value the prospective lessee or lessor would attribute to the proximity
or convenience to the lessor. (Meeting the fair market value standard
is a requirement for several of the other compensation-related
exceptions in the statute. We discuss these other exceptions later in
this preamble.)
The August 1995 final rule incorporated the provisions of section
1877(e)(1)(A) into our regulations at Sec. 411.357(a), without imposing
any additional requirements. This proposed rule would retain
Sec. 411.357(a). In addition, the final rule incorporated the
definition of ``fair market value'' in Sec. 411.351. This proposed rule
would retain the definition. Also, since the statute requires that fair
market value be ``consistent with the general market value,'' we have
added to the definition an explanation of ``general market value.''
b. Exception--rental of equipment
Section 1877(e)(1)(B) provides an exception for payments made by a
lessee of equipment to the lessor for the use of the equipment if the
following conditions are met:
The lease is set out in writing, signed by the parties,
and specifies the equipment covered by the lease.
The equipment rented or leased does not exceed that which
is reasonable and necessary for the legitimate business purposes of the
rental or lease and is used exclusively by the lessee when being used
by the lessee.
The lease provides for a term of rental or lease of at
least 1 year.
The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
The lease would be commercially reasonable even if no
referrals were made between the parties.
The lease meets any other requirements the Secretary may
impose by regulation as needed to protect against Medicare program or
patient abuse.
The August 1995 final rule incorporated this provision into our
regulations at Sec. 411.357(b), without imposing any additional
requirements. This proposed rule would retain Sec. 411.357(b), with
minor editorial changes.
c. Exception--bona fide employment relationship
Under section 1877(e)(2), any amount paid by an employer to a
physician (or an immediate family member of the physician) who has a
bona fide employment relationship with the employer for the provision
of services does not constitute a compensation arrangement for purposes
of the prohibition if the following conditions are met:
The employment is for identifiable services.
The amount of the remuneration under the employment is
consistent with the fair market value of the services and (except for
certain productivity bonuses) is not determined in a manner that takes
into account (directly or indirectly) the volume or value of any
referrals by the referring physician.
The remuneration is made in accordance with an agreement
that would be commercially reasonable even if no referrals were made to
the employer.
The employment meets any other requirements the Secretary
may impose by regulation as needed to protect against Medicare program
or patient abuse.
The statute provides that, under this exception, a productivity
bonus that is based on services performed personally by the physician
(or immediate family member) does not violate the ``volume or value of
referrals'' standard.
``Employee'' is defined in section 1877(h)(2) as an individual who
would be considered to be an employee of the entity under the usual
common law rules that apply in determining employer-employee
relationships, as applied for purposes of section 3121(d)(2) of the
Internal Revenue Code of 1986.
The August 1995 final rule incorporated the provisions of section
1877(e)(2) into our regulations at Sec. 411.357(c), without imposing
any additional requirements. This proposed rule would retain
Sec. 411.357(c), but with additional requirements that we describe in
section III. The final rule also incorporated the definition of
``employee'' into our regulations at Sec. 411.351. Again, this proposed
rule would retain that definition.
d. Exception--personal service arrangements
Under section 1877(e)(3)(A), remuneration from an entity under an
arrangement (including remuneration for specific physician services
furnished to a nonprofit blood center) does not constitute a
compensation arrangement for purposes of the prohibition on referrals
if the following conditions are met:
The arrangement is set out in writing, signed by the
parties, and specifies the services covered by the arrangement.
The arrangement covers all of the services to be furnished
by the physician (or immediate family member) to the entity.
The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement.
The term of the arrangement is for at least 1 year.
The compensation to be paid over the term of the
arrangement is set in advance, does not exceed fair market value, and,
except in the case of a physician incentive plan (as described below)
is not determined in a manner that takes into account the volume or
value of any referrals or other business generated between the parties.
The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates State or Federal law.
The arrangement meets any other requirements the Secretary
may impose by regulation as needed to protect against program or
patient abuse.
The August 1995 final rule incorporated section 1877(e)(3)(A) into
our regulations at Sec. 411.357(d)(1), without imposing any additional
requirements. This proposed rule would retain Sec. 411.357(d)(1), with
several changes that we discuss in section III of this preamble.
Section 1877(e)(3)(B)(i) provides that, in the case of a physician
incentive plan between a physician and an entity, the compensation may
be determined in a manner (through a withhold, capitation, bonus, or
otherwise) that takes into account, directly or indirectly, the volume
or value of any referrals or other business generated between the
parties, if the plan meets the following requirements:
No specific payment is made (directly or indirectly) under
the plan to a physician or a physician group as an inducement to reduce
or limit medically necessary services provided with respect to a
specific individual enrolled with the entity.
If the plan places a physician or a physician group at
substantial financial risk as determined by the Secretary under section
1876(i)(8)(A)(ii), the plan
[[Page 1669]]
complies with any requirements the Secretary may impose under that
section.
Upon request by the Secretary, the entity provides the
Secretary with access to descriptive information regarding the plan, in
order to permit the Secretary to determine whether the plan is in
compliance with the requirements listed above.
(Note: Sections 1876(i)(8) and 1903(m)(2)(A) require that physician
incentive plans be regulated. On March 27, 1996, we published, at 61 FR
13430, a final rule with comment period that implemented this
legislation for purposes of both the Medicare and Medicaid programs by
establishing requirements at Sec. 417.479 (for Medicare) and at
Sec. 434.70 (for Medicaid). A final rule amending the final rule with
comment was published on December 31, 1996 at 61 FR 69034.)
The August 1995 final rule incorporated section 1877(e)(3)(B)(i)
into our regulations at Sec. 411.357(d)(2). Because of the
establishment at Sec. 417.479 of requirements concerning incentive
plans, this proposed rule would revise Sec. 411.357(d)(2). It would
replace the reference to requirements established by the Secretary
under section 1876(i)(8)(A)(ii) of the Act with a reference to the
requirements of Sec. 417.479. We would also reverse the order of
paragraphs (ii) and (iii) of Sec. 411.357(d)(2) because we believe this
order reflects a more logical progression. In addition, we would delete
existing Sec. 411.357(d)(3), which contains a time-sensitive provision
related to personal services arrangements that, based on the statute,
is now obsolete.
Section 1877(e)(3)(B)(ii) defines a ``physician incentive plan'' as
any compensation arrangement between an entity and a physician or
physician group that may directly or indirectly have the effect of
reducing or limiting services provided with respect to individuals
enrolled with the entity. The August 1995 final rule incorporated this
definition into our regulations at Sec. 411.351. This proposed rule
would retain that definition.
e. Exception--remuneration unrelated to the provision of designated
health services
Prior to OBRA '93, section 1877(b)(4) provided an exception for any
financial relationship with a hospital if the financial relationship
does not relate to the provision of clinical laboratory services. OBRA
'93 eliminated this provision, but SSA '94 reinstated it until January
1, 1995. OBRA '93 also added paragraph (e)(4) to section 1877,
retroactive to January 1, 1992. Under section 1877(e)(4), remuneration
provided by a hospital to a physician that does not relate to the
furnishing of designated health services does not constitute a
compensation arrangement for purposes of the prohibition on referrals.
Section 1877(e)(4) differs from the predecessor provision at section
1877(b)(4) in that it retains only the compensation aspect of the
exception. In addition, it applies only to remuneration from a hospital
to a physician (that is, it does not include remuneration from a
physician to a hospital) if the remuneration does not relate to the
furnishing of designated health services. Also, the exception does not
apply to remuneration from a hospital to a member of a physician's
immediate family.
The August 1995 final rule incorporated the provisions of sections
1877(b)(4) and (e)(4) as they were effective on January 1, 1992, and as
they relate to compensation, into our regulations at Sec. 411.357(g).
This proposed rule would revise Sec. 411.357(g) by removing that
portion that was based on the predecessor provision of section
1877(b)(4), since that provision has expired. We would also revise that
portion of Sec. 411.357(g) that was based on section 1877(e)(4) by
changing the reference to remuneration not related to the furnishing of
clinical laboratory services to remuneration not related to the
furnishing of designated health services. We have also made several
other changes described in section III of this preamble.
f. Exception--physician recruitment
Section 1877(e)(5) provides that remuneration provided by a
hospital to a physician to induce the physician to relocate to the area
serviced by the hospital in order to be a member of the hospital's
medical staff does not constitute a compensation arrangement for
purposes of the prohibition on referrals if the following conditions
are met:
The physician is not required to refer patients to the
hospital.
The amount of remuneration under the arrangement is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician.
The arrangement meets any other requirements the Secretary
may impose by regulation as needed to protect against program or
patient abuse.
The August 1995 final rule incorporated the provisions of section
1877(e)(5) into our regulations at Sec. 411.357(e), with additional
requirements. Under our authority to impose additional requirements, we
specified that the arrangement and its terms must be in writing and
signed by both parties. We also specified that the physician must not
be precluded from establishing staff privileges at another hospital or
referring business to another entity. This proposed rule would retain
Sec. 411.357(e), with a minor editorial change.
g. Exception--isolated transaction
Section 1877(e)(6) provides that an isolated transaction, such as a
one-time sale of property or a practice, is not considered to be a
compensation arrangement for purposes of the prohibition on referrals
if the following conditions are met:
The amount of remuneration for the transaction is
consistent with fair market value and is not determined, directly or
indirectly, in a manner that takes into account the volume or value of
referrals by the physician.
The remuneration is provided under an agreement that would
be commercially reasonable even if no referrals were made to the
entity.
The arrangement meets any other requirements the Secretary
may impose by regulation as needed to protect against Medicare program
or patient abuse.
The August 1995 final rule incorporated the provisions of section
1877(e)(6) into our regulations at Sec. 411.357(f), with additional
requirements. Under our authority to impose additional requirements, we
specified that there can be no additional transactions between the
parties for 6 months after the isolated transaction, except for
transactions that are specifically excepted under one of the other
exceptions provided in the regulations. This proposed rule would retain
Sec. 411.357(f), with a minor editorial change. In addition, we
established definitions of ``transaction'' and ``isolated transaction''
at Sec. 411.351. We defined a ``transaction'' as an instance or process
of two or more persons doing business. We defined an ``isolated
transaction'' as one involving a single payment between two or more
persons. We specified that a transaction that involves long-term or
installment payments is not considered an isolated transaction. This
proposed rule would retain those definitions, with the clarification
that ``transactions'' can involve persons or entities.
h. Exception--certain group practice arrangements with a hospital
Section 1877(e)(7) provides that an arrangement between a hospital
and group under which designated health services are furnished by the
group but
[[Page 1670]]
are billed by the hospital does not constitute a compensation
arrangement for purposes of the prohibition on referrals if the
following conditions are met:
With respect to the services furnished to a hospital
inpatient, the arrangement is for the provision of inpatient hospital
services under section 1861(b)(3).
The arrangement began before December 19, 1989, and has
continued in effect without interruption since that date.
With respect to the designated health services covered by
the arrangement, substantially all of those services furnished to
patients of the hospital are furnished by the group under the
arrangement.
The arrangement is set out in a written agreement that
specifies the services to be furnished by the parties and the amount of
compensation.
The compensation paid over the term of the agreement is
consistent with fair market value, and the compensation per unit of
services is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
The compensation is provided under an agreement that would
be commercially reasonable even if no referrals were made to the
entity.
The arrangement between the parties meets any other
requirements the Secretary may impose by regulation as needed to
protect against Medicare program or patient abuse.
The August 1995 final rule incorporated the provisions of section
1877(e)(7), as they relate to clinical laboratory services, into our
regulations at Sec. 411.357(h), without imposing any additional
requirements. This proposed rule would revise Sec. 411.357(h) to apply
the provisions to the designated health services, and would make
certain minor changes described in section III.
i. Exception--payments by a physician for items and services
Section 1877(e)(8) provides that the following do not constitute
compensation arrangements for purposes of the prohibition on referrals:
Payments made by a physician to a laboratory in exchange
for the provision of clinical laboratory services.
Payments made by a physician to an entity as compensation
for items or services other than clinical laboratory services if the
items or services are furnished at fair market value.
The August 1995 final rule incorporated the provisions of section
1877(e)(8) into our regulations at Sec. 411.357(i). This proposed rule
would retain Sec. 411.357(i), but clarify that ``services'' as used in
the provision means services of any kind (not just those defined as
``services'' for purposes of the Medicare program in Sec. 400.202).
6. Requirements Related to the ``Substantially All'' Test
As mentioned earlier, the definition of ``group practice'' in
section 1877(h)(4) contains a requirement that substantially all of the
services of the physicians who are members of the group be furnished
through the group. In the August 1995 final rule, we interpreted
``substantially all'' to mean at least 75 percent of the total patient
care services of the group practice members. Further, we defined
``members of the group,'' at Sec. 411.351, as physician partners and
full-time and part-time physician contractors and employees during the
time they furnish services to patients of the group practice that are
furnished through the group and are billed in the name of the group.
This proposed rule would revise the definition of ``members of the
group'' to exclude independent contractors, to count physician owners
other than partners, and to count physicians as members during the time
they furnish ``patient care services'' to the group. We discuss these
changes in section III of this preamble.
The August 1995 final rule defined ``patient care services,'' at
Sec. 411.351, as any tasks performed by a group practice member that
address the medical needs of specific patients, regardless of whether
they involve direct patient encounters. We included, as examples, the
services of physicians who do not directly treat patients, time spent
by a physician consulting with other physicians, and time spent
reviewing laboratory tests. Under Sec. 411.351, ``patient care
services'' are measured by the total patient care time each member
spends on these services.
This proposed rule would retain the definition of patient care
services, but would broaden the definition to include tasks that
benefit patients in general or the group practice. We are also
proposing minor changes that we believe are necessary to clarify what
tasks qualify under the definition. We describe these changes in
section III of this preamble.
The August 1995 final rule also required, at Sec. 411.360, that a
group practice submit a written statement to its carrier annually to
attest that, during the most recent 12-month period (calendar year,
fiscal year, or immediately preceding 12-month period) 75 percent of
the total patient care services of group practice members was furnished
through the group, was billed under a billing number assigned to the
group, and the amounts so received were treated as receipts of the
group.
Section 411.360 also provides that a newly-formed group practice
(one in which physicians have recently begun to practice together) or
any group practice that has been unable in the past to meet the
definition of a group practice as set forth at section 1877(h)(4)
must--
Submit a written statement to attest that, during the next
12-month period (calendar year, fiscal year, or next 12 months), it
expects to meet the 75 percent standard and will take measures to
ensure the standard is met; and
At the end of the 12-month period, submit a written
statement to attest that it met the 75 percent standard during that
period, billed for those services under a billing number assigned to
the group, and treated amounts received for those services as receipts
of the group. If the group did not meet the standard, any Medicare
payments made to the group during the 12-month period that were
conditioned on the group meeting the standard are overpayments.
In addition, Sec. 411.360 specifies that--
Once any group has chosen to use its fiscal year, the
calendar year, or some other 12-month period, the group practice must
adhere to this choice.
The attestation must contain a statement that the
information furnished in the attestation is true and accurate and must
be signed by a group representative.
Any group that intends to meet the definition of a group
practice in order to qualify for one of the exceptions provided in the
regulations must submit the required attestation to its carrier by
December 12, 1995.
The August 1995 final rule contains a discussion of the rationale
for the above provisions. On December 11, 1995, we published in the
Federal Register, at 60 FR 63438, a final rule that delays the date by
which a group of physicians must file an attestation statement. The
December final rule amended Sec. 411.360 to require that a group that
intends to meet the definition of a group practice must submit an
attestation statement to its carrier no later than 60 days after the
group receives attestation instructions from its carrier. The preamble
to the December rule points out that a group can regard itself as a
group practice in the interim period before it receives attestation
instructions, provided the group believes that it meets the
[[Page 1671]]
definition of a group practice under Sec. 411.351.
This proposed rule would retain Sec. 411.360, as amended by the
December 1995 final rule. We propose to make several minor changes to
clarify that a group is only required to complete an attestation if it
wishes to qualify as a group practice for purposes of meeting an
exception that requires group status. We are also changing the
provision to require that the attestation be signed by an authorized
representative of the group practice who is knowledgeable about the
group, and to contain a statement that the information furnished in the
attestation is true and accurate to the best of the representative's
knowledge and belief. The proposed provision also states that any
person filing a false statement will be subject to applicable criminal
and civil penalties.
7. Reporting Requirements
Prior to SSA '94, section 1877(f) included the requirement that
each entity furnishing Medicare covered items or services must provide
us with certain information concerning its ownership or investment
arrangements. In our December 3, 1991 interim final rule with comment
period, published in the Federal Register at 56 FR 61374, we extended
the rule to include certain information concerning an entity's
compensation arrangements for the reasons discussed in the preamble of
that rule.
Section 1877(f) also gave the Secretary the option of waiving the
reporting requirements, for certain entities that do not furnish
clinical laboratory services, in all but 10 States. The interim final
rule discussed our decision to waive the reporting requirements for all
entities (other than those providing clinical laboratory services) in
States other than the minimum 10 States specified in the statute. In
the 10 States, we were required to obtain data from at least six
specific types of entities. We gathered data from these providers in
the fall of 1991.
Section 152 of SSA '94 amended section 1877(f) extensively. It
extended the reporting requirements to specifically cover information
not only about an entity's ownership or investment interests, but about
compensation arrangements as well. SSA '94 also eliminated the
Secretary's authority to waive the reporting requirements for certain
States or services, although the Secretary continues to have the right
to determine that an entity is not subject to the reporting
requirements because it provides services covered under Medicare very
infrequently. In addition, the requirements continue to not apply to
designated health services furnished outside of the United States.
Section 1877(f) allows the Secretary to gather the information in such
form, manner, and at such times as she specifies.
We discussed the provisions of section 1877(f), as they relate to
clinical laboratories and as they read under OBRA '90, in detail in the
December 1991 interim final rule. The August 1995 final rule adopted
the provisions of the interim final rule with revisions that reflect
the changes made by SSA '94. While the August 1995 final rule reflects
the amendments made to section 1877(f), it did not interpret these
amendments. This proposed rule retains the reporting requirements as
they appear in the August 1995 final rule, subject to certain
interpretations we have added in section III of this preamble. These
requirements are set forth at existing Sec. 411.361, and we would apply
them to any future reporting we may require.
8. Sanctions
Prior to OBRA '93, section 1877(g)(1) required a denial of payment
for a clinical laboratory service that was provided in violation of the
referral prohibition. Paragraph (g)(2) of section 1877 required the
timely refund of amounts collected in violation of the prohibition.
OBRA '93 extended these provisions to apply to all of the designated
health services, effective January 1, 1995. The August 1995 final rule
incorporated these provisions as they relate to clinical laboratory
services into our regulations at Secs. 411.353(c) and (d),
respectively. This proposed rule would revise Secs. 411.353(c) and (d)
to extend their application to the other designated health services.
Paragraph (g)(3) of section 1877 provides for the imposition of a
civil money penalty of $15,000 per service and exclusion from Medicare
and any State health care program, including Medicaid, for any person
who presents or causes to be presented a bill or claim the person knows
or should know is for a service for which payment may not be made under
Sec. 1877(a). The same penalty applies for a service for which a person
has not made a refund as described in paragraph (g)(2).
Paragraph (g)(4) provides for a $100,000 civil money penalty and
the same exclusion penalty for any physician or other entity that
enters into a circumvention scheme that the physician or entity knows
or should know has a principal purpose of assuring referrals by the
physician to a particular entity which, if the physician made the
referrals directly, would be in violation of section 1877. A proposed
rule published by the Office of Inspector General on October 20, 1993
(58 FR 54096) addresses sections 1877(g)(3) and (g)(4). That rule
became final on March 31, 1995 (60 FR 16580).
Paragraph (g)(5) of section 1877 provides for possible exclusion
and a civil money penalty of not more than $10,000 per day for each day
in which a person has failed to meet a reporting requirement in section
1877(f). The December 1991 interim final rule covering the reporting
requirements incorporated this provision into our regulations at
Sec. 411.361(g), and the August 1995 final rule redesignated
Sec. 411.361(g) as Sec. 411.361(f). This proposed rule would retain
Sec. 411.361(f).
9. Additional Definitions
In implementing provisions of section 1877 as they were effective
on January 1, 1992, the August 1995 final rule established definitions
of the following terms (which were not discussed above) at
Sec. 411.351:
a. Clinical laboratory services means the biological,
microbiological, serological, chemical, immunohematological,
biophysical, cytological, pathological, or other examination of
materials derived from the human body for the purpose of providing
information for the diagnosis, prevention, or treatment of any disease
or impairment of, or the assessment of the health of, human beings.
These examinations also include procedures to determine, measure, or
otherwise describe the presence or absence of various substances or
organisms in the body.
b. Entity means a sole proprietorship, trust, corporation,
partnership, foundation, not-for-profit corporation, or unincorporated
association. For reasons discussed in section III of this preamble,
this proposed rule would revise the definition of ``entity'' to include
a physician's sole proprietorship and any practice of multiple
physicians that provides for the furnishing of a designated health
service.
c. Hospital means any separate legally-organized operating entity
plus any subsidiary, related, or other entities that perform services
for the hospital's patients and for which the hospital bills. However,
we have excluded from this definition entities that perform services
for hospital patients ``under arrangements'' with the hospital. We
propose to amend this definition to make it clear that ``hospitals''
include regular hospitals, psychiatric hospitals, and rural primary
care hospitals.
[[Page 1672]]
d. HPSA means, for purposes of the August 1995 final rule, an area
designated as a health professional shortage area under section
332(a)(1)(A) of the Public Health Service Act for primary medical care
professionals (in accordance with the criteria specified in 42 CFR part
5, Appendix A, Part I--Geographic Areas). In addition, with respect to
dental, mental health, vision care, podiatric, and pharmacy services,
an HPSA means an area designated as a health professional shortage area
under section 332(a)(1)(A) of the Public Health Service Act for dental
professionals, mental health professionals, vision care professionals,
podiatric professionals, and pharmacy professionals, respectively.
e. Immediate family member or ``member of a physician's immediate
family'' means husband or wife; natural or adoptive parent, child, or
sibling; stepparent, stepchild, stepbrother, or stepsister; father-in-
law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law; grandparent or grandchild; and spouse of a grandparent
or grandchild.
f. Laboratory means an entity furnishing biological,
microbiological, serological, chemical, immunohematological,
hematological, biophysical, cytological, pathological, or other
examination of materials derived from the human body for the purpose of
providing information for the diagnosis, prevention, or treatment of
any disease or impairment of, or the assessment of the health of, human
beings. These examinations also include procedures to determine,
measure, or otherwise describe the presence or absence of various
substances or organisms in the body. Entities only collecting or
preparing specimens (or both) or only serving as a mailing service and
not performing testing are not considered laboratories.
g. The August 1995 final rule defined a ``plan of care'' as the
establishment by a physician of a course of diagnosis or treatment (or
both) for a particular patient, including the ordering of items or
services. For reasons discussed earlier, this proposed rule would
remove the words ``items or'' from this definition.
(We explain our rationale for some of these definitions in the
March 1992 proposed rule, and we explain the remainder in the August
1995 final rule.) We would extend these definitions to apply to
referrals involving any of the designated health services.
We have made some changes to the definitions in addition to those
noted above. Any changes in definitions that we have included in this
proposed rule do not result from changes in the legislation, but
reflect our most recent interpretations of the statute. In section III
of this preamble, we discuss in detail how we propose to interpret
provisions in section 1877 and in section 1903(s) that we have either
not interpreted in the August 1995 final rule or that we believe we
must reconsider in the context of the designated health services. In
section III, we also define or interpret terms that are present in the
statute (such as each of the designated health services) as well as
include new definitions that we propose to add to the rule to enable us
to implement other parts of the statute.
10. Conforming Changes
We propose to revise existing Secs. 411.1(a) and 411.350(a), which
set forth the statutory basis for the provisions in part 411, subpart
A, and part 411, subpart J, respectively, by changing the reference to
``clinical laboratory services'' to ``designated health services.''
11. Editorial Changes
In addition to the proposed changes discussed above, we would also
make a number of editorial changes to subpart J of part 411. These
changes would not affect the substance of the provisions. As an example
of the type of change we would make, in Sec. 411.355(a), we would add
the words ``of this chapter'' after the reference to Sec. 410.20(a).
B. Applying The Referral Prohibition to the Medicaid Program: Section
1903(s) of the Act and the Provisions of This Proposed Rule
Title XIX of the Act authorizes Federal grants to States to
establish Medicaid programs to provide medical assistance to needy
individuals. Medicaid programs are administered by the States in
accordance with Federal laws and regulations. State Medicaid agencies
operate their programs in accordance with a Medicaid State plan that is
approved by us.
While Medicaid programs are administered by the States, they are
jointly financed by the Federal and State governments. The Federal
government pays its share of medical assistance expenditures to the
State on a quarterly basis according to a formula described in sections
1903 and 1905(b). The amount of the Federal share for medical
assistance is called Federal financial participation (FFP). Before the
enactment of OBRA '93, there were no statutory or regulatory
requirements concerning the availability of FFP for Medicaid services
resulting from physician referrals.
Section 13624 of OBRA '93, entitled ``Application of Medicare Rules
Limiting Certain Physician Referrals,'' added a new paragraph (s) to
section 1903 of the Act. This new provision extends aspects of the
Medicare prohibition on physician referrals to Medicaid. Specifically,
this provision restricts FFP for expenditures for medical assistance
under the State plan consisting of designated health services, as
defined under section 1877(h)(6), that are furnished to an individual
on the basis of a physician referral that would result in the denial of
payment under the Medicare program if Medicare covered the services to
the same extent and under the same terms and conditions as under a
State's Medicaid plan.
This proposed rule would revise Sec. 435.1002, ``FFP for
services,'' to reflect section 1903(s). We would specify in
Sec. 435.1002(a) that the availability of FFP for expenditures for
Medicaid services is subject to the limitations set forth in new
Sec. 435.1012. We would entitle Sec. 435.1012 as ``Limitation on FFP
Related to Prohibited Referrals.'' The proposed new provision states
that we will deny FFP for designated health services (as defined in
Sec. 431.351) furnished under the State plan to an individual on the
basis of a physician referral that would result in the denial of
payment under the Medicare program if Medicare covered the services to
the same extent and under the same terms and conditions as under the
State plan. We believe that certain aspects of section 1903(s) require
our interpretation, and we discuss these aspects in section III of this
preamble.
Section 4314 of the Balanced Budget Act of 1997 established section
1877(g)(6) of the Act. It requires that the Secretary issue written
advisory opinions to outside parties concerning whether the referral of
a Medicare patient by a physician for designated health services (other
than clinical laboratory services) is prohibited under the physician
referral provisions in section 1877. Because the Medicare rules can
affect whether a State will receive FFP for certain services, States,
as well as individuals and entities that provide services under the
Medicaid program, may be interested in the advisory opinion process. As
a result, we have included in Sec. 435.1012(c) a cross reference to the
Medicare regulations that set forth the specific procedures we will use
in issuing advisory opinions.
Section 1903(s) also specifies that the reporting requirements of
section
[[Page 1673]]
1877(f) and the penalties for failing to report in section 1877(g)(5)
apply to a provider of a designated health service for which payment
may be made under Medicaid in the same manner as they apply to a
provider that furnishes a designated health service for which payment
may be made under Medicare.
This proposed rule would incorporate the provisions of sections
1877(f) and (g)(5) into our Medicaid regulations by adding new
Secs. 455.108 and 455.109 to part 455 (``Program Integrity:
Medicaid''). These two provisions would appear under a new subpart C
entitled ``Disclosure of Information by Providers for Purposes of the
Prohibition on Certain Physician Referrals.'' Section 455.108,
``Purpose,'' would specify that subpart C implements section 1903(s) of
the Act. Section 455.109, ``Disclosure of ownership, investment, and
compensation arrangements,'' would list the specific disclosure
requirements, and the sanctions for failing to comply. We interpret
these disclosure requirements, as we believe they apply to Medicaid
providers, in section III of this preamble.
III. Interpretations of Sections 1877 and 1903(s) of the Act
In this section of the preamble, we discuss in detail how we
propose to interpret provisions in section 1877 and in section 1903(s)
that we either did not interpret in the August 1995 final rule or that
we interpreted in the context of referrals for clinical laboratory
services, but must reconsider in the context of the additional
designated health services. We propose to define or interpret terms
that are present in the statute (such as each of the designated health
services) or to reinterpret or clarify certain statutory terms that we
interpreted in the past. We also propose to add certain new terms and
definitions to the rule that we believe are necessary for us to
implement parts of the statute. This section is structured in the order
we used to present the statutory provisions and our interpretations in
the August 1995 final rule. We would like to point out that, in these
proposed regulations, we intend to interpret only the provisions of
section 1877 of the Act, and not the provisions of any other State or
Federal laws, such as the antitrust laws, the anti-kickback statute, or
the Internal Revenue Code.
A. Definitions
1. Designated Health Services
As we noted above, OBRA '93 expanded the physician referral
prohibition to apply to ten designated health services in addition to
clinical laboratory services. Section 1877(h)(6) lists these services,
but does not define them. Because the designated health services are
not defined in section 1877, we would define them in Sec. 411.351.
Designated health services as components of other services. We
believe that a designated health service remains one, even if it is
billed as something else or is subsumed within another service category
by being bundled with other services for billing purposes. For example,
most services provided by a skilled nursing facility (SNF) are
considered SNF services, which are not themselves designated health
services. Nonetheless, SNF services can encompass a variety of
designated health services, such as physical therapy services or
laboratory services.
Similarly under Medicaid, services provided by a clinic are
considered ``clinic services'' under section 1905(a)(9) of the Act, but
could encompass a variety of designated health services, such as
occupational therapy, physical therapy, or radiology services.
We base our interpretation on the fact that Congress compiled its
list of designated health services based on abuses or potential abuses
it perceived in regard to a variety of specific kinds of services. The
list in section 1877(h)(6), in fact, does not exactly track the service
categories as they are defined under either Medicare or Medicaid. In
short, we regard the services designated in section 1877 as subject to
the requirements of that section regardless of the setting in which
they are provided or the payment category under which they are billed.
On the other hand, we are also aware that designated health
services are sometimes provided as merely peripheral parts of some
other major service that a physician has prescribed. For example,
physicians often employ echocardiography (to obtain ultrasound signals
from the heart) as a mechanism to intraoperatively view the results of
bypass surgery. We do not believe that a physician using
echocardiography this way has made a specific referral for a designated
health service; instead, we regard the physician as prescribing a
physician service that happens to incidentally include
echocardiography. In other words, it is our view that a physician is
unlikely to over-prescribe bypass surgery in order to enhance his or
her investment in an echocardiography machine. Because we believe that
Congress meant to include under designated health services specific
services that are or could be subject to abuse, we are proposing to
define those services accordingly. Thus, we propose to deviate from
standard Medicare or Medicaid definitions of certain services in order
to meet the intent of the statute.
How we define designated health services. We have chosen, in
general, to base the definitions for the designated health services on
existing definitions in the Medicare program. Except for inpatient
hospital services and home health services, our definitions are based
on how Medicare covers a service under Part B. As noted above, we have
chosen to deviate from these definitions when we believe it is
appropriate to fulfill the purpose of the statute.
These definitions would apply for purposes of physician referrals
that are made for services covered under Medicare and for analogous
services covered under the Medicaid program. However, section 1903(s)
precludes FFP for medical assistance under a State plan consisting of a
designated health service furnished to an individual on the basis of a
referral that would result in a denial of payment under Medicare if
Medicare provided for coverage of the service to the same extent and
under the same terms and conditions as under the State plan. We believe
that in enacting section 1903(s), Congress was clearly concerned that
financial relationships of the kind that would prohibit a referral for
services under Medicare may also lead to improper utilization of
Medicaid services. However, because Medicaid has its own unique set of
coverage requirements, a State can cover and reimburse designated
health services very differently from the way these services are
covered and reimbursed under the Medicare program. We believe that
Congress was aware of these program differences and specifically meant
to provide us with some flexibility in applying the Medicare physician
referral rules in the Medicaid context. Therefore, we intend to apply
this flexibility in the following manner, which we believe will further
the goals of the statute:
When the definition of a designated health service is the same
under both programs, we intend to use the same definition, as described
in this preamble, for both programs. However, when the definition of a
designated health service differs under a State's plan from the
definition under Medicare, we will assume that the services under the
State's plan take precedence, even if the definition will encompass
services that are not covered by Medicare. However, we propose not to
include Medicaid services as designated health services in situations
[[Page 1674]]
in which including those services appears to run counter to the
underlying purpose of the legislation. Because Medicaid is administered
by the States, we do not believe that we are in the best position to
determine when including particular services will have this effect. As
a result, we are specifically soliciting comments on how to implement
our policy in a manner that will achieve the goals of the statute.
We have received a number of inquiries from individuals who were
confused about whether a particular service falls under one of the
designated service categories listed in section 1877(h)(6). In order to
remedy this problem, we have included below general explanations of
each of the designated health services, including explanations of how
we interpret similar or parallel services under Medicare. In the text
of the proposed regulation, however, we have defined designated health
services whenever we could by simply cross-referencing existing
definitions in the Medicare statute, regulations, or manuals or by
including specific language whenever we believe the definitions should
deviate from standard Medicare definitions.
a. Clinical laboratory services
We would retain the definition that was incorporated into our
regulations at Sec. 411.351 by the August 1995 rule.
b. Physical therapy services (including speech-language pathology
services)
Physical therapy services. Sections 1861(s)(2)(D) and 1832 provide
for coverage of outpatient physical therapy services under Part B,
which are defined in section 1861(p). Under section 1861(p), outpatient
physical therapy services may be furnished by a provider of services, a
clinic, rehabilitation agency, or public health agency, or by others
under arrangements with and under the supervision of one of these
entities. The services must be furnished to an outpatient who is under
the care of a doctor of medicine or osteopathy, or a doctor of
podiatric medicine, under a plan of care established by one of these
physicians or by a qualified physical therapist. The plan must be
periodically reviewed by the physician and must include the type,
amount, and duration of physical therapy services to be furnished. No
service is included as outpatient physical therapy if it would not be
included as an inpatient hospital service if furnished to an inpatient
of a hospital. Outpatient physical therapy may be furnished by a
provider to an individual as an inpatient of a hospital or extended
care facility if the individual has exhausted or is otherwise
ineligible for benefit days under Medicare Part A.
Outpatient physical therapy services may be furnished by an
independent physical therapist in his or her office or in an
individual's home. The physical therapist must meet any standards
created by the Secretary in regulations, including health and safety
standards. Special provisions concerning services furnished by a
physical therapist in independent practice are set forth at
Sec. 410.60(c).
Under section 1861(p), the term ``outpatient physical therapy
services'' also includes speech-language pathology services. Medicare
covers speech-language pathology services if furnished to an outpatient
by a provider of services, a clinic, rehabilitation agency, or public
health agency, or by others under arrangements with and under the
supervision of one of these entities. However, the statute does not
provide for coverage of services furnished by speech-language
pathologists in independent practice.
Plan of treatment requirements for outpatient physical therapy and
speech-language pathology services are set forth in Sec. 410.61.
Conditions for outpatient physical therapy services are set forth in
Sec. 410.60(a) and (b), and conditions and exclusions for outpatient
speech-language pathology services are set forth in Sec. 410.62.
Basically, covered outpatient physical therapy services include
three types of services, which are best described in Sec. 410.100(b)
(which specifically concerns services provided by a comprehensive
outpatient rehabilitation facility). Section 410.100(b) provides that
the following are physical therapy services:
Testing and measurement of the function or dysfunction of
the neuromuscular, musculoskeletal, cardiovascular, and respiratory
systems.
Assessment and treatment related to dysfunction caused by
illness or injury and aimed at preventing or reducing disability or
pain and restoring lost function.
The establishment of a maintenance therapy program for an
individual whose restoration has been reached. (However, maintenance
therapy itself is not covered as part of these services. Sections
3101.8 of the Medicare Intermediary Manual (HCFA Pub. 13, Part 3) and
2210 of the Medicare Carriers Manual provide guidelines for coverage of
restorative therapy and maintenance programs.)
Speech-language pathology services. These services are defined in
section 1861(ll)(1) as such speech, language, and related function
assessment and rehabilitation services furnished by a qualified speech-
language pathologist as this pathologist is legally authorized to
perform under State law (or the State regulatory mechanism) as would
otherwise be covered if furnished by a physician. Section 1877(ll)(3)
defines a ``qualified speech-language pathologist.''
Speech-language pathology services are briefly described in
Sec. 410.100(d) as those necessary for the diagnosis and treatment of
speech and language disorders that create difficulties in
communication. Section 2216 of the Medicare Carriers Manual provides
that speech-language pathology services are also services necessary for
the diagnosis and treatment of swallowing disorders (dysphagia),
regardless of the presence of a communication disability. This section
of the manual also discusses restorative therapy and maintenance
programs and group speech pathology services under the two main
categories of diagnostic or evaluation services and therapeutic
services.
Services that are essentially the same as ``outpatient physical
therapy services'' and ``outpatient speech pathology services'' are
also covered by Medicare in other contexts and in different settings,
and may be billed under different categories. For example, section
1861(b)(3) lists as ``inpatient hospital services'' other diagnostic or
therapeutic items or services furnished by a hospital or by others
under arrangements with the hospital, as are ordinarily furnished to
inpatients. We have a longstanding policy of covering physical therapy
and occupational therapy as diagnostic or therapeutic ``inpatient
hospital services.'' The Medicare regulations in Sec. 482.56, in fact,
include conditions of participation for hospitals that provide physical
therapy, occupational therapy, or speech pathology services.
Similarly, these services can also be covered as SNF services.
Section 1861(h)(3) includes as ``extended care services'' physical or
occupational therapy or speech-language pathology services furnished by
the SNF (or by others under arrangements made by the facility), to an
inpatient of the facility. These services can also be furnished as
``incident to'' a physician's services under section 1861(b)(2)(A).
This provision covers services and supplies furnished as an incident to
a physician's professional service, of kinds that are commonly
furnished in physicians' offices and are commonly either furnished
without charge or included in the physicians' bills. Physical and
occupational therapy can qualify as
[[Page 1675]]
``incident to'' services, as reflected in section 2050.2 of the
Carriers Manual, if the physician directly supervises auxiliary
personnel who furnish these services and if these personnel are
employed by the physician.
Section 1877(h)(6)(B) lists as a designated health service
``physical therapy services,'' rather than the more limited category of
``outpatient physical therapy services.'' Therefore, we believe that we
can include within our definition of these services any physical
therapy or speech-language pathology services that are covered under
Medicare, regardless of where they are furnished and by whom, or how
they are billed.
For purposes of section 1877, we would define ``physical therapy
services'' as those outpatient physical therapy services (including
speech-language pathology services) described at section 1861(p) of the
Act and at Sec. 410.100(b) and (d). Physical therapy services also
include any other services with the characteristics described in
Sec. 410.100(b) and (d) that are covered under Medicare Part A or B,
regardless of who provides them, the location in which they are
provided, or how they are billed.
c. Occupational therapy services
Sections 1861(s)(2)(D) and 1832 of the Act provide for coverage of
outpatient occupational therapy services under Part B. Section 1861(g)
defines ``outpatient occupational therapy services'' by substituting
the word ``occupational'' for the word ``physical'' each place that it
appears in the definition of outpatient physical therapy services in
section 1861(p).
Under section 1861(g), outpatient occupational therapy services may
be furnished by a provider of services, a clinic, rehabilitation
agency, or public health agency, or by others under arrangements with
and under the supervision of one of these entities. The services must
be furnished to an outpatient who is under the care of a doctor of
medicine or osteopathy, or a doctor of podiatric medicine, under a plan
of care established by one of these physicians or by a qualified
occupational therapist. The plan must be periodically reviewed by the
physician and must include the type, amount, and duration of
occupational therapy services to be furnished. No service is included
as outpatient occupational therapy if it would not be included as an
inpatient hospital service if furnished to an inpatient of a hospital.
Outpatient occupational therapy may be furnished by a provider to an
individual as an inpatient of a hospital or extended care facility if
the individual has exhausted or is otherwise ineligible for benefit
days under Medicare Part A.
Outpatient occupational therapy services may be furnished by an
independent occupational therapist in his or her office or in an
individual's home. The occupational therapist must meet any standards
created by the Secretary in regulations, including health and safety
standards.
Coverage guidelines for occupational therapy services are set forth
in sections 3101.9 of the Medicare Intermediary Manual (HCFA Pub. 13,
Part 3) and 2217 of the Medicare Carriers Manual. The purpose of
occupational therapy services is described generally in section 3101.9
of the Intermediary Manual as follows: ``Occupational therapy is a
medically prescribed treatment concerned with improving or restoring
functions which have been impaired by illness or injury or, where
function has been permanently lost or reduced by illness or injury, to
improve the individual's ability to perform those tasks required for
independent functioning.''
Basically, covered outpatient occupational therapy services include
the following types of services, which are best described in section
410.100(c), a section that specifically concerns services provided by a
comprehensive outpatient rehabilitation facility. For purposes of
section 1877, we would use the same services that are described in
section 410.100(c). In Sec. 411.351, occupational therapy services
would include the following:
Teaching of compensatory techniques to permit an
individual with a physical impairment or limitation to engage in daily
activities.
Evaluation of an individual's level of independent
functioning.
Selection and teaching of task-oriented therapeutic
activities to restore sensory-integrative function.
Assessment of an individual's vocational potential, except
when the assessment is related solely to vocational rehabilitation.
As we pointed out in the section covering physical therapy
services, services that are essentially the same as ``outpatient
occupational therapy services'' are also covered by Medicare in other
contexts and in different settings, and may be billed under different
categories. For example, they might be covered as ``inpatient hospital
services'' under section 1861(b)(3) as ``other diagnostic or
therapeutic items or services'' furnished by a hospital or by others
under arrangements with the hospital; they might be covered as SNF
services under section 1861(h)(3) as part of a patient's ``extended
care services''; or they might be furnished in a physician's office as
services ``incident to'' the physician's services under section
1861(b)(2)(A).
Section 1877(h)(6)(C) lists as a designated health service
``occupational therapy services,'' rather than the more limited
category of ``outpatient occupational therapy services.'' Therefore, we
believe that we can include within our definition of these services any
occupational therapy services which are covered under Medicare,
regardless of where they are furnished and by whom, or how they are
billed.
For purposes of section 1877, we would define ``occupational
therapy services'' as those outpatient occupational therapy services
described at section 1861(g) of the Act and at 42 CFR 410.100(c).
Occupational therapy services also include any other services with the
characteristics described in Sec. 410.100(c) that are covered under
Medicare Part A or B, regardless of who furnishes them, the location in
which they are furnished, or how they are billed.
d. Radiology services, including magnetic resonance imaging,
computerized axial tomography scans, ultrasound services, and radiation
therapy services and supplies
Section 1877(h)(6)(D) identifies ``radiology services, including
magnetic resonance imaging, computerized axial tomography scans, and
ultrasound'' as a designated health service. Section 1877(h)(6)(E)
identifies ``radiation therapy services and supplies'' as a designated
health service.
Sections 1861(s)(3) and 1832 establish that ``diagnostic X-ray
tests,'' including diagnostic mammography services under certain
conditions, are considered medical or other health services under Part
B. Similarly, section 1861(s)(4) establishes that ``X-ray, radium, and
radioactive isotope therapy, including materials and services of
technicians'' are considered medical or other health services under
Part B. Even though the statute does not define these terms, the
payment provisions in section 1833(a)(2)(E) prescribe rules for paying
for outpatient hospital radiology services. These include diagnostic
and therapeutic radiology, nuclear medicine, computer assisted
tomography (CAT scan) procedures, magnetic resonance imaging, and
ultrasound and other imaging services (but excluding screening
mammography). We cover these services under the conditions described in
Secs. 410.32(a) and 410.35 of the regulations and in the Coverage
[[Page 1676]]
Issues Manual (HCFA Pub. 6) and in other manuals.
Section 1861(s)(13) includes as medical or other health services
screening mammography services, which are defined in section 1861(jj)
as a ``radiologic procedure'' provided to a woman for the purpose of
early detection of breast cancer. We believe that screening mammography
could qualify as one of the ``radiology services'' listed in section
1877(h)(6)(D) as a designated health service. However, as we have
stated elsewhere, we believe that Congress enacted the physician
referral prohibition to limit the tendency for referring physicians to
overutilize services because they have a financial incentive to do so.
It is our view that screening mammography services cannot be subject to
overutilization. We base this conclusion on the fact that the statute
specifically limits the frequency with which the Medicare program will
cover these services. That is, section 1834(c)(2) specifically
prescribes how frequently the screenings will be covered for different
age groups. In addition, we never consider the covered level of
screenings to be unnecessary services--we believe that all women should
receive the screenings that are covered for them under the statute. (We
cover these screening services under the conditions described in
Sec. 410.34 and in the Coverage Issues Manual.)
We wish to make it clear that the only type of mammography that we
would exclude from the definition of ``radiology services'' listed
under section 1877(h)(6)(D) would be screening mammography as covered
under section 1861(s)(13) and as defined in section 1861(jj). It is our
view that ``radiology services'' does include diagnostic mammography,
which is not subject to the same limits. (Diagnostic mammography
services are defined in Sec. 410.34(a) as mammography furnished to a
symptomatic patient for the purpose of detecting breast disease, while
screening mammography is furnished to asymptomatic patients.)
Although Congress did not set up section 1877(h)(6)(D) and (E) in a
manner that parallels section 1861(s)(3) and (4), we believe that
paragraphs (D) and (E) of section 1877(h)(6), taken together, cover the
same services that are covered as Part B services under section
1861(s)(3) and (4). Therefore, throughout this document the terms
``radiology'' and ``imaging'' mean any diagnostic test or therapeutic
procedure using X-rays, ultrasound and other imaging services, CT
scans, MRIs, radiation, or nuclear medicine, including diagnostic
mammography services, except for the distinctions that follow.
The physician's professional component--Medicare has traditionally
considered a physician's professional services related to radiology to
in general be covered as physician services under section 1861(s)(1)
rather than as radiology services under either paragraph (3) or (4) of
section 1861(s). However, we believe that it is appropriate for
purposes of section 1877 to consider radiology services as including
these physician services. We are proposing to include the professional
component because radiology always consists of a technical service
combined with a physician's professional service. Whenever a technical
radiological service is overutilized, it follows that a physician's
radiological service will also be overutilized.
Several studies have found that nonradiologists with imaging
facilities in their own offices order imaging tests far more frequently
than physicians who refer their patients to imaging facilities outside
their practices. We mentioned several of these studies in section I.A
of this preamble in the general discussion concerning studies that have
raised serious concerns about physicians who make self-referrals. For
example, one GAO study found that Florida nonradiologists who were sole
practitioners or in group practices or other practice affiliations with
imaging facilities in their own offices, when compared to physicians
who referred outside their practices, had imaging rates about 3 times
higher for MRIs; about 2 times higher for CT scans; 4.5 to 5.1 times
higher for ultrasound, echocardiography, and diagnostic nuclear
medicine imaging; and about 2 times higher for complex and simple X-
rays. (GAO Report, ``Medicare: Referrals to Physician-owned Imaging
Facilities Warrant HCFA's Scrutiny,'' No. B-253835, pages 2, 3, and 10
(October 1994).)
Similarly, a study appearing in the New England Journal of Medicine
compared the frequency and costs of diagnostic imaging furnished by
self-referring physicians to the frequency and costs of these same
services when physicians refer patients to an unrelated radiologist.
The study covered referrals for four medical conditions. The study
determined that the self-referring physicians obtained imaging
examinations 4.0 to 4.5 times more often than the physicians who
referred to unrelated radiologists. In addition, with respect to three
of the four medical conditions, the self-referring physicians charged
significantly more than the radiologists for imaging examinations of
similar complexity. The combination of more frequent imaging and higher
charges resulted in mean imaging charges per episode of care that were
4.4 to 7.5 times higher for the self-referring physicians. (Bruce J.
Hillman, M.D., and others, ``Frequency and Costs of Diagnostic Imaging
In Office Practice--A Comparison of Self-Referring and Radiologist-
Referring Physicians,'' The New England Journal of Medicine, Vol. 323,
No. 23 (Dec. 6, 1990), pp. 1604-1608)
Exclusion for Invasive or Interventional Radiology
We would exclude from the meaning of radiology, for the purposes of
section 1877, any ``invasive'' radiology (also commonly referred to as
interventional radiology). Invasive radiology is any procedure in which
the imaging modality is used to guide a needle, probe, or a catheter
accurately. Examples include percutaneous transluminal angioplasty
(PTA); the placement of catheters for therapeutic embolization of
tumors, arteriovenous malformations, or bleeding sites; the placement
of drainage catheters; removal of stones; balloon dilation of
strictures; biopsies; arthrograms; and myelograms.
We are basing this exclusion on the theory that the radiology
services in these procedures are merely incidental or secondary to
another procedure that the physician has ordered. As we have stated
earlier, we believe that Congress meant for the categories listed in
the statute as designated health services to encompass services that
tend to be subject to abuse. It is our view that physicians do not
routinely refer patients for the main procedures listed in the last
paragraph, such as angioplasty, in order to profit from unnecessary
radiology services. As a result, we are proposing not to include these
``secondary'' radiology procedures as designated health services. We
are also specifically soliciting comments on any other types of
services that would qualify as designated health services, but which
may actually be incidental to other procedures.
We would include the following definition at Sec. 411.351:
Radiology services and radiation therapy and supplies means any
diagnostic test or therapeutic procedure using X-rays, ultrasound or
other imaging services, computerized axial tomography, magnetic
resonance imaging, radiation, or nuclear medicine, and diagnostic
mammography services, as covered under section 1861(s)(3) and (4) of
the Act and Secs. 410.32(a), 410.34, and 410.35, including the
professional
[[Page 1677]]
component of these services, but excluding any invasive radiology
procedure in which the imaging modality is used to guide a needle,
probe, or a catheter accurately.
e. Durable medical equipment and supplies
Sections 1861(s)(6) and 1832 establish DME as one of the
``medical or other health services'' covered under Medicare Part B.
Section 1861(n) defines DME as including iron lungs, oxygen tents,
hospital beds, and wheelchairs (under certain conditions), used in a
patient's home (including certain institutions that can qualify as
the patient's home), whether furnished on a rental basis or
purchased. The definition of DME is explained further in the
Medicare regulations. Section 414.202 defines DME as equipment
furnished by a supplier or a home health agency that meets the
following conditions:
Can withstand repeated use.
Is primarily and customarily used to serve a medical
purpose.
Generally is not useful to an individual in the absence
of an illness or injury.
Is appropriate for use in the home.
Durable medical equipment includes equipment such as
wheelchairs, hospital beds, nebulizers, and walkers. We also regard
DME that is furnished to a patient under a home health plan under
section 1861(m)(5) as DME for purposes of section 1877. The
conditions under which we cover DME are described in Sec. 410.38.
For the purposes of this proposed rule, we would use the definition
of DME set forth in section 1861(n) and in Sec. 414.202.
We have received a number of inquiries concerning Medicare
claims processed by the four Durable Medical Equipment Regional
Carriers (DMERCs). Many people erroneously believe that all devices,
items, or supplies processed by the DMERCs are items of DME. This is
not so, because the DMERCs are also responsible for paying claims
for other items, such as immunosuppressive drugs, orthotics,
prosthetics, and prosthetic devices and related supplies.
We have received requests that we clearly identify in this
regulation which items are considered DME and which are not. Because
the number of items considered to be DME is so extensive, we cannot
in this proposed rule identify each of them. However, in response to
these requests, we have provided below the general categories of
DME.
We have also listed below the types of supplies used with the
DME. We are listing the supplies because when identifying DME as a
designated health service, Congress also included the supplies
necessary for the effective use of the DME as part of the designated
health service. For example, supplies used with DME could include
such items as test strips and lancets used with blood glucose
monitoring equipment or drugs used with a nebulizer. In general,
supplies are items that cannot be reused. We would also like to
point out that, effective December 1, 1996, in order for drugs used
in conjunction with DME to be covered by Medicare, the entity
dispensing the drug must have a Medicare supplier number, must be
licensed to dispense the drug in the State in which it will be
dispensed, and must bill and receive payment in its own name.
An infusion pump may be covered as DME, in which case the
supplies necessary for its effective use are covered as designated
health services; these supplies include the drugs and biologicals
that must be put directly into the infusion pump.
External infusion pumps--External infusion pumps may be covered
as DME under Medicare if certain coverage requirements are met,
including use in the home. The Medicare Coverage Issues Manual
provides for the coverage of infusion pumps for certain indications
and under certain circumstances, as described in sections 60-9 and
60-14. Other uses of external infusion pumps are covered if the
DMERC's medical staff verifies the appropriateness of the therapy
and of the prescribed pump for the individual patient. Payment may
also be made for the drugs necessary for the effective use of an
infusion pump as long as they are reasonable and necessary for the
patient's treatment.
Section 1877(b)(2) provides an exception for in-office ancillary
services ``other than durable medical equipment (excluding infusion
pumps) and parenteral and enteral nutrients, equipment, and
supplies.'' Section 1877(b)(2) has the effect of specifically
excepting infusion pumps from the prohibition on a physician
referring durable medical equipment furnished in the physician's own
office. External infusion pumps may be used in a physician's office
to administer drug therapy, including chemotherapy. However,
external infusion pumps (or other drug delivery systems used in the
physician's office (and not in the patient's home) are covered by
Medicare under section 1861(s)(2)(A) as a service incident to the
physician's service and not as DME. In addition, we do not believe
that the in-office ancillary exception applies to external infusion
pumps used outside a physician's office. That is, we do not believe
that Congress intended for the in-office exception to apply to
infusion pumps that are only picked up at a physician's office to be
used in the home, or that are delivered to the home.
Implantable infusion pumps--Implantable infusion pumps may also
be covered as DME in accordance with the policy described in the
Medicare Coverage Issues Manual when they are used for certain
indications. Coverage for other uses of implantable infusion pumps
is allowed if the carrier's medical staff verifies that the drug and
the infusion pump are reasonable and necessary. (Implantable devices
are not billed to the DMERC carriers; rather, they are billed to the
local carrier.)
If an implantable infusion pump is implanted in the physician's
office, but will be used at home and elsewhere, we believe that it
qualifies as DME that has been furnished in the physician's office.
Hence, the in-office ancillary services exception could apply, since
section 1877(b)(2) specifically includes infusion pumps, but not
other DME.
End-Stage Renal Disease equipment and supplies--Section
1861(s)(2)(F) includes as covered medical and other health services
home dialysis supplies, equipment, and self-care home dialysis
support services, as well as institutional dialysis services and
supplies provided to individuals with end-stage renal disease
(ESRD). This ESRD benefit is separate from the DME benefit under
section 1861(s)(6). Therefore, the equipment, services, and supplies
covered under this section of the statute are not covered as DME
under Medicare. Examples of home dialysis equipment and supplies
include needles and syringes, blood pressure cuffs, dialysate
solution, and intermittent peritoneal dialyzers.
Other items of equipment furnished in a physician's office--As
mentioned above, Medicare does not cover equipment used in a
physician's office as DME but may pay for the equipment under other
provisions in the statute. For example, section 1861(s)(2)(A) covers
services and supplies furnished incident to a physician's services,
and can include the use of any equipment that is needed in order for
a physician to provide a covered service.
In addition, we may cover diagnostic testing under the
diagnostic services benefit under section 1861(s)(3), which would
include equipment used in diagnostic testing irrespective of where
the equipment is used. For example, dynamic electrocardiography
(EKG), commonly known as Holter monitoring, is a diagnostic
procedure that provides a continuous record of the
electrocardiographic activity of a patient's heart while he or she
is engaged in daily activities. Diagnostic services under section
1861(s)(3) are not themselves included as a designated health
service and thus are not specifically covered by this rule.
General Categories of DME--Under certain circumstances (which
include use in the patient's home), the following items may be
covered as DME. (Readers should refer to section 60-9 of the
Medicare Coverage Issues Manual for additional information.)
Alternating pressure pads and mattresses and miscellaneous support
surfaces
Bed pans
Blood glucose monitors
Canes/crutches and walkers
Commodes
Continuous positive airway pressure
Cushion lift, power seat
Decubitus care equipment
Gel flotation pads and mattresses
Heating pads
Heat lamps
Hospital beds and accessories
Intermittent positive pressure breathing equipment
Infusion pumps, supplies and drugs
Lymphedema pumps
Manual wheelchair base
Motorized wheelchair/power wheel chair base
Nebulizers
Wheel chair options/accessories
Oxygen and related respiratory equipment
Pacemaker monitor
Patient lifts
Pneumatic compressor and appliances
Power operated vehicles
Restraints
Roll about chairs
Safety equipment
Support surfaces
[[Page 1678]]
Suction pumps
Traction equipment
Transcutaneous electric nerve simulators and supplies
Trapeze equipment, fracture frame, and other orthopaedic devices
Ultraviolet cabinets
We would include the following definition at Sec. 411.351:
Durable medical equipment has the meaning given in section
1861(n) of the Act and Sec. 414.202.
f. Parenteral and enteral nutrients, equipment, and supplies
Coverage of enteral and parenteral therapy as a Medicare Part B
benefit is provided under the prosthetic device benefit provision in
section 1861(s)(8). The regulations cover prosthetic devices in
Sec. 410.36(a)(2). Details for enteral and parenteral therapy are
set forth in the Medicare Coverage Issues Manual at section 65-10.
When the coverage requirements for enteral or parenteral nutritional
therapy are met, Medicare also covers related supplies, equipment
and nutrients.
Enteral nutrients, equipment, and supplies--Enteral nutrition
therapy provides nutrients to an individual with a functioning
gastrointestinal tract who, due to pathology to or nonfunction of
the structures that normally permit food to reach the digestive
tract, cannot maintain weight and strength commensurate with his or
her general condition. Enteral nutritional therapy may be
administered by nasogastric, jejunostomy, or gastrostomy tubes. This
benefit also includes supplies appropriate for the method of
administration.
Therefore, at Sec. 411.351, we would define ``enteral nutrients,
equipment, and supplies'' as ``items and supplies needed to provide
enteral nutrition to a patient with a functioning gastrointestinal
tract who, due to pathology to or nonfunction of the structures that
normally permit food to reach the digestive tract, cannot maintain
weight and strength commensurate with his or her general condition,
as described in section 65-10 of the Medicare Coverage Issues Manual
(HCFA Pub. 6).''
Parenteral nutrients, equipment, and supplies--Parenteral
nutrition therapy provides nutrients to an individual with severe
pathology of the alimentary tract that does not allow adequate
absorption of sufficient nutrients to maintain weight and strength
commensurate with the patient's general condition. Since the
alimentary tract of such a patient does not function adequately,
parenteral nutrition may be provided through an indwelling catheter
placed percutaneously in the subclavian vein and then advanced into
the superior vena cava. An example of a condition that may typically
qualify for coverage is a massive small bowel resection resulting in
a severe inability to absorb nutrition in spite of oral intake.
Parenteral nutritional therapy would include the equipment and
supplies necessary to furnish the parenteral nutrition therapy.
(Parenteral nutrients are commonly considered as prescription drugs.
Effective December 1, 1996, any entity dispensing drugs that are
used in conjunction with a prosthetic device, including parenteral
equipment, must meet certain conditions in order for the drugs to be
covered under Medicare. These conditions are described in the
section covering DME and the supplies used in conjunction with DME.)
At Sec. 411.351, we would define ``parenteral nutrients,
equipment, and supplies'' as ``items and supplies needed to provide
nutriment to a patient with permanent, severe pathology of the
alimentary tract that does not allow absorption of sufficient
nutrients to maintain strength commensurate with the patient's
general condition, as described in section 65-10 of the Medicare
Coverage Issues Manual (HCFA Pub. 6).''
We wish to point out that section 1877(b)(2) specifically
excludes parenteral and enteral nutrients, equipment, and supplies
as a service that can qualify for the in-office ancillary services
exception.
g. Prosthetics, orthotics, and prosthetic devices
Prosthetics--Section 1861(s)(9) provides for inclusion as
medical and other health services artificial legs, arms, and eyes,
including replacements if required because of a change in a
patient's physical condition. Prosthetics are covered in the
regulations in Secs. 410.36(a)(3) and 414.202. As described in
section 2133 of the Medicare Carriers Manual, these appliances are
covered when furnished under a physician's order. We also cover
adjustments to artificial limbs or other appliances required by wear
or by a change in the patient's condition when ordered by a
physician.
We would define ``prosthetics,'' at Sec. 411.351, as artificial
legs, arms, and eyes, as described in section 1861(s)(9) of the Act.
Orthotics--Orthotics are included as a medical service under
section 1861(s)(9) as leg, arm, back, and neck braces. The
regulations at Sec. 410.36(a)(3) allow payment for these services to
include replacements if required because of a change in the
individual's condition. We have interpreted the statute in section
2133 of the Medicare Carriers Manual to cover these items when used
for the purpose of supporting a weak or deformed body member or
restricting or eliminating motion in a diseased or injured part of
the body. In the Carriers Manual, orthotics are covered only when
furnished under a physician's order.
Under section 2133D of the Medicare Carriers Manual, orthopedic
footwear is covered under the orthotic benefit if the footwear is an
integral part of a leg brace. Diabetic shoes are covered under
section 1861(s)(12) of the Act in a separate benefit category.
Splints, casts, and other devices used for the reduction of
fractures and dislocations are covered under section 1861(s)(5). We
do not consider diabetic shoes, casts, splints, or these other
devices to be included under orthotics, prosthetics, or prosthetic
devices.
At Sec. 411.351, we would define ``orthotics'' as ``leg, arm,
back, and neck braces, as listed in section 1861(s)(9) of the Act.''
Prosthetic devices--Section 1861(s)(8) provides for inclusion as
medical and other health services ``prosthetic devices (other than
dental) which replace all or part of an internal body organ
(including colostomy bags and supplies directly related to colostomy
care), including replacement of such devices, and including one pair
of conventional eyeglasses or contact lenses furnished subsequent to
each cataract surgery with insertion of an intraocular lens.'' This
definition is reflected in the regulations at Secs. 410.36(a)(2) and
414.202. The statute specifically excludes dental devices from
Medicare coverage as prosthetic devices. (In addition, renal
dialysis machines are covered under the end stage renal disease
benefit and are discussed elsewhere in this section.)
Under the prosthetic device benefit, Medicare also includes
supplies that are necessary for the effective use of a prosthetic
device, for example, tape to secure an indwelling catheter. Section
1877(h)(6)(H) includes prosthetic devices as a designated health
service and also specifically includes the supplies associated with
these devices. (Effective December 1, 1996, any entity dispensing
drugs that are used in conjunction with a prosthetic device must
meet certain conditions in order for the drugs to be covered under
Medicare. These conditions are described in the section covering DME
and drugs used in conjunction with DME.) Section 410.100(f)(2)
provides that services necessary to design the device, select
materials and components, measure, fit, and align the device, and
instructions to the patient are also included in this benefit.
Examples of prosthetic devices include cochlear implants, cardiac
pacemakers, and incontinence control appliances.
We have received many questions concerning whether Medicare
considers an intraocular lens to be a prosthetic device. The answer
is yes. We have also been asked, for purposes of the designated
health services listed in section 1877(h)(6), to define a prosthetic
device to exclude any device that is implanted by a physician as
part of a surgical procedure. The theory behind this exclusion is
that such devices are only a small component of a central procedure,
which is the surgery needed to implant them. Physicians would not
unnecessarily subject patients to a surgical procedure just to boost
profits on intraocular lenses or other implantable devices, and are
thus not the kind of services Congress meant to cover. In addition,
some physicians believe that it is critical in many cases that they
have the freedom to prescribe their own choice of an implantable
device because they have particularized the design or find the
device better to work with than others.
On the other hand, we have also been advised that only a very
small percentage of surgeons ``customize'' prosthetic devices by
developing their own, or by modifying existing devices. In addition,
it is not uncommon for physicians to receive compensation from
companies that manufacture or supply these devices, sometimes in the
form of ``consulting fees,'' perhaps in exchange for the physician's
agreement to use that company's device exclusively. Physicians might
also have an ownership interest in a supplier or manufacturer, thus
realizing a profit every time the device is used.
[[Page 1679]]
It has also come to our attention that physicians who have some
relationship with a manufacturer or supplier are in a position to
manipulate a hospital's or an ASC's choice of a prosthetic device in
exchange for the physicians' referrals. Although these practices
might not lead to the overutilization of services, we believe that
they can drive up the cost of certain services that are not subject
to a fee schedule, which we would regard as a form of potential
program abuse. Such an arrangement might also result in patient
abuse, since a physician may choose a prosthetic device based on
financial incentives rather than on the best interest of the
patient. Because of the controversy surrounding surgically implanted
devices, we have not excluded them from the definition of
``prosthetic devices,'' but specifically solicit comments on this
issue.
We would also like to point out that intraocular lenses that are
implanted in an ambulatory surgical center (ASC) would be covered
under the ASC payment rate. We have excluded any services covered
under the ASC rate from the referral prohibition under an exception
we created in Sec. 411.355(d).
We have also been asked whether, if an ophthalmologist has an
optical shop as part of his or her office, he or she can refer
Medicare patients to the optical shop for eyeglasses. Medicare
coverage of eyeglasses and contact lenses is very limited, covering
only those that qualify as ``prosthetic devices'' used after
intraocular lenses are implanted during cataract surgery. Thus, a
physician would not be prohibited from referring a Medicare patient
to the optical shop for any conventional eyewear that is not covered
under the Medicare program. For eyeglasses that are covered by
Medicare, the physician could prescribe and fill the eyeglass
prescription if an exception applies. For example, the services
might meet the in-office ancillary services exception if the optical
shop is located in the physician's office suite. Alternatively, the
optical shop might qualify as a rural provider so that the exception
for rural ownership in section 1877(d)(2) of the Act could apply.
At Sec. 411.351, we would define a ``prosthetic device'' as a
device (other than a dental device) listed in section 1861(s)(8)
that replaces all or part of an internal body organ, including
colostomy bags and including one pair of conventional eyeglasses or
contact lenses furnished subsequent to each cataract surgery with
insertion of an intraocular lens. We would define ``prosthetic
supplies'' as ``supplies that are necessary for the effective use of
a prosthetic device (including supplies directly related to
colostomy care).''
h. Home health services
How we will define home health services. Medicare-covered home
health services are defined in section 1861(m), and requirements for
payment for home health services furnished to eligible beneficiaries
are set forth in part 409, subpart E (``Home Health Services Under
Hospital Insurance'') of our regulations. For purposes of the
physician referral prohibition, ``home health services'' would have
the same meaning as the appropriate provisions described in part
409, subpart E. A brief explanation of the home health benefit
follows:
Home health services are items and services furnished to an
individual who is confined to the home, under the care of a
physician, and in need of at least one of the following skilled
services: intermittent skilled nursing services, physical therapy
services, speech-language pathology services, or continuing
occupational therapy services.
To receive covered home health services, a beneficiary must be
under a plan of care established and periodically reviewed by a
physician. Home health services are furnished by, or under
arrangements made by, a participating home health agency. Home
health services are furnished on a visiting basis in a place of
residence used as an individual's home. (A patient may not receive
home health services in a physician's office.) An individual's home
is wherever the individual makes his or her home. This may be his or
her own dwelling, an apartment, a relative's home, a home for the
aged, or some other type of institution. However, an institution is
not considered a patient's home if the institution meets the basic
requirements in the definition of a hospital (as defined in section
1861(e)(1)), an SNF (as defined in section 1819(a)(1)), or a nursing
facility (as defined in section 1919(a)(1)).
The following services may be furnished under the home
health services benefit if appropriate requirements are met:
Part-time or intermittent nursing care furnished by or
under the supervision of a registered professional nurse.
Physical therapy, occupational therapy, and speech-
language pathology services.
Medical social services furnished under the direction
of a physician.
Part-time or intermittent services of a home health
aide.
Medical supplies (including catheters, catheter
supplies, ostomy bags, and supplies related to ostomy care, and a
covered osteoporosis drug, but excluding biologicals and other
drugs), the use of durable medical equipment, and appliances
suitable for home use.
The medical services of an intern or resident in
training under an approved hospital teaching program if a home
health agency is affiliated with or under the common control of the
hospital furnishing the medical services.
A beneficiary may also receive home health services on an
outpatient basis at a hospital, SNF, or a rehabilitation center
under arrangements made by the home health agency if equipment is
required that cannot be made available at the beneficiary's home or
the services are furnished while the beneficiary is at the facility
to receive services requiring equipment that cannot be made
available at the beneficiary's home. Home health services do not
include transportation of the beneficiary to the facility for these
home health services.
Existing Sec. 409.49 identifies services that are excluded from
payment under the Medicare home health benefit. Note that included
among those services is any service that would not be covered as
inpatient hospital services.
Also note that under the Medicare statute, home health services
can be provided only by an HHA. That is, under section 1814(a),
payments for services furnished to an individual may be made only to
providers of services that are eligible for that payment. To be
eligible, an HHA must, among other things, have in effect its own
provider agreement with Medicare, as described in section 1866, and
meet the specific conditions of participation for HHAs, as described
in section 1891. As a result, we regard home health services as
services ``provided by an HHA'' and not as services provided by any
other entity, even if the HHA is owned by the other entity or is
otherwise financially related to it. (We regard hospital services
the same way; that is, they can be provided only by an entity that
meets the requirements for participation as a hospital.) Therefore,
even if a hospital owns an HHA, the exception for hospital ownership
in section 1877(d)(3), which applies to designated health services
``provided by a hospital,'' would not apply to home health services
provided by a hospital-based HHA.
At Sec. 411.351, we would include the following definition:
``Home health services'' means the services described in section
1861(m) of the Act and part 409, subpart E of this chapter.''
How We Propose to Reconcile Section 1877 and the Physician
Certification Requirements for Home Health Services Under 42 CFR
424.22(d)
Section 903 of the Omnibus Reconciliation Act of 1980 amended
sections 1814(a) and 1835(a) of the Act to prohibit the certification
of need for home health services, and the establishment and review of a
home health plan of care for those services, by a physician who has a
significant ownership interest in, or a significant contractual or
financial relationship with, the home health agency that provides those
services. These amendments were incorporated into the regulations at 42
CFR 405.1633(d) (which was redesignated as section 424.22(d)), by an
interim final rule with comment period that we published in the Federal
Register on October 26, 1982, at 42 FR 47388, and that became effective
on November 26, 1982.
On June 30, 1986, we published a final rule in the Federal
Register at 51 FR 23541 that confirmed the provisions of the October
26, 1982 rule and clarified that under the term, ``significant
ownership interest in or a significant financial or contractual
relationship with'' the home health agency, we intended to include
salaried employment. This clarification was made effective on August
29, 1986.
The only exceptions to the home health regulations were
uncompensated officers or directors of an HHA, HHAs operated by
Federal, State, or local governmental authority, and sole community
HHAs. The home health certification restrictions of sections 1814(a)
and 1835(a) and Sec. 424.22(d) have not been significantly updated
since 1986.
[[Page 1680]]
On November 5, 1997, we published a notice with comment period
in the Federal Register (62 FR 59818) that announced our intention
to reconcile the statutory prohibitions in sections 1814(a) and
1835(a) concerning physician certification for home health services
with the related section 1877 prohibition. In that notice we stated
that we had decided to reexamine appropriate provisions of section
1877 and the home health regulations as they pertain to indirect
compensation arrangements involving physicians who are compensated
by entities that own HHAs. We announced that, pending that
evaluation, we had decided to withdraw certain recent
interpretations of Sec. 424.22(d), as it applies to certification
and recertification or establishment and review of plans of care by
physicians who are salaried employees of, or have a contractual
arrangement to provide services to, an entity that also owns the
HHA. In addition, we stated that we would address the issue of
indirect compensation, applicable to the health services designated
in section 1877, in this proposed rule.
We believe that sections 1814(a), 1835(a), and 1877 address the
same behaviors and are identical in purpose: they each prohibit a
physician who has a significant ownership interest in, or a
significant financial relationship with, a home health agency from
certifying or recertifying a patient's need for home health
services. We have defined the concepts of ``significant ownership
interests and significant financial relationships'' in the home
health context in Sec. 424.22(d)(1) through (d)(3), based on a fixed
percentage of ownership and, for financial or contractual
relationships, based on a specific dollar amount of compensation
(or, if less, a percent of the agency's operating expenses).
Under section 1877, in contrast, any level of ownership or
compensation amounts to a financial relationship unless the
arrangement meets any of a number of exceptions. We believe that the
provisions we are developing under section 1877 are more effective
than the current provisions in Sec. 424.22(d) in accommodating
Congress' desire to discourage physicians from overutilizing certain
services. Furthermore, section 1877 relates more specifically and in
greater detail to the issue of referrals for home health services by
physicians who have a financial relationship with the entity
providing those services, and reflects Congress' most recent
thoughts on that issue.
We believe that it is confusing to have in effect two provisions
that address prohibited referrals, each of which includes different
criteria, and can lead to different results.
We are therefore proposing to use the section 1877 definition of a
``financial relationship,'' and our interpretations of this definition,
for the concept of a ``significant ownership interest in, or a
significant financial or contractual relationship with, a home health
agency'' in sections 1814(a) and 1835(a). In order to do this, we are
proposing to amend Sec. 424.22(d) to state that a physician cannot
certify or recertify a patient's need to receive home health services
from an agency if the physician has a ``financial relationship'' with
that agency, as defined in Sec. 411.351, unless the financial
relationship meets one of the exceptions in Secs. 411.355 through
411.357. In addition, we will list sections 1814(a) and 1835(a) in
Sec. 411.1 as part of the statutory basis for this proposed regulation.
Section 424.22, paragraphs (d)(4), (e), (f), and (g) relate to
certain specific exceptions to the prohibition on certification in
sections 1814(a) and 1835(a). These paragraphs except physicians who
serve as uncompensated officers or directors of an HHA, HHAs that
are operated by a Federal, State, or local governmental authority,
or HHAs that are classified as sole community HHAs in accordance
with our regulations. Even if a physician and an HHA are involved in
an arrangement that meets one of these exceptions, the arrangement
simultaneously remains subject to the requirements in section 1877.
That is, if an exception in Sec. 424.22 is subsumed within the
exceptions in section 1877, a physician will be able to refer; if it
is not, the arrangement will disqualify the physician from referring
in spite of Sec. 424.22. Thus, we believe the exceptions listed in
Sec. 424.22 have been superseded by section 1877 and should not be
separately listed; we are therefore proposing to eliminate them. We
are particularly interested in hearing from the public about these
proposed changes.
i. Outpatient prescription drugs
Medicare does not cover a category of services called
``outpatient prescription drugs.'' Without additional direction from
Congress on what constitutes ``outpatient prescription drugs'' for
the purposes of section 1877, we believe that it is reasonable to
assume that Congress intended to include only drugs furnished to
individuals under the Medicare Part B benefit and to exclude drugs
furnished by providers under Medicare Part A. We also propose to
limit ``outpatient prescription drugs'' to drugs that a patient
would be able to obtain from a pharmacy with a prescription. We
consider that this category includes any drugs that a patient could
get with a prescription, even if patients generally do not do so.
For example, we would include such drugs as oncology drugs that are
routinely furnished in a physician's office, under the physician's
direct supervision, provided the drugs could be obtained by
prescription from a pharmacy.
Coverage for prescription drugs furnished outside of a provider
setting is very limited under Medicare Part B. ``Drugs and
biologicals'' are defined in the Medicare statute in section 1861(t)
and the coverage of drugs and biologicals is explained in part 410
of our regulations. We consider a ``biological'' to be a drug
product that is derived from a living organism or its products,
including, but not limited to, serums, vaccines, antigens, and
antitoxins. We apply to biologicals the same rules that we apply to
any drugs. Therefore, for purposes of section 1877, we propose to
define outpatient prescription drugs to include biologicals.
An explanation of the drug and biological benefit is set forth in
section 2049 of the Medicare Carriers Manual. This section of the
manual provides general requirements for drugs and biologicals that are
covered under Medicare Part B. (These requirements do not apply to
certain kinds of drugs that are covered under specific provisions of
the statute. We discuss these other provisions below, following the
general requirements.) In general, drugs are covered only if all of the
following requirements are met:
The drug or biological is included, or approved for
inclusion, in the latest official edition of the United States
Pharmacopoeia, the National Formulary, or the United States Homeopathic
Pharmacopoeia, unless unfavorably evaluated in AMA Drug Evaluations or
Accepted Dental Therapeutics.
The drug or biological is furnished incident to a
physician's services.
The drug or biological is reasonable and necessary for the
diagnosis or treatment of the illness for which it is administered
according to accepted standards of medical practice.
The drug or biological is not excluded as a preventive
immunization.
The drug or biological has not been determined by the Food
and Drug Administration (FDA) to be less than effective. Drugs or
biologicals must be approved for marketing by the FDA to be considered
safe and effective, for purposes of the Medicare program, when used for
indications specified on the labeling.
Based on the usual method of administration of the form of
a drug or biological as furnished by a physician, the drug or
biological is of a type that cannot be self-administered.
Drugs and biologicals that are specifically covered under Part B
would include those furnished in a physician's office incident to the
physician's professional services under section 1861(s)(2)(A); as part
of outpatient hospital services under section 1861(s)(2)(B); and, even
though they are preventive immunizations, pneumococcal vaccine,
influenza vaccine, and hepatitis B vaccine under section 1861(s)(10);
and antigens under section 1861(s)(2)(G).
Drugs that are or can be self-administered, such as those in pill
form or in a self-injectable form, are not covered by Medicare Part B
unless the statute specifically provides this coverage. The statute
currently provides for the coverage of the following self-administered
drugs under limited conditions: blood clotting factors under section
1861(s)(2)(I), drugs used in
[[Page 1681]]
immunosuppressive therapy under section 1861(s)(2)(J), erythropoietin
(EPO) for dialysis patients under section 1861(s)(2)(O), and certain
oral cancer drugs under section 1861(s)(2)(Q). (The statute provides
under section 1861(m) for the coverage of certain osteoporosis drugs,
defined in section 1861(kk), that can be self-administered but are
furnished to a home health patient who is unable to self-administer the
drugs. However, these drugs are covered under section 1861(m) as part
of the Medicare Part A home health services benefit.)
After much consideration, we believe it would be inappropriate to
include as outpatient prescription drugs, for purposes of section 1877,
EPO and other drugs furnished as part of dialysis treatment for ESRD
patients who dialyze at home or in a dialysis center, even though these
drugs are not included in the end stage renal disease composite payment
rate, but are billed separately. We base this policy on our perception
that what the patient is primarily receiving is the dialysis treatment.
EPO and several other drugs are a relatively minor (although important)
part of a much larger and more complicated treatment and are
inextricably linked to the dialysis service. That is, it would not be
possible to provide dialysis safely and effectively without these drugs
because they are critical to the overall effectiveness of the treatment
and well-being of the patient. In addition, although many dialysis
patients self-administer EPO, we believe that the opportunity for
program abuse involving EPO is extremely unlikely. That is because
section 1881(b)(11)(B)(ii)(I) establishes the payment rate for EPO,
regardless of whether the beneficiary purchases the drug for self-
administration or it is administered by the dialysis facility. Also, we
have recently implemented a claims processing mechanism to ensure that
payment is not made for excessive administration. That is, payment will
not be made for EPO when a patient's hematocrit reading over a 3-month
average exceeds 36.5, the upper limit of the drug labeling indication.
We would define ``outpatient prescription drugs'' at Sec. 411.351
as ``those drugs (including biologicals) defined or listed under
section 1861(t) and (s) of the Act and part 410 of this chapter, that a
patient can obtain from a pharmacy with a prescription (even if
patients can only receive the drug under medical supervision), and that
are furnished to an individual under Medicare Part B, but excluding EPO
and other drugs furnished as part of a dialysis treatment for an
individual who dialyzes at home or in a facility.''
j. Inpatient hospital services
Services generally regarded as inpatient hospital services.
Inpatient hospital services are a Part A benefit defined under section
1861(b). The definition of these services in section 1861(b) is
reflected in Sec. 409.10(a) of our regulations. As defined at
Sec. 409.10(a), inpatient hospital services include the following
services when furnished to an inpatient of a participating hospital or,
in the case of emergency services or services in foreign hospitals, to
an inpatient of a qualified hospital (as described below).
Bed and board.
Nursing services and other related services.
Use of hospital facilities.
Medical social services.
Drugs, biologicals, supplies, appliances, and equipment.
Certain other diagnostic or therapeutic services.
Medical or surgical services provided by certain interns
or residents-in-training.
We propose to use the definition in section 1861(b) and
Sec. 409.10(a). As a clarification, we would state in the definition
that inpatient hospital services include services that a hospital
provides for its patients that are furnished either by the hospital or
by others under arrangements with the hospital; that is, the hospital
bills for these services on behalf of its patients. We would specify
that the definition does not encompass the services of other
physicians, physician assistants, nurse practitioners, clinical nurse
specialists, certified nurse midwives, and certified registered nurse
anesthetists and qualified psychologists who bill independently. Also,
we would refer to existing Sec. 409.10(b), which states that
``inpatient hospital services'' do not include SNF-type care furnished
by a hospital or an RPCH that has a swing-bed approval, or any nursing
facility-type care that may be furnished as a Medicaid service.
Psychiatric hospital and RPCH services. We propose to also include
as inpatient hospital services inpatient psychiatric hospital services,
which are defined in section 1861(c). These services are defined as
``inpatient hospital services'' furnished to an inpatient of a
psychiatric hospital (defined in section 1861(ff)), which means that
they are essentially the same services as those furnished to an
inpatient of a regular hospital. In addition, we believe that a
psychiatric hospital qualifies as a hospital, for all practical
purposes, except that it is primarily engaged in providing psychiatric
services for the diagnosis and treatment of mentally ill persons rather
than the more general care and treatment that a regular hospital
provides to injured, disabled, or sick persons. Also, a psychiatric
hospital must meet all of the nine basic requirements that a regular
hospital must meet in order to qualify as a hospital, except that for
two of the requirements, it must meet analogous standards that relate
particularly to psychiatric care.
We also propose to regard as ``inpatient hospital services,'' for
purposes of section 1877, inpatient services provided by a
participating rural primary care hospital (RPCH). This term refers to
facilities designated as RPCHs by the Secretary under section
1820(i)(2). ``Inpatient rural primary care hospital services'' are
defined in section 1861(mm)(2) as items and services, furnished to an
inpatient of an RPCH by such a hospital, that would be inpatient
hospital services if furnished to an inpatient of a hospital by a
hospital.
Section 1861(e) of the Act states that ``the term 'hospital' does
not include, unless the context otherwise requires, a rural primary
care hospital * * *.'' While it seems clear from this provision that
RPCHs are not to be considered hospitals under the Medicare law for
most purposes, we also believe the reference to context in this
provision indicates that RPCHs may be classified as hospitals where, in
specific contexts, it is consistent with the purpose of the legislation
to do so. We base the policy to include inpatient RPCH services as
``inpatient hospital services'' on our belief that a physician who has
a financial relationship with an RPCH is in as much of a position to
profit from overutilizing referrals to the RPCH as he or she would be
if the financial relationship were with an ordinary hospital. In
addition, the RPCH provides services that are very similar to inpatient
hospital services.
Because we propose to consider RPCH and psychiatric hospital
services as inpatient hospital services, the exception for hospital
services included in section 1877(d)(3) could apply. This exception
applies to services furnished by a hospital if a physician refers to a
hospital in which he or she is authorized to perform services and if
the physician has an ownership or investment interest in the hospital
as a whole, and not in a subdivision of the hospital.
Emergency hospital services. We propose to not include within the
definition of ``inpatient hospital services'' emergency inpatient
services provided by a hospital located outside
[[Page 1682]]
the United States and covered under the authority in section 1814(f)(2)
of the Act and part 424, subpart H. We also propose to exclude
inpatient hospital services provided by a nonparticipating hospital
within the United States under emergency conditions, as authorized by
section 1814(d) and described in part 424, subpart G. We are excluding
these services because Medicare covers them infrequently and only when
they result from an emergency situation.
The regulations define ``emergency services'' in Sec. 424.101 as
only those services necessary to prevent death or serious impairment of
health and, because of the danger to life or health, require use of the
most accessible hospital available and equipped to furnish the
services. In order to receive payment, a physician or the hospital must
submit medical information that describes the nature of the emergency
and specifies why it required that the beneficiary be treated in the
most accessible hospital. Because Medicare covers these services only
if they involve a documented emergency situation, we do not believe
that physicians have the opportunity or incentive to overutilize them.
For the reasons cited above, we are also proposing to exclude from
the definition of ``designated health services'' any physician services
that otherwise qualify as designated health services but are furnished
to an individual in conjunction with emergency inpatient hospital
services furnished outside of the United States. These physician
services are covered by Medicare under the authority in section
1862(a)(4), which permits coverage of inpatient hospital services,
accompanying physician services, and ambulance services (which are not
designated health services) furnished outside of the United States
under certain limited conditions. To reflect this proposal, we are
defining ``designated health services'' for purposes of the referral
prohibition to exclude emergency physician services furnished outside
of the United States.
Certain dialysis services. We are aware that there are situations
in which a physician might own a dialysis machine, rent it to a
hospital, and provide the hospital with a technician to run the
machine. This arrangement might fail to meet an exception if the
physician refers patients for dialysis services, and also receives
rental payments based on the volume or value of those referrals. The
physician might also fail to meet an exception if he or she owns a part
of the dialysis unit in the hospital (rather than owning part of the
hospital as a whole, as required under the ``hospital exception'' in
section 1877(d)(3)).
We believe there are certain unique situations involving dialysis
in which there would be no risk of overutilization. We intend to
exclude from the definition of ``inpatient hospital services'' dialysis
furnished by a hospital that is not certified to provide end stage
renal dialysis (ESRD) services under subpart U of 42 CFR 405. In these
circumstances, we do not believe there would be a risk of program or
patient abuse because dialysis would be provided only under the
following emergency circumstances, when there is no other appropriate
treatment:
A non-ESRD patient needs dialysis because of renal
dysfunction or for augmenting clearance of toxins. For example, a
patient with acute tubular necrosis or a patient with theophylline
overdose requires dialysis.
The primary reason for a hospital admission for an ESRD
patient is not maintenance dialysis. For example, an ESRD patient needs
surgery unrelated to his or her kidney condition, and the surgeon has
operating privileges only at a participating Medicare, but non-ESRD,
certified hospital and the individual receives maintenance dialysis
while he or she is an inpatient.
Certain lithotripsy services. We have been asked to consider
excluding from the definition of ``inpatient hospital services''
services involving certain lithotriptors. Specifically, we are
referring to services involving lithotriptors that employ
extracorporeal shock wave lithotripsy (ESWL) when used to break up
upper urinary tract kidney stones. ESWL focuses shock waves generated
outside of the body specifically on stones under X-ray visualization,
pulverizing them by repeated shocks. (The use of lithotripsy for
breaking up kidney stones is discussed in section 35-81 of the Medicare
Coverage Issues Manual.)
The theory behind excluding from ``inpatient hospital services''
services involving ESWL is that there is no risk of overutilization of
these services. In general, severe obstruction, infection, intractable
pain, or serious bleeding are indications of the need for surgical
removal of a stone. Only when a patient requires surgical treatment
would a physician prescribe ESWL. When a patient needs additional
treatment, there is no alternative available that is less invasive or
less expensive than ESWL. In addition, the procedure itself apparently
documents the medical necessity to prescribe it. As we understand ESWL,
the kidney stone is located, identified, and the progress of the
therapy is recorded as part of the visualization process.
While we agree that it might be unlikely that physicians would
overutilize ESWL, we wish to raise some of the same concerns that we
raised under our discussion on surgically-implanted prosthetic devices.
That is, we believe that these arrangements can potentially lead to
patient abuse, with physicians requiring the use of certain equipment
based on financial incentives, rather than on the best interests of the
patient. Because of the controversial nature of lithotripsy, we have
not excluded it from the definition, but specifically solicit comments
on this issue.
Inpatient hospital services and the definition of a ``hospital.''
Note that our proposed definition of ``inpatient hospital services''
would affect in only a limited way the definition of the term
``hospital'' that we included in the August 1995 final rule. We
included the definition of a ``hospital'' in Sec. 411.351 solely for
the purpose of determining ownership of a hospital as an entity, and we
did not include as part of the hospital any entities furnishing
services under arrangements. However, we would amend the definition of
a hospital to make it clear that the entities covered by that
definition are those that qualify as a ``hospital'' under section
1861(e), as a ``psychiatric hospital'' under section 1861(f), or as a
``rural primary care hospital'' under section 1861(mm)(1).
We would include the following definition at Sec. 411.351:
``Inpatient hospital services'' are those services defined in section
1861(b) of the Act and Sec. 409.10(a) and (b) and include inpatient
psychiatric hospital services listed in section 1861(c) of the Act and
inpatient rural primary care hospital services, as defined in section
1861(mm)(2). ``Inpatient hospital services'' do not include emergency
inpatient services provided by a hospital located outside the United
States and covered under the authority in section 1814(f)(2) and 42 CFR
part 424, subpart H and emergency impatient services provided by a
nonparticipating hospital within the United States, as authorized by
section 1814(d) and described in 42 CFR part 424, subpart G. These
services also do not include dialysis furnished by a hospital that is
not certified to provide end stage renal dialysis (ESRD) services under
subpart U of 42 CFR 405.
Inpatient hospital services include services that a hospital
provides for its patients that are furnished either by the hospital or
by others under arrangements with the hospital. They do
[[Page 1683]]
not encompass the services of other physicians, physician assistants,
nurse practitioners, clinical nurse specialists, certified nurse
midwives, and certified registered nurse anesthetists and qualified
psychologists who bill independently.
k. Outpatient hospital services
Sections 1861(s)(2)(B) and (C) and 1832 provide for coverage of
outpatient hospital services under Part B. Section 1861(s)(2)(B)
provides for coverage of hospital services (including drugs and
biologicals that cannot, as determined in accordance with regulations,
be self-administered) incident to physician services furnished to
outpatients (we consider these ``therapeutic services'') and partial
hospitalization services incident to these services. Section
1861(s)(2)(C) provides for coverage of ``diagnostic services which
are--(i) furnished to an individual as an outpatient by a hospital or
by others under arrangements with them made by a hospital; and (ii)
ordinarily furnished by such hospital (or by others under such
arrangements) to its outpatients for the purpose of diagnostic study.''
We describe below the coverage provisions concerning outpatient
hospital services under the categories of therapeutic and diagnostic
services, and partial hospitalization services. We also discuss briefly
the special rules for physical therapy, occupational therapy, and
speech pathology services furnished to a hospital outpatient.
We would consider all covered services (either diagnostic or
therapeutic) performed on hospital outpatients that are billed by the
hospital to Medicare (including arranged for services) as outpatient
hospital services. In addition, it should be noted that outpatient
hospital emergency services may be therapeutic (furnished incident to a
physician's service) or may be diagnostic in nature. Unlike other
outpatient hospital services, emergency services may be covered in
nonparticipating hospitals subject to the conditions described in
section 1835(b) and 42 CFR part 424, subpart G. We propose to exclude
these emergency services from the definition of ``outpatient hospital
services'' for the same reasons that we cited above in excluding them
from the definition of ``inpatient hospital services.''
We have also been asked to exclude services involving lithotriptors
that employ ESWL when used to break up upper urinary tract kidney
stones. We have the same concerns in the outpatient context about the
potential for patient abuse that we raised in our discussion about
excluding these services from the definition of ``inpatient hospital
services.'' In addition, we have learned of situations in which
urologists in a particular geographic area invest in lithotriptors,
then require that outpatient departments use the physicians' equipment
if they want to receive any urology referrals. Because this kind of
manipulation can lead to increases in the cost of services, we regard
it as creating the potential for program abuse. Because of the
controversial nature of lithotripsy, we have not excluded it as an
outpatient hospital service, but specifically solicit comments on this
issue.
However, we are proposing to include under the definition of
``outpatient hospital services'' outpatient services furnished by a
psychiatric hospital (as defined in section 1861(f)) and RPCH services,
which are included under Medicare Part B by section 1832(a)(2)(H).
``Outpatient rural primary care hospital services'' are defined in
section 1861(mm)(3) as medical and other health services furnished by
an RPCH. We are including both of these kinds of services as
``outpatient hospital services'' for the same reasons that we have
included them as ``inpatient hospital services,'' as described in the
section above covering inpatient hospital services.
Outpatient hospital services incident to physician services
(therapeutic services)--Under sections 1861(s)(2)(B) of the Act and 42
CFR 410.27, these ``incident to'' services specifically include drugs
and biologicals that cannot be self-administered. ``Incident to''
services must be furnished by or under arrangements made by a
participating hospital and as an integral though incidental part of a
physician's services. We consider these services as therapeutic
services that aid the physician in the treatment of the patient. Under
section 230.4 of the Medicare Hospital Manual (HCFA Pub. 10),
therapeutic services that hospitals furnish on an outpatient basis are
those services and supplies (including the use of hospital facilities)
that are incident to the services of physicians in the treatment of
patients. These services include clinic services and emergency room
services. To be covered as ``incident to'' a physician's services, the
services and supplies must be furnished on a physician's order by
hospital personnel under hospital medical staff supervision in the
hospital or, if outside the hospital, by hospital-affiliated personnel
who are under the direct personal supervision of a physician who is
treating the patient.
Diagnostic outpatient hospital services--Under Sec. 410.28,
diagnostic services furnished in a hospital to outpatients, including
certain drugs and biologicals required to perform the services (even if
those drugs or biologicals are self-administered), are covered if the
services meet the following conditions:
They are furnished by or under arrangements made by a
participating hospital.
They are ordinarily furnished by, or under arrangements
made by, the hospital to its outpatients for the purpose of diagnostic
study.
They would be covered as inpatient hospital services if
furnished to an inpatient.
If furnished under arrangements, they are furnished in the
hospital or in other facilities operated by or under the supervision of
the hospital or its organized medical staff.
Section 230.3 of the Medicare Hospital Manual explains that a
service is diagnostic if it is an examination or procedure to which the
patient is subjected, or which is performed on materials derived from a
hospital outpatient, to obtain information to aid in the assessment of
a medical condition or the identification of a disease. Among these
examinations and tests are diagnostic laboratory services such as
hematology and chemistry; diagnostic x-rays; isotope studies; EKGs;
pulmonary function tests; and other tests given to determine the nature
and severity of an ailment or injury. Hospital personnel may furnish
diagnostic services outside the hospital premises without the direct
personal supervision of a physician.
Partial hospitalization services--Partial hospitalization services
are included as ``medical or other health services'' covered by
Medicare Part B under section 1861(s)(2)(B) and must be provided
``incident to'' a physician's services. Partial hospitalization
services are defined in section 1861(ff). This definition is reflected
in Secs. 410.27(d) and 410.43, which provide that partial
hospitalization services consist of a variety of outpatient psychiatric
services. These services must be prescribed by a physician, who
certifies and recertifies the need for the services, and the services
must be furnished under a plan of treatment, all in accordance with
provisions in subpart B of part 424. Section 424.24(e)(1) requires that
a physician certify that an individual would require inpatient
psychiatric care if the partial hospitalization services were not
provided.
Section 230.5 of the Medicare Hospital Manual further explains the
partial hospitalization services benefit. It points out that there is a
wide range
[[Page 1684]]
of services and programs that a hospital may provide to its outpatients
who need psychiatric care, ranging from a few individual services to
comprehensive, full-day programs. However, payment may be made only for
services meeting the requirements of the outpatient hospital benefit.
That is, the services must be incident to a physician's service and be
reasonable and necessary for the diagnosis or treatment of the
patient's condition. This means the services must be for the purpose of
diagnostic study or the services must reasonably be expected to improve
the patient's condition.
Special rules that apply to physical therapy, occupational therapy,
and speech pathology services furnished to a hospital outpatient
covered under Part B--The rules for these services appear in sections
241 and 242 of the Medicare Hospital Manual. Sections 210.8, 210.9, and
210.11 of the Medicare Hospital Manual describe these therapies (which
do not require direct physician supervision) and set forth the
conditions that must be met for the services to be covered as
outpatient hospital services.
We would include the following definition at Sec. 411.351:
``Outpatient hospital services'' means the therapeutic, diagnostic, and
partial hospitalization services listed under section 1861(s)(2)(B) and
(C); outpatient services furnished by a psychiatric hospital, as
defined in section 1861(f); and outpatient rural primary care hospital
services, as defined in section 1861(mm)(3); but excluding emergency
services covered in nonparticipating hospitals under the conditions
described in section 1835(b) and 42 CFR part 424, subpart G.
2. Direct Supervision
Section 1877(b)(2) provides an exception for in-office ancillary
services. To qualify as in-office ancillary services, the services
must, among other things, be furnished personally by a referring
physician or another physician in the same group practice, or be
furnished by individuals who are ``directly supervised'' by one of
these physicians.
In the August 1995 final rule, we defined ``direct supervision'' as
supervision by a physician who is present in the office suite and
immediately available to provide assistance and direction throughout
the time that clinical laboratory services are being performed. We are
proposing to apply this definition to referrals for any of the other
designated health services that can be excepted under section
1877(b)(2). We also propose to revise this definition to make it clear
that ``present in the office suite'' means the physician must be
present in the office suite in which the services are being furnished,
at the time they are being furnished. We believe this clarification is
necessary for situations in which a physician might be working in more
than one suite in a building, such as when he or she provides services
other than designated health services in one suite, while the
designated health services are furnished in a separate suite in the
same building.
We also wish to clarify that we believe the supervision requirement
is meant to establish the services as those that are integral to the
physician's own practice, and that are conducted within his or her own
sphere of activity: hence the title in-office ancillary services. It is
our view that Congress did not intend to except referrals made by a
physician to a separate, profit-making enterprise in which the
physician has invested or from which he or she receives payments.
Hence, we do not believe the in-office ancillary exception applies to
services that are performed in a location that is separate and distinct
from one in which the physician conducts his or her own everyday
activities.
Consistent with our interpretation that Congress intended this
exception to apply to services that are closely attached to the
activities of the referring physician, we used the definition of
``direct supervision'' that appears in section 2050 of the Medicare
Carriers Manual, Part 3--Claims Processing, which describes services
that are ``incident to'' a physician's professional services under
section 1861(s)(2)(A). This provision requires that the physician be
present in the office suite and immediately available to provide
assistance and direction throughout the time the aide or technician is
performing services. The very same definition appears in the
regulations at Sec. 410.32(a), which states, in general, that
diagnostic x-ray tests are covered only if performed under the ``direct
supervision'' of certain physicians or by certain radiology
departments. As we stated in the preamble to the August 1995 final
rule, we believe Congress was adopting and ratifying the Secretary's
longstanding definition of this term.
Nonetheless, since the publication of the August 1995 final rule,
we have become aware that many of the ancillary services that
physicians and physician groups provide are subject to a range of
supervision requirements for coverage purposes, some of which are more
stringent than the current ``incident to'' supervision requirements,
and some of which are less stringent. (The requirements for diagnostic
services, for example, currently appear in Sec. 410.32 of the
regulations, in various places in the Medicare Carriers Manual, and as
part of certain CPT codes. The requirements for physician supervision
of diagnostic tests in all settings in which the technical component is
payable under the physician fee schedule have been consolidated in a
proposed regulation that was published on June 18, 1997 at 62 FR
33158.)
We recognize, in examining supervision requirements that include a
physician's presence, that they each have some of the same and some
separate purposes. The ``incident to'' rule is intended to ensure that
the physician is at hand when the services are furnished because the
law only covers them when they are ``incident to a physician's
professional services,'' making the physician's presence essential, for
both quality control and billing purposes, as a condition of coverage.
In the case of the diagnostic services, the service is explicitly
related to a medical need for the personal supervision or involvement
of a physician in performing or monitoring the tests. These two sets of
coverage-based ``supervision'' tests have their particular purposes and
both remain a condition of coverage and payment for Medicare, in
addition to any supervision requirements that appear in the section
1877 referral provisions.
The ``direct supervision'' requirement in the in-office ancillary
services exception appears to us to share with the ``incident to'' test
the need to tie the services directly to the activities of the
physician, to ensure that they are part of his or her own medical
practice. We continue to believe that Congress intended in including
``direct supervision'' in the law the concept of ``direct supervision''
that appears as part of the ``incident to'' requirements. However, in
the context of physician referrals, we believe the physician's presence
is necessary for ``management'' purposes (that is, to demonstrate that
the physician is there, actively running the practice), rather than for
coverage purposes. Thus, the requirement that the physician be on the
premises the entire time that a designated health service is being
furnished can have absurd and impractical results, preventing a
physician from leaving the office suite for even brief periods when
there may be no health and safety standards requiring his presence.
Accordingly, we propose to depart from our interpretation that the
definition of ``direct supervision'' for purposes of the referral
prohibition is identical to the definition in the ``incident to''
context. That is, we
[[Page 1685]]
propose to continue to require that the services in general be
performed by aides or technicians only when the physician is present in
the office suite so that they are tied to his or her activities, but
allow very limited absences from the office. We propose to amend the
definition as follows:
Direct supervision means supervision by a physician who is
present in the office suite in which the services are being
furnished, throughout the time they are being furnished, and
immediately available to provide assistance and direction. ``Present
in the office suite'' means that the physician is actually
physically present. However, the physician is still considered
``present'' during brief unexpected absences as well as during
routine absences of a short duration (such as during a lunch break),
provided the absences occur during time periods in which the
physician is otherwise scheduled and ordinarily expected to be
present and the absences do not conflict with any other requirements
in the Medicare program for a particular level of physician
supervision.
Under this definition, a physician must actually be physically
present in the office suite at the time designated health services are
being furnished, or be absent only under the limited conditions
described in the definition. We anticipate that the question of when an
absence qualifies as ``brief and unexpected'' or as a ``routine absence
of a short duration'' will be a determination that only the local
carrier can make, based on individual circumstances.
A service will not qualify as an in-office ancillary service during
any time period in which the physician is scheduled to be in the
office, but in reality is specifically or routinely expected to be
somewhere else or during any time period in which the physician is
scheduled to be somewhere else. Therefore, laboratory services or other
designated health services performed by technicians or aides would not
qualify as in-office ancillary services if they are performed during
time periods that occur before or after the physician's regularly
scheduled office hours. (Aides or technicians can perform other tasks
in the absence of the physician, such as setting up equipment or
cleaning up, as long as the tasks are not components of designated
health services provided to Medicare or Medicaid patients.) Also, a
physician's absences to perform medical services outside the office
would not be permissible under ``direct supervision,'' such as absences
to do hospital rounds or provide care in an outpatient clinic. However,
we would allow absences for unexpected medical emergencies.
While this definition for referral purposes would allow a physician
to occasionally be absent for short periods, specific coverage
requirements for services furnished and billed as ``incident to'' a
physician's services, for diagnostic services, or for any other
services with separate supervision requirements would continue to
operate to determine whether a specific service is covered. We
recognize that this approach will require a physician to pay close
attention to the specific coverage requirements that apply to
individual services, as well as the supervision requirement in section
1877(b). Nonetheless, most of the coverage rules have been in effect
for many years, so physicians have had experience in complying with
them. In coordinating the separate supervision requirements with the
requirement in section 1877, physicians must only comply with the
separate coverage requirement if it is more stringent than the
requirement in section 1877, as interpreted in this proposed rule.
We believe that our proposed amendment to the definition of
``direct supervision'' addresses the concerns of physicians who feel
that, as a practical matter, they cannot be in the office every single
minute of every day. The amendment will allow physicians who must be
called away briefly to avoid the sanctions that could arise from
section 1877 if they are not present at the moment when a medical
service is furnished, provided there are no health and safety reasons
for them to be on the premises.
In line with the ``incident to'' manual provision, we are also
proposing that a physician is directly supervising an individual
outside the office suite (such as in an SNF) if the physician is in the
room with the technician when the technician is performing services.
(We derive this rule from section 2050, which states that direct
supervision does not exist if a physician is only available by phone or
is only physically present somewhere in the building.) Section 45-15 of
the Coverage Issues Manual discusses situations in which a physician
establishes an office within an SNF or other institution. Under this
provision, a physician's office within an institution must be confined
to a separately identified part of the facility that is used solely as
the physician's office and cannot be construed to extend throughout the
entire institution. (However, to qualify for the in-office ancillary
exception in either of these ``out of office'' situations, the services
must meet the additional statutory requirements for location and
billing described in section 1877(b)(2).)
We are not proposing that there must be any particular
configuration of rooms for an office to qualify as one office
``suite.'' However, direct supervision means that a physician must be
in the office suite and immediately available to provide assistance and
direction. Thus, a group of contiguous rooms should in most cases
satisfy this requirement. We have been asked whether it would be
possible for a physician to directly supervise a service furnished on a
different floor. We think the answer would depend upon individual
circumstances that demonstrate that the physician is close at hand. The
question of physician proximity for physician referral purposes, as
well as for incident to purposes, is a decision that only the local
carrier could make based on the layout of each group of offices. For
example, a carrier might decide that in certain circumstances it is
appropriate for one room of an office suite to be located on a
different floor, such as when a physician practices on two floors of a
townhouse.
3. Entity
In-office referrals are referrals to an ``entity.'' Section
1877(a)(1) prohibits a physician from referring Medicare patients for
the furnishing of designated health services to an entity with which
the physician (or an immediate family member) has a financial
relationship, unless an exception applies. The statute encompasses any
entity that provides designated health services, without qualifications
or limits. We attempted to reflect the breadth of the concept in the
August 1995 final rule at Sec. 411.351, where we defined an ``entity''
as a sole proprietorship, trust, corporation, partnership, foundation,
not-for-profit corporation, or unincorporated association.
We wish to clarify that we regard an individual physician or group
of physicians as referring to an ``entity'' when they refer to
themselves, or among themselves. The concept of a ``referral'' under
section 1877(h)(5)(A) and (B) covers the request by a physician for an
item or service under Part B, or the request or establishment of a plan
of care by a physician that includes the provision of a designated
health service. This statutory definition does not exclude in-office
referrals, nor does it specify that a referral occurs only when a
physician refers to an outside entity.
In addition, the in-office ancillary services exception in section
1877(b)(2) would not be necessary if in-office referrals were free from
the prohibition. Section 1877(b)(2) makes it clear that designated
health services that are furnished personally by the referring
physician who is a solo practitioner or, in the case of a group
practice, by
[[Page 1686]]
another member of the physician's group practice, or by other
individuals who are directly supervised by these physicians, are
subject to the referral prohibition. Physicians who refer to or among
themselves are excepted from the prohibition only if they meet the
criteria specified in section 1877(b)(2). Similarly, physician services
provided personally by (or under the personal supervision of) another
physician in the same group practice as the referring physician are
specifically excepted under section 1877(b)(1). To clarify our position
on in-office referrals, we propose revising the definition of an
``entity'' in Sec. 411.351 to include any physician's solo practice or
any practice of multiple physicians that provides for the furnishing of
a designated health service.
4. Fair Market Value
The term ``fair market value'' appears in most of the compensation
related exceptions. These exceptions, among other things, require that
compensation between physicians (or family members) and entities be
based on the fair market value of the particular items or services that
these parties are exchanging. We defined this term in the August 1995
final rule by using the definition in section 1877(h)(3). This
provision defines fair market value as the value in arm's-length
transactions, consistent with the general market value, with other
specific terms for rentals or leases.
We have previously defined the term fair market value in our
regulations in part 413, in the context of reasonable cost
reimbursement in payments for end stage renal disease services. Section
413.134(b)(2) explains the circumstances under which an appropriate
allowance for depreciation on buildings and equipment used in
furnishing patient care can be an allowable cost. This provision
defines ``fair market value'' for purposes of determining the costs
incurred by a present owner in acquiring an asset. ``Fair market
value'' is defined as ``the price that the asset would bring by bona
fide bargaining between well-informed buyers and sellers at the date of
acquisition. Usually the fair market price is the price that bona fide
sales have been consummated for assets of like type, quality, and
quantity in a particular market at the time of acquisition.''
To be consistent, we are incorporating this definition of what
constitutes ``fair market value'' into this proposed rule to explain,
for purposes of those exceptions that involve compensation paid for
assets, what we believe constitutes a value that is ``consistent with
the general market value.'' However, we are modifying the definition as
follows so that it also applies to any arrangements involving items or
services, including employment relationships, personal services
arrangements, and rental agreements:
General market value is the price that an asset would bring, as
the result of bona fide bargaining between well-informed buyers and
sellers, or the compensation that would be included in a service
agreement, as the result of bona fide bargaining between well-
informed parties to the agreement, on the date of acquisition of the
asset or at the time of the service agreement. Usually the fair
market price is the price at which bona fide sales have been
consummated for assets of like type, quality, and quantity in a
particular market at the time of acquisition, or the compensation
that has been included in bona fide service agreements with
comparable terms at the time of the agreement.
The definition of ``fair market value'' will continue to include
the additional requirements in section 1877(h)(3) for rentals or
leases. Among other things, the statute defines the fair market value
of rental property as its value for general commercial purposes, not
taking into account its intended use.
5. Financial Relationship
A referral alone is not a financial relationship. We wish to
clarify that when a physician simply refers patients to an outside
entity, he or she does not have a financial relationship with that
entity. A financial relationship consists of an ownership or investment
interest in the entity or a compensation arrangement with the entity.
If the physician does not own any portion of the entity, and does not
pay the entity or receive any kind of payment from the entity for the
referral or for anything else, there is no financial relationship.
A financial relationship can involve more than the Medicare or
Medicaid programs. In Sec. 411.351 we defined a financial relationship
as a direct or indirect relationship in which a physician or immediate
family member has an ownership or investment interest in an entity or a
compensation arrangement with the entity. We would like to emphasize
that a financial relationship can exist between a physician and an
entity even if that relationship does not involve designated health
services or the Medicare or Medicaid programs. For example, a
compensation arrangement is defined in Sec. 411.351 as, in general, any
arrangement involving any remuneration between a physician (or family
member) and an entity. This remuneration can involve payments for
anything, such as payments for rent, payments for nonmedical types of
items or services, or for housing or travel expenses.
Ownership interests can be indirect. The statute and the August
1995 final regulation specify that an ownership or investment interest
in an entity can exist through equity, debt, or other means and
includes an interest in an entity that holds an ownership or investment
interest in any entity providing designated health services. We do not
regard the last part of this provision as a limiting factor, but rather
as an indication that Congress wished to include, in the concept of
``ownership,'' an interest that is at least one level removed from
direct ownership. We propose to interpret this provision to apply to
interests that are removed by an unlimited number of levels.
This interpretation would cover situations involving multiple
levels, such as when a physician has an interest in an entity that has
an interest in another entity that in turn holds the ownership interest
in the entity that provides designated health services. We believe that
this interpretation fulfills the intent of the statute, which was meant
to prevent physicians from evading the prohibition by establishing
their ownership interests indirectly in ``holding companies'' rather
than in the entities that furnish designated health services. It is our
view that the number of layers of ownership is irrelevant, as long as a
physician or family member has established an indirect interest. To
reflect this interpretation, we would revise the description of
ownership in Sec. 411.351 (as part of the definition of ``financial
relationship'') as follows: ``An ownership or investment interest in an
entity that exists in the entity through equity, debt, or other means
and includes any indirect ownership or investment interest, no matter
how many levels removed from a direct interest; for example, ownership
includes situations in which a physician or immediate family member has
an interest in any entity that holds an ownership or investment
interest in any entity providing designated health services.''
Payments that result from an ownership or investment interest are
not compensation. We would like to emphasize a point that we discussed
at length in the preamble to the August 1995 final regulation. We
explained there that when a physician or family member has an ownership
or investment interest in an entity, we will not count as compensation
any returns on that investment. For example, if a physician has an
investment interest in an entity in the form of stock or
[[Page 1687]]
securities, we will not count any of the dividends or other payments
that derive from that ownership or investment interest as a
compensation arrangement between the physician and the entity.
(However, a physician or family member can receive an ownership
interest from an entity in a manner than could constitute a
compensation arrangement, such as when a physician receives stock as
part of a salary payment or in exchange for the sale of his or her
practice.)
6. Group Practice
The value of group practice status under the law. When a group of
physicians qualifies as a ``group practice'' as defined under section
1877(h)(4), the group may qualify for several exceptions in the law
that are specifically designed to accommodate groups. For example,
section 1877(b)(1) excepts from the referral prohibition physician
services provided personally by (or under the personal supervision of)
another physician in the same group practice as the referring
physician. Similarly, section 1877(b)(2) excepts in-office ancillary
services that are furnished personally by or are directly supervised by
either the referring physician or by another physician who is a member
of the same group practice as the referring physician. However, a group
of physicians does not have to meet the definition of a group practice
in order to qualify for other exceptions under the law that are based
on characteristics other than the referring physician's group practice
status.
We wish to also point out that the definition of a group practice
in section 1877(h)(4) is particular to the referral rules. That is, it
was designed to allow physicians in specific kinds of groups to
continue to refer patients for designated health services under certain
circumstances. Therefore, the definition may have little or no bearing
on which physicians qualify as a group practice for purposes of other
Medicare or Medicaid provisions.
Who can organize and control a group practice. The statute defines
a ``group practice'' as a group of two or more physicians legally
organized into a partnership, professional corporation, foundation,
not-for-profit corporation, faculty practice plan, or similar
association. The statute requires that a group practice consist of a
legal entity. Thus, a group that is not legally organized, but is
instead only holding itself out as a group, would not qualify as a
group practice under the statutory definition. Moreover, we believe
that the statute specifically requires that a partnership consist of
two or more physicians who are partners and that a professional
corporation consist of two or more physicians who are incorporated
together.
We believe that more complex business configurations may be
involved when two or more physicians are ``legally organized'' into a
foundation, not-for-profit corporation, or a faculty practice plan. As
we pointed out in the preamble to the August 1995 final rule, the
statute is silent about who must actually legally organize these kinds
of associations. As a result, we interpreted this provision in the
final rule to allow any individuals or entities to set up legal
structures for these kinds of associations, provided two or more
physicians have a role in providing services and the physicians meet
all of the other specific requirements in section 1877(h)(4). In
addition, the statute is silent about who must operate any of the group
practice associations. We have interpreted the statute, in the August
1995 final rule, to allow any individuals or entities to do this. For
example, a hospital could own and operate a group practice, provided
there are no State laws to prevent this.
A group practice as one legal entity. In the August 1995 final rule
we took the position that the statute contemplates a group practice
that is composed of one single group of physicians who are organized
into one legal entity. We stated that a group practice could not
consist of two or more groups of physicians, each organized as separate
legal entities, although we believed that a single group practice (that
is, one single group of physicians) could own other legal entities
(such as a billing entity) for the purpose of providing services to the
group practice. We based this conclusion on the fact that section
1877(h)(4)(A) defines a group practice as a group of two or more
physicians who are legally organized as a partnership, professional
corporation, etc. However, we continue to receive numerous inquiries
about whether a group can consist of several legal entities that are,
in turn, legally organized into the one group.
We believe that Congress meant that a group must be one legal
entity, and that it regarded this characteristic as a mark of a true
group practice. It is our view that any other interpretation could pose
the risk of multiple groups of physicians remaining in many ways
separate, but joining together for the sole purpose of taking advantage
of the exceptions in section 1877 that apply to group practices.
Therefore, we propose to continue to require that a group consist of
just one legal entity. Nonetheless, we would like to clarify that we
believe that a group practice is still ``one legal entity'' even if it
is composed of owners who are actually individual professional
corporations or is owned by physicians who are individually
incorporated. It is our understanding that a group can contain
physicians who are individually incorporated as professional
corporations, and who provide services to group patients. This kind of
configuration is apparently common in group situations and generally
results when an individual physician wishes to qualify for certain tax
and pension advantages. The physician is employed by the professional
corporation, which in turn contracts with the group. We believe that
such a group is not a conglomeration of multiple physician groups, but
may instead be a true group practice, provided all the other criteria
in section 1877(h)(4) are met.
We have also considered the issue of whether individuals who are
separately incorporated as individual professional corporations and who
contract with the group practice qualify as ``members'' of the group.
We are proposing (in this section under the heading ``The requirement
for physician-patient encounters'') to, in general, eliminate
contractors from qualifying as ``members'' of a group practice, a
proposal that a major group practice association asserted would be
highly important to its membership. The association believes that many
group practices would have difficulty meeting the ``substantially all''
requirement in the group practice definition if the groups have to
consider as members the many specialists with whom they contract to
furnish services through the group practice on a part-time basis. Thus,
we are proposing to include only owner and employee physicians as
``members'' of a group practice. However, we are also proposing to
consider as owner ``members'' physicians who belong to individual
professional corporations that, in turn, own the group practice.
The ``full range of services'' test. A ``group practice'' is
defined in some detail in section 1877(h)(4) of the statute. One of the
criteria in the statutory definition is that each physician who is a
member of the group must furnish substantially the full range of
services that the physician routinely furnishes, including medical
care, consultation, diagnosis, and treatment through the joint use of
shared office space, facilities, equipment, and personnel. We defined
the term ``group practice'' in Sec. 411.351 of the August 1995 final
rule by using the statutory
[[Page 1688]]
definition and by adding certain interpretations. In one of these, we
required physician members to furnish the full range of ``patient care
services'' that they routinely furnish, rather than just ``services.''
Elsewhere in Sec. 411.351, we defined ``patient care services'' as any
tasks performed by a member that address the medical needs of specific
patients, regardless of whether they involve direct patient encounters.
On considering this issue further, we propose revising the
definition of ``patient care services'' to apply to any of a
physician's tasks that address the medical needs of specific patients
or patients in general, or that benefit the practice.
We believe that the ``full range of services'' provision, along
with most of the other criteria in the group practice definition, was
designed to ensure that, as part of the group, a physician is actually
practicing medicine as he or she ordinarily would and has not simply
joined the group in name only. We realize, however, that a physician
member can legitimately furnish other kinds of services to the group,
beyond services that benefit only specific patients. For example, a
physician member might spend time training staff members, arranging for
equipment, or performing administrative or management tasks. As long as
these tasks actually benefit the operation of the group practice, we
believe they should be counted as part of the test for gauging
``substantially the full range of'' a physician's services.
The ``substantially all'' test and the group billing number
requirement. The ``Substantially All'' Test--Effective January 1, 1995,
substantially all of the services of the group members must be
furnished through the group and be billed under a billing number
assigned to the group (the ``substantially all'' test). We discussed
the substantially all test, as it was effective on January 1, 1992, at
great length in the August 1995 final rule. We wish to clarify certain
aspects of the test, which appears as part of the definition of a group
practice in Sec. 411.351.
Section 411.351 requires that substantially all of the ``patient
care services'' of the physicians who are group members (at least 75
percent of the total patient care services of the members) be furnished
through the group. The change we have described above in the section on
the ``full range of services'' test, concerning our definition of
``patient care services,'' would affect this test as well. As a result,
a group would count any of a physician's tasks that address the medical
needs of specific group patients or group patients in general or that
benefit the group practice. The group would not consider in the
calculation any time during a physician's week that he or she spent on
nonpatient care services, such as teaching in a medical school or doing
outside research. For example, if a physician spends 3 days a week
furnishing patient care services as part of a group practice and 2 days
a week doing research outside the practice, the physician is providing
100 percent of his or her patient care services through the group
practice.
The definition in Sec. 411.351 also requires that patient care
services be measured in terms of total patient care time that each
member spends on patient care services. We wish to clarify that we
expect a group practice to look at a physician's total patient care
time during a week, furnished both inside and outside of the group
practice, to determine what percentage of this time is furnished
through the one group. For example, if a physician provides patient
care services to a group practice 4 days a week and patient care
services in an unrelated clinic 1 day a week, the physician is
providing 80 percent of his or her patient care services through the
group practice.
Some group practices have informed us that patient care time is not
a common measurement of how groups keep track of a physician's
contributions to the group. The time standard in the regulation, they
claim, will create a whole separate, burdensome administrative process.
In light of these comments, we explored alternative options that were
suggested to us. These included counting a percentage of the
physician's personal income, counting physician-patient encounters, or
counting resource-based Relative Value Units (RVUs), a method of
assigning resources to CPT codes ([Physicians'] Current Procedural
Terminology, 4th edition, 1993 (copyrighted by the American Medical
Association)). We found that there is no perfect measure; each of these
methods has advantages and disadvantages.
The income option would require that a group determine what
percentage of the physician's overall practice income is derived from
the group practice. While this would be perhaps the easiest calculation
to make, many physicians might consider the data involved to be
intensely private. In addition, to the extent that a physician's
billing practices differ among settings, an equivalent amount of income
derived from within the practice may not account for the same amount of
patient care activity that occurs outside the practice. For example, a
physician who works at a clinic for low income patients while outside
the group could receive considerably less income for patient care than
he or she would receive for equivalent services furnished through the
group practice.
We also explored the possibility of counting the number of a
physician's patient encounters. However, encounters do not capture the
level of intensity involved in any task. For example, a physician might
complete one encounter in an entire day, if it involves complex
surgery. Another physician could have 30 encounters in the same day,
each of which took 15 minutes to complete. In addition, a group would
need to gather information about the number of a physician's encounters
outside of the group practice to determine the percentage of encounters
furnished through the group. One problem with counting the number of
patient care encounters and also with counting RVUs, which is discussed
immediately below, is that neither method can take into account work
that benefits the group in general but is not a service furnished to a
patient, for example, time a physician spends training technical
personnel.
We next explored the possibility of counting RVUs to determine the
share of a physician's efforts furnished through a group practice,
since RVUs capture the intensity level of different services. For
Medicare purposes, a physician is paid based on the CPT code that is
billed for a particular service. Each CPT code has assigned to it a
certain intensity level (based on the content of the service and the
time the physician has spent), and each intensity level translates into
a specified number of RVUs. It is this associated RVU amount that
determines a physician's payment for a service. The Medicare billing
system can reveal all of the procedures for which a physician has
billed, based on the CPT codes, and the value of all of the associated
RVUs. There are thousands of CPT codes, many of which can be modified
(for instance, to state that a physician acted as an assistant at
surgery or co-surgeon, rather than as the surgeon). There is software
available that can assign RVUs based on the CPT code and modifiers.
To use this method, it would be necessary for a group to collect
all CPT and modifier billing data for the physician both inside and
outside the practice, assign RVUs, and compare the totals. There is no
``full-time'' equivalent RVU amount that a group could use as a proxy
to measure the inside RVUs against; therefore, the group would have to
collect detailed data about outside practice time. We believe that the
RVU method could
[[Page 1689]]
impose a burden on groups because of the high volume of codes that
physicians are likely to submit, especially in large group practices.
This method is further complicated by the fact that it is not clear
that all insurers use CPT codes in all cases. For example, some HMOs
provide a given payment for a particular kind of service and may not
collect data on individual office visits or tests.
As a result of our assessment, we believe that measuring a
physician's activities by using time spent doing work for the group, as
required in the August 1995 final rule, may be the most straightforward
and least burdensome method for measuring a physician's efforts,
especially because we do not intend to require that physicians keep
detailed time sheets to verify their time. Practices should already be
able to track the amount of time spent by each member in activities
related to the practice. While this data may not be present in billing
records, it should be present in appointment databases, personal
schedules, and other easily accessible sources. To simplify matters, a
group can assume a physician works a standard 40 hour week unless he or
she can present evidence of a shorter or longer work week. A practice
should be able to maintain records in the form of general schedules
that are sufficient to demonstrate its calculations in the event of an
audit. Finally, we consulted several group practice associations about
their preference for measuring the standard. They informed us that they
favor using time in calculating the standard.
As a result of our investigation, we are therefore proposing to use
the measure of physician time as the ``default'' standard. We believe
that our carriers can evaluate the ``substantially all'' test only if
we have one, or perhaps a few, standards. Therefore, we are soliciting
comments on other possible methods that groups might use, provided
these methods will provide verifiable data that demonstrates that a
group meets the ``substantially all'' criteria. We will review all
alternative methods, but only include those in the final rule that we
believe are both verifiable and administratively feasible.
The Billing Number Requirement--We are interpreting the new billing
number requirement in the ``substantially all'' test to mean that a
single group can have more than one billing number, as long as the
group bills under a billing number that has been assigned to the group.
We do not believe there is anything in the statute to preclude a group
practice from having more than one number. This interpretation will
accommodate situations in which one group practice has multiple numbers
because it has many locations or operates in more than one State.
It has also come to our attention that there are an increasing
number of situations in which a group has another entity (not a wholly-
owned entity) bill for it, such as a management services organization
(MSO) or billing agent. We propose to allow a group to meet the
requirement that services have been ``billed under a billing number
assigned to the group'' if an agent bills for the group, under the
group's name, using the group's billing number, provided the
arrangement meets the requirements in Sec. 424.80(b)(6). However,
because of the specific terms of the statute, we do not believe a group
can receive payments for its services through a separate entity (one
that is not wholly owned) that bills in its own right, under its own
billing number, even if the payments ultimately constitute group
revenues.
The requirement for physician-patient encounters and the definition
of group ``members''. Effective January 1, 1995, the group practice
definition in section 1877(h)(4)(A)(v) requires that members of the
group must personally conduct no less than 75 percent of the physician-
patient encounters of the group practice. We believe this provision may
have been designed to differentiate between legitimate group practices
and those with ``member'' owners or investors who are members in name,
but who treat few, if any, patients. In such a scenario, nonmember
physician contractors could be hired to treat most of the group's
patients. This arrangement would allow the nonpracticing ``outside''
physician owners to refer to the ``group'' for the furnishing of
laboratory services or other ancillary types of services that are
designated health services.
In Sec. 411.351 of the August 1995 final rule, we defined
``members'' of a group practice broadly as physician partners and full-
time and part-time physician contractors and employees during the time
they furnish services to patients of the group practice that are
furnished through the group and are billed in the name of the group.
This definition would cover all of the physicians who are involved, in
some capacity, in a group practice arrangement, while they are
furnishing services to group patients. As a result, all group practice
patients who have an encounter in the group setting with a physician
would be treated by a member of the group practice. Our interpretation
would thus render the encounter requirement in section 1877(h)(4)(A)(v)
superfluous.
It has come to our attention that group practices generally do not
regard independent contractors as members of the group. In addition,
when a group practice contracts with a number of independent
contractors, the group can experience difficulties in meeting the
``substantially all'' requirement, especially if the contractors work
for the group only on a part-time basis. In order to remedy this
problem, and to give meaning to the encounter requirement in section
1877(h)(4)(A)(v), we propose a change in the definition of a member of
a group practice. We propose to exclude independent contractors from
the definition. In addition, we propose to redefine ``members of the
group'' to include not just physician partners, but physicians with any
other form of ownership in the practice (including physicians whose
ownership is held by their individual professional corporations). We
also propose to count any of the physicians listed under the definition
as ``members'' during the time they furnish ``patient care services''
to the group rather than just during the time they furnish services to
patients of the group that are furnished through the group and are
billed in the name of the group. This change reflects our belief that a
physician can legitimately be participating as a group member while
providing services to the group for which the practice cannot directly
bill, such as certain administrative services. We are also proposing to
extend this definition to group practices in the context of the
additional designated health services.
Group practices should note that under the revised definition of a
group ``member,'' independent contractors cannot supervise the
provision of designated health services under the in-office ancillary
services exception. Under section 1877(b)(2), services must be
furnished personally by the referring physician, personally by a
physician who is a member of the same group practice, or by individuals
who are directly supervised by the referring physician or another
physician in the group practice. We will no longer consider independent
contractors as physicians who are ``in the group practice.'' An
independent contractor may be able to refer to the group practice for
the provision of designated health services, provided the physician
qualifies for the personal services exception in section 1877(e)(3) of
the Act, or the new general compensation exception in Sec. 411.357. We
would also like to point out that the definition of who qualifies as a
``member of a group practice'' in Sec. 411.351 applies only in
[[Page 1690]]
the context of the referral provisions in section 1877 of the Act. The
concept of group membership may be different for purposes of other
provisions of the Medicare or Medicaid statutes.
As a result of our change in who constitutes a group practice
member, at least 75 percent of all physician-patient encounters must
occur between owner or employee physicians and patients. We regard an
``encounter'' as any appointment during which a group practice patient
is actually examined or treated by a physician.
Methods for distributing group costs and revenues. The statute
requires that a group distribute its income and overhead in accordance
with methods that are ``previously determined.'' We regard this
provision as ambiguous, since it is not clear prior to what event these
methods must be in place. A method will always be in place just prior
to a distribution, since a distribution can occur only if there is some
method in place to carry it out.
It is our view that this provision was meant to require that a
group have an established plan for its distributions, rather than
making ad hoc decisions about distributions just before making them.
Congress may have feared that ad hoc disbursements would be more likely
to reflect a physician's referrals. To give meaning to this provision,
we propose to interpret it so that a group must have in place methods
for distribution determined prior to the time period the group has
earned the income or incurred the costs. We believe these methods can
be determined by any party, and not just members of the group practice.
For example, if a hospital has established a group practice to run a
hospital affiliated clinic, the hospital might be the party that
determines how clinic income will be distributed.
We are also proposing that the overhead expenses of and the income
from the practice be distributed according to methods that indicate
that the practice is a unified business. That is, the methods must
reflect centralized decision making, a pooling of expenses and
revenues, and a distribution system that is not based on each satellite
office operating as if it were a separate enterprise. We would impose
this additional standard under our authority under section
1877(h)(4)(A)(vi) to add standards by regulation to the definition of a
group practice.
Volume or value of referrals cannot be reflected in a physician
member's compensation. Beginning on January 1, 1995, physicians who are
group practice members cannot directly or indirectly receive
compensation based on the volume or value of their own referrals.
However, the statute qualifies this rule by allowing physicians to be
paid a share of over-all profits of the group, or a productivity bonus,
as described under the next two subheadings. (Groups should take note
that the following discussion only describes what is appropriate under
section 1877. You should be aware of and comply with other applicable
statutes, including the anti-kickback statute, when entering into
arrangements.)
We believe that the ``volume or value'' standard precludes a group
practice from paying physician members for each referral they
personally make or based on the value of the referred services. This
standard applies to any of a physician's actions that constitute
``referrals,'' as these are defined in section 1877(h)(5)(A) and (B) of
the Act. We include here a brief discussion of what constitutes a
``referral'' for purposes of the ``volume or value'' standard:
Section 1877(h)(5)(A) states that referrals include, subject to an
exception for certain specialized services, the request by a physician
for an item or service for which payment may be made under Part B,
including the request for a consultation with another physician (and
any test or procedure ordered by, or to be performed by (or under the
supervision of) that other physician). We are interpreting this
provision to apply not to a physician's requests for any Part B items
or services, but only to a physician's requests for designated health
services covered under Part B. We explain our rationale for this
position in the next section, which discusses the definition of a
``referral.''
The second part of the statutory definition of ``referral'' in
section 1877(h)(5)(B) covers (subject to an exception for certain
specific services) the request or establishment of a plan of care by a
physician that includes the provision of a designated health service.
Although this second part is not drafted in Medicare-specific terms and
could be interpreted to cover situations involving any designated
health service, we are interpreting it as applying only to those
designated health services covered under Medicare. We discuss this
position, and our interpretation of referrals for Medicaid covered
services, in more detail in the section dealing with what constitutes a
``referral.''
Because of our interpretation of what constitutes a ``referral,''
an entity wishing to be considered a group practice in order to use the
in-office ancillary services exception cannot compensate its members
based on the volume or value of referrals for designated health
services for Medicare or Medicaid patients but could do so in the case
of other patients. However, the most straightforward way for a group to
demonstrate that it is meeting the requirements for the exception would
be for the group to avoid a link between physician compensation and the
volume or value of any referrals, regardless of whether the referrals
involve Medicare or Medicaid patients. Alternatively, a group that
wants to compensate its members on the basis of non-Medicare and non-
Medicaid referrals would be required to separately account for revenues
and distributions relating to referrals for designated health services
for Medicare and Medicaid patients. If a group purports to be making
payments to its physicians for nonprogram referrals, but these appear
to us to be inordinately high or otherwise inconsistent with the fair
market value of those referrals, we could determine that the
physicians' compensation does not meet the fair market value standard,
and thus may actually reflect additional compensation for Medicare or
Medicaid referrals.
A physician member's compensation can reflect over-all profits.
Although physician members cannot be compensated directly or indirectly
based on their own referrals, under section 1877(h)(4)(A)(iv) and
(B)(i), a physician can be paid a share of over-all profits of the
group, as long as the share is not determined in a manner that is
directly related to the volume or value of that physician's own
referrals.
In the case of over-all profits, we are interpreting the statute as
follows: First, we are taking the position that the statute does not
affect a physician's compensation for services other than designated
health services. Thus, for purposes of section 1877, a group practice
can distribute profits from services other than designated health
services in any way it sees fit. For example, a group can distribute
profits from the physicians' own nondesignated health services under an
even split, based on referrals, or according to the amount of a
physician's investment in the group, seniority, hours spent devoted to
the practice, or the number or difficulty of services the physician has
furnished. The practice can also offer different types of sharing of
profits or other kinds of compensation arrangements, or combinations of
arrangements, to different physicians or groups of physicians. (Groups
should be careful to comply with other statutes, including the anti-
kickback statute, when creating compensation arrangements.)
However, when a physician makes a referral for a designated health
service
[[Page 1691]]
for a Medicare or Medicaid patient (for example, orders a laboratory
test or occupational therapy), we believe the statute requires a
different scheme. That is, the referring physician can receive a
portion of the group's overall pooled revenues from these services as
long as the group does not share these profits in a manner that relates
directly to who made the referrals for them. We believe, for example,
that these profits can be shared according to most of the principles
described above, such as an even split, a physician's investment in the
group, the number of hours a physician in general devotes to the group,
or the difficulty of a physician's work. However, each physician's
personal compensation cannot include payments based directly on the
number or value of the referrals he or she has made.
Since self-referrals are referrals under section 1877, profits
should not be pooled and divided between group members so that they
relate directly to the number of designated health services for
Medicare or Medicaid patients physicians referred to themselves or the
value of those self-referrals (such as a value based on the complexity
of the service). Thus, a physician should not receive extra, specific
compensation from the pooled profits for performing a designated health
service he or she has self-referred. We believe that rewarding a
physician each time he or she self-refers for a designated health
service can constitute an incentive to overutilize services. Nor should
a physician's compensation relate directly to the number of referrals
for designated health services he or she has made to other group
physicians, to the group's nonphysician staff, or to any other entity
or individual.
We regard ``over-all profits of the group'' to mean all of the
profits or revenues a group can distribute in any form to group
members, even if the group is located in two different States or has
many different locations within one State. We would not interpret the
concept of ``overall profits'' as the profits that belong only to a
particular specialty or subspecialty group. We believe that the
narrower the pooling, the more likely it will be that a physician will
receive compensation for his or her own referrals (for example, a
subspecialty group or location could contain only one or two
physicians).
A physician member's compensation can reflect productivity bonuses.
Under section 1877(h)(4)(A)(iv) and (B)(i), a physician's compensation
cannot directly or indirectly reflect the volume or value of his or her
referrals, except that the physician can receive a productivity bonus,
as long as the bonus is not determined in a manner that is directly
related to the volume or value of that physician's own referrals. A
productivity bonus must be based on services that are personally
performed by a physician or incident to personally performed services.
As we have noted above for sharing of profits, we have interpreted
section 1877 as imposing no restrictions on productivity bonuses based
on revenues that have nothing to do with a physician's referrals for
designated health services under Medicare or Medicaid. Thus, for all
nondesignated health services, a physician can be compensated under any
productivity scheme that a group derives. We understand that group
practices use many different measures of a physician's productivity,
such as counting patient encounters, charges or collections
attributable to the physician, or hours of patient care services, or
factoring in the degree of difficulty of a physician's procedures, ways
in which the physician has improved his or her professional
qualifications, or the amount of time the physician is willing to be
on-call. In addition, a group can pay physicians based on a percentage
of profits, straight salary, or any combination of base and incentive
payments.
In terms of designated health services that a physician refers for
Medicare or Medicaid patients, a physician's productivity bonus can
only indirectly reflect those services that he or she personally
performed or that are incident to those personally performed services.
We regard services as ``personally performed'' by a physician when he
or she participates directly in the delivery of the service. As we have
noted elsewhere, we believe that a physician has made a ``referral'' if
the physician refers a patient for a designated health service to him
or herself, to other physicians in the group, or to the physician's own
or the group practice's employees or contractors or to any other entity
or individual. Unlike the over-all profit situation, in which amounts
can be aggregated, the productivity bonus by its very nature will be
based on a physician's individual referrals and performance, and will
fluctuate accordingly. However, the statute precludes a productivity
bonus for a physician that directly reflects the volume or value of
that physician's own referrals.
Thus, we believe a physician's compensation can reflect a bonus for
designated health services the physician personally performs or
``incident to'' services the physician directly supervises, provided
the services result from the referral of a physician other than the one
performing or supervising the service. A physician in this situation is
not being compensated based on the volume or value of his or her own
referrals. A physician can receive compensation for his or her own
referrals for designated health services only through the aggregation
that occurs as part of over-all sharing of profits.
We regard the reference in section 1877(h)(4)(B)(i) to services
performed ``incident to a physician's personally performed services''
as a reference to the services defined in section 1861(s)(2)(A) of the
Act. Here they are listed under ``Medical and Other Health Services''
as services and supplies (including drugs and biologicals that cannot,
as determined in accordance with regulations, be self-administered)
furnished as an incident to a physician's professional service, of
kinds that are commonly furnished in physicians' offices and are
commonly either furnished without charge or included in the physicians'
bills.
Our longstanding interpretation of this provision appears in
section 2050 of the Medicare Carriers Manual, Part 3--Claims
Processing. This provision states that ``incident to'' services are
those that are furnished as an integral, although incidental part, of
the physician's personal professional services in the course of
diagnosis or treatment of an illness or injury. The services of
nonphysicians must be furnished under the physician's direct
supervision by employees of the physician.
Because the provision in section 1877(h)(4)(B)(i) on productivity
bonuses is a difficult one, and because physicians are now compensated
in many ways, we directly solicit comments on our interpretation of
this provision.
7. Referral
We have received a number of inquiries about what constitutes a
``referral'' for purposes of section 1877. The concept of a referral
appears in several places: physicians are prohibited from making
certain referrals and a number of the compensation-related exceptions
require that any payment passing between a physician and an entity not
reflect the volume or value of the physician's referrals. We believe
that the concept of a ``referral'' in the statute is a broad one, and
that prohibited referrals are a subset of these. Below we discuss our
interpretation of what constitutes a ``referral.''
Under section 1877(h)(5)(A), referrals include, subject to an
exception for
[[Page 1692]]
certain specialized services, the request by a physician for an item or
service for which payment may be made under Part B, including the
request for a consultation with another physician (and any test or
procedure ordered by, or to be performed by (or under the supervision
of) that other physician).
We believe that ``an item or service for which payment may be made
under Part B'' means a Part B item or service that ordinarily ``may
be'' covered under Medicare (that is, that could be a covered service
under Medicare at the present time in the community in which the
service has been furnished) for a Medicare-eligible individual,
regardless of whether Medicare would actually pay for this particular
service, at the time, for the particular eligible individual who has
been referred. (For example, Medicare might not pay for a service if
the individual has not yet met his or her deductible.)
The second part of the statutory definition of ``referral'' in
section 1877(h)(5)(B) covers (subject to an exception for certain
specialized services) the request or establishment of a plan of care by
a physician that includes the provision of a designated health service.
Although this second part is not drafted in Medicare-specific terms and
could be interpreted to cover situations involving any designated
health service, we are interpreting it as applying only to those
designated health services that ``may be'' covered under Medicare. We
base this position on the fact that the referral prohibition in section
1877(a)(1) applies only to designated health services covered under
Medicare.
We are not aware of any rationale for the distinction between the
definition for Part B services, in which a physician's request for any
Part B item or service constitutes a referral, and the definition for
other items or services, in which a referral consists of a physician's
request for, or a plan of care providing for, only a designated health
service. The broader definition for Part B services has no
ramifications in terms of the actual referral prohibition, which
encompasses only referrals for designated health services. However, it
is significant in terms of the standard that appears in the ``group
practice'' definition and in a number of the compensation-related
exceptions that precludes compensation between parties that reflects
the volume or value of a physician's referrals.
It is our understanding that section 1877 was designed to prevent
physicians from overutilizing the specific health care services
designated in the statute, a list Congress derived based on its sense
of which services tend to be subject to abuse. We do not believe the
statute was meant to preclude physicians from being compensated for
their referrals for totally different Part B services. Thus, we are
taking the position that, since the prohibition relates only to
referrals for designated health services, the concept of a referral for
a Part B service under section 1877(h)(5)(A) should be limited to just
referrals for designated health services.
As we explained in the discussion on the definition of an
``entity,'' we believe that the concept of a ``referral'' covers
situations in which physicians refer to themselves or among themselves.
(As we noted in that discussion, a physician could be prohibited from
referring to him or herself or to other group practice members if the
services do not meet the in-office ancillary services exception in
section 1877(b)(2) or the physician services exception in section
1877(b)(1) of the Act or some other exception.) We believe that a
physician has made a referral under section 1877(h)(5) when he or she
requests any designated health service covered under Part A or Part B
or establishes a plan of care that includes a designated health service
covered under Part A or B, even if the physician furnishes the service
personally. We interpret this language to cover a physician's
certifying or recertifying a patient's need for a designated health
service. For Part B services, a referral can also include a
consultation with another physician.
We are interpreting a physician's ``request'' for an item or
service, or the establishment of a plan of care, as a step that occurs
after a physician has initially examined a patient or furnished
physician services that are not designated health services, or
otherwise concluded that the patient needs a designated health service.
(We describe our rationale for this interpretation in more detail in
section III.C.2 of this preamble, where we discuss the in-office
ancillary services exception.)
We are interpreting a ``request'' as occurring whenever a physician
asks for a service in any way or indicates that he or she believes the
service is necessary (for example, by verbally stating that the service
is necessary, by entering description of the service into the patient's
records or onto a medical chart or by writing a prescription).
What constitutes a ``referral'' for a Medicaid service. Section
1903(s) of the Act applies aspects of the referral prohibition to the
Medicaid program for referrals that would result in a denial of payment
for the service under Medicare, if Medicare covered the service to the
same extent and under the same terms and conditions as under the State
plan. We interpret this provision to mean that a State should apply the
Medicare rules in section 1877 to a referral for a Medicaid service,
even if the service is not covered under Medicare.
However, the definition of a referral in section 1877(h)(5)(A) and
(B) is cast specifically in terms of a request for certain Part B
Medicare services and for ``other items,'' which in the Medicare
context we have interpreted to mean Part A services. Since Medicaid
services are not categorized this way, we propose to interpret this
provision by establishing an analogous definition. That is, (subject to
an exception for certain specialized services, which we describe below)
a physician has made a referral if he or she has requested a Medicaid
covered designated health service that is comparable to a service
covered under Part B of Medicare (including a request for a
consultation with another physician). A physician has also made a
referral for any other Medicaid covered item or service if the service
is a designated health service and the physician has requested it or
has established a plan of care that includes it.
We are also translating a ``referral'' from the Medicare context to
mean a physician's requests for, or plan of care including, a
designated health service that ordinarily ``may be'' covered under the
particular State Medicaid program for an individual in the patient's
eligibility category, regardless of whether the State Medicaid agency
would actually pay for this particular service, at the time, for the
particular Medicaid-eligible individual who has been referred.
Prohibited referrals only involve designated health services. It is
important to keep in mind that the only referrals that are prohibited
under section 1877 of the Act are those that involve the furnishing of
a designated health service listed in section 1877(h)(6). As we note in
section IV.A.5 of this preamble in our discussion on referrals to
immediate family members, a physician is free to make a referral for a
service that is not a designated health service (or a service that does
not include a designated health service), such as certain physician
services. For example, a physician can refer a patient to an
obstetrician for general prenatal care. If the obstetrician prescribes
ultrasound as part of this prenatal care, it is the obstetrician who
has made a referral for a designated health service, and not the
original physician.
The statutory exception to the definition of a ``referral.'' Before
OBRA
[[Page 1693]]
'93, the definition of a ``referral'' under section 1877(h)(5)(A) was
qualified by an exception in section 1877(h)(5)(C) for a request by a
pathologist for certain clinical diagnostic laboratory tests and
pathological examination services. These services had to be furnished
by (or under the supervision of) the pathologist, as the result of a
consultation requested by another physician. We incorporated this
provision into the August 1995 final rule in Sec. 411.351.
We are also proposing to interpret the level of supervision that a
pathologist must provide if another individual, such as a technician,
actually furnishes the services. The statute requires ``supervision,''
rather than the ``direct supervision'' that appears as part of the in-
office ancillary services exception. We are interpreting
``supervision'' to mean the level of supervision ordinarily required
under Medicare coverage and payment rules or, when they apply, the
health and safety standards, for the particular services at issue in
the particular locations in which the services will be furnished.
As the result of OBRA '93, beginning on January 1, 1995, the
exception to what constitutes a ``referral'' in section 1877(h)(5)(C)
was expanded to include a request by a radiologist for diagnostic
radiology services and a request by a radiation oncologist for
radiation therapy, if the services are furnished by (or under the
supervision of) the radiologist or radiation oncologist as the result
of a consultation requested by another physician. We are incorporating
this amendment into the definition of a ``referral'' in Sec. 411.351.
Diagnostic radiology services and radiation therapy are also defined in
Sec. 411.351, where we have presented our proposed definitions of the
different designated health services.
When a physician has requested a ``consultation.'' The services
that are excepted from the ``referral definition'' under section
1877(h)(5)(C) must result from a consultation requested by a physician
other than the pathologist, radiologist, or radiation oncologist who
actually performs or supervises the performance of the services listed
above. We discussed the concept of a consultation briefly in the
preamble to the proposed rule covering referrals for clinical
laboratory services at 57 FR 8595. We said that, for purposes of
Medicare coverage, a ``consultation'' is--
a professional service furnished to a patient by a physician (the
consultant) at the request of the patient's attending physician. A
consultation includes the history and examination of the patient as
well as a written report that is transmitted to the attending
physician for inclusion in the patient's permanent record ***. Other
referrals, such as sending a patient to a specialist who assumes
responsibility for furnishing the appropriate treatment, or
providing a list of referrals for a second opinion, are not
``consultations'' or ``referrals'' that would trigger the laboratory
services use prohibition.
We would like to clarify that a consultation occurs whenever a
physician requests that a patient see another physician, such as a
particular specialist, but the original physician retains control over
the care of the patient, including any care related to the condition
that prompted the consultation. Section 1877(h)(5)(A) implies that a
``consultation'' is still a consultation even if the consultant
physician takes the initiative to order, perform, or supervise the
performance of, tests for the patient. The consultant physician, as we
noted in the preamble of the August 1995 rule, must provide the
original physician with a report. Nonetheless, we regard this as a
consultation as long as it is the original physician who gathers
information from the consultant physician about his or her examination
of the patient and any test results and then makes a decision about how
to proceed with the patient's care.
Conversely, the original physician has not arranged for a
consultation, but instead has made a referral, in situations in which
the specialist takes over the patient's care for purposes of the
condition that prompted the referral. For example, a physician might
send a patient to a specific cardiologist, who examines the patient
thoroughly, sends a report to the attending physician but is the only
one who sees the patient thereafter for the purpose of treating a heart
problem.
8. Remuneration
Remuneration that does not result in a compensation arrangement. A
compensation arrangement is defined in section 1877(h)(1) as any
arrangement involving any remuneration between a physician (or family
member) and an entity, other than an arrangement involving only
remuneration described in section 1877(h)(1)(C). Section 1877(h)(1)(C)
lists certain specific kinds of remuneration that do not result in a
compensation arrangement, such as the forgiveness of amounts owed for
inaccurate tests, mistakenly performed tests, or for the correction of
minor billing errors.
We believe there is some ambiguity in section 1877(h)(1) concerning
the requirement that excepted remuneration must result from an
arrangement involving only the remuneration described in section
1877(h)(1)(C). This provision could be read to mean that the items in
section 1877(h)(1)(C) are excepted when the arrangement that exists
between the physician and entity involves nothing but the excepted
forms of payment. As a practical matter, we realize that the kinds of
remuneration listed in section 1877(h)(1)(C) seldom occur as isolated
transactions, but are often subsets or components of other
arrangements. For example, the forgiveness of minor billing errors
suggests that the parties transact and exchange services or items for
payment when there are no billing errors; those transactions that
contain billing errors may be only a small fraction of the parties'
overall business dealings.
To clarify this provision, we are interpreting it to mean that the
portion of a business arrangement that consists of the remuneration
listed in section 1877(h)(1)(C) alone does not constitute a
compensation arrangement. Any other forms of remuneration that might
accompany these payments are not excepted and could constitute a
compensation arrangement, provided they do not otherwise meet one of
the other exceptions in this proposed regulation.
Section 1877(h)(1)(C)(ii) excepts from the definition of
``remuneration'' the provision of items, devices, or supplies that are
used solely to collect, transport, process, or store specimens for the
entity providing the item, device, or supply, or order or communicate
the results of tests or procedures for the entity. We believe that some
pathology laboratories have been furnishing physicians with materials
ranging from basic collection items and storage items (for example,
jars for urine samples and vials for blood samples) to more specialized
or sophisticated items, devices, or equipment (snares used to remove
gastrointestinal polyps, needles used for biopsies or to draw bone
marrow or samples of amniotic fluid for amniocentesis, and computers or
fax machines used to transmit results).
In order for these items and devices to meet the statutory
requirement, they must be used solely to collect, transport, process,
or store specimens for the laboratory or other entity that provided the
items and devices. We interpret ``solely'' in this context to mean that
these items are used solely for the purposes listed in the statute,
such as cups used for urine collection or vials used to hold and
transport blood to the entity that supplied the items or devices.
[[Page 1694]]
We do not believe that an item or device meets this requirement if
it is used for any purposes besides these. For example, we do not
regard specialized equipment such as disposable or reusable aspiration
and injection needles and snares as solely collection or storage
devices. Instead, these items are also surgical tools that are
routinely used as part of a surgical or medical procedure. For example,
the Food and Drug Administration (FDA) regulations in 21 CFR
878.4800(a) define a ``manual surgical instrument for general use'' as
a ``non-powered, hand-held, or hand-manipulated device, either reusable
or disposable, intended to be used in various general surgical
procedures.'' Surgical instruments listed in the regulation include
disposable or reusable aspiration and injection needles, snares, and
other similar devices. Snares are also listed in these regulations as
components of various specialized surgical devices, such as ear, nose,
and throat manual surgical instruments, endoscopic electrosurgical
units, and manual gastroenterology-urology surgical instruments and
accessories.
In addition, to ensure that items or devices that could qualify for
this exception are used solely for the entity that supplied them, the
number or amount of these items should be consistent with the number or
amount that is used for specimens that are actually sent to this entity
for processing. That is, if a physician tends to annually perform 400
blood tests that are sent to a particular laboratory for analysis, we
would not expect the physician to accept from that laboratory items,
devices, or supplies in excess of an amount that is reasonable for the
projected tests. In determining the amount of goods that are
reasonable, we would consider not just quantity, but such facts as
whether the laboratory packages together a set of items to be used for
just one tissue collection or one use, or whether an item can be used
multiple times, for multiple entities.
If, on the other hand, a physician keeps a particular item or
device and uses it repeatedly or could use it repeatedly for any
patients or for other uses, we would presume that the item or device is
not one that meets the requirement, unless the physician can
demonstrate otherwise. For example, if computer equipment or fax
machines can be used for a number of purposes in addition to ordering
or receiving results from an entity, we would presume that the
``solely'' requirement is not met, unless the physician can demonstrate
that the equipment is integral to, and used exclusively for, performing
the outside entity's work. Detailed records concerning the use of the
machine would be necessary to overcome this presumption.
Section 1877(h)(1)(C)(iii) ``excepts'' from a compensation
arrangement situations involving certain payments made by an insurer or
a self-insured plan to a physician. The payments must be those that
satisfy a claim, submitted on a fee-for-service basis, for the
furnishing of health services by that physician to an individual who is
covered by a policy with the insurer or by the self-insured plan. The
payments must meet certain specified conditions.
We believe that this provision was designed for situations in which
an insurer is involved in the delivery of health care services. If the
insurer owns a health care facility, a physician might otherwise be
precluded from referring to that facility just because the physician
receives compensation from the insurer in the form of payments that
satisfy claims the physician has submitted. If the physician is seeking
fee-for-service payments from an insurer, he or she may not have an
arrangement with the insurer that could qualify as a personal services
arrangement, or otherwise qualify under any of the other statutory
exceptions.
Discounts can be a form of remuneration for some of the designated
health services. In the August 1995 final rule, we defined remuneration
to include discounts. In the preamble to that rule, we explained that
we believe that, for most items or services that a physician might
purchase, the statute dictates this result. Section 1877(e)(8)(B)
excepts from a compensation arrangement payments made by a physician to
an entity as compensation for items or services (other than clinical
laboratory services) if the items or services are furnished at fair
market value. As a result, any amounts that a physician pays for items
or services that do not reflect fair market value, such as certain
discounted items or services, would not meet the exception.
We may have implied in the August 1995 final rule that all
discounts would fail to meet the fair market value standard. We wish to
clarify here that we believe a discount does meet the fair market value
standard if it is an arm's-length transaction; an entity offers it to
all similarly situated individuals, regardless of whether they make
referrals to the entity; the discount does not reflect the volume or
value of any referrals the physician has made or will make to the
entity; and the discount is passed on to Medicare or other insurers. We
are aware of situations in which discounts enure to the benefit of
referring physicians. For example, physicians will sometimes purchase
oncology drugs from manufacturers at a discount, yet mark the drugs up
to eliminate the discount when billing Medicare. Such arrangements
would not meet the standard.
We are also creating a new exception under our authority in section
1877(b)(4), which allows us to except any other financial relationship
that we determine does not pose a risk of program or patient abuse. The
new exception would allow physicians to receive a discount based on the
volume of their referrals to an entity, provided the discount is passed
on in full to the patients or their insurers (including Medicare), and
does not enure to the benefit of the physicians in any way.
The statute provides a different exception for laboratory services.
Section 1877(e)(8)(A) states that there is no compensation arrangement
when a physician makes payments to a laboratory in exchange for the
laboratory providing clinical laboratory services. This exception does
not include a fair market value standard. Congress may not have
included this standard based on its belief that, under the Medicare
program, physicians cannot purchase laboratory services at a discount,
and then bill the Medicare program for them at a marked up rate.
We agree that physicians are precluded from purchasing and marking
up laboratory services covered under Medicare under section
1833(h)(5)(A) of the Act. This provision states that, in general,
Medicare payment for a clinical diagnostic laboratory test may be made
only to the person or entity that performed or supervised the
performance of the test. In addition, payment for laboratory tests is
made on the basis of a fee schedule.
B. General Prohibition on Referrals
Which designated health services are covered by the prohibition.
Section 1877(a)(1)(A) prohibits referrals to an entity for the
furnishing of designated health services ``for which payment otherwise
may be made under [Medicare], * * *.'' We believe that this means any
designated health service that ordinarily ``may be'' covered under
Medicare (that is, that could be a covered service under Medicare in
the community in which the service has been provided) for a Medicare-
eligible individual, regardless of whether Medicare would actually pay
for this particular service, at the time, for that particular
individual (for example, the individual may not have met his or her
deductible).
[[Page 1695]]
We believe that the same principles apply for designated health
services under the Medicaid program. Section 1903(s) says that the
Secretary cannot make Federal financial participation payments to a
State for designated health services, as they are defined under section
1877(h)(6), furnished to an individual on the basis of a referral that
would result in a denial of payment under Medicare, if Medicare covered
the services to the same extent and under the same terms and conditions
as under the State plan. We interpret this provision to mean that the
Medicare rules in section 1877 apply to Medicaid services, as if
Medicare covered the same items and services as a State's Medicaid
program.
As a result, a referral could affect a State's FFP if the
designated health service is one ``for which payment otherwise may be
made'' under a State's Medicaid program, regardless of whether a State
agency would actually pay for this particular service, at the time, for
that particular individual. Therefore, if a State plan could cover the
service for a Medicaid eligible individual in the individual's
eligibility group, we believe it is a service that is covered by the
referral prohibition.
Limitations on billing and refunds on a timely basis. As part of
the prohibition on referrals in section 1877(a), the statute also
provides that an entity may not present or cause to be presented a
Medicare claim or a bill to any individual, third party payor, or other
entity for designated health services furnished under a prohibited
referral. In the August 1995 final rule, we included in Sec. 411.353(d)
the requirement that an entity that collects payment for a laboratory
service that was performed under a prohibited referral must refund all
collected amounts on a timely basis. We are proposing to apply this
provision to such amounts collected for any of the designated health
services. We are also proposing to define ``timely basis'' by cross
referring to Sec. 1003.101 in the OIG civil money penalty regulations.
While Sec. 1003.101 currently defines this term as ``the 60-day period
from the time the prohibited amounts are collected by the individual or
entity,'' the OIG is planning to issue shortly revised final
regulations that will amend this term. Under the amended version, the
60-day timeframe for a refund will begin when the individual or entity
knew or should have known that the amount collected was related to a
prohibited referral. We plan to adopt this revised definition as well.
C. General Exceptions That Apply to Ownership or Investment Interests
and to Compensation Arrangements
1. Exception for Physician Services
The statute provides that the referral prohibition does not apply
in cases involving physician services (as defined in section 1861(q))
provided personally by (or under the personal supervision of) another
physician in the same group practice as the referring physician.
Physician services are generally defined in section 1861(q) as
professional services performed by physicians, including surgery,
consultation, and home, office, and institutional calls. The Medicare
regulations have interpreted this provision in Sec. 410.20(a) to
include diagnosis, therapy, surgery, consultations, and home, office,
and institutional calls, provided the services are furnished by one of
the types of doctors listed in Sec. 410.20(b).
Note that this exception applies to physician services that
constitute designated health services, as we would define designated
health services in Sec. 411.351. The exception in the Medicare context
does not cover services that are performed by nonphysicians but are
furnished under a physician's supervision, such as ancillary or
``incident-to'' services. Under Medicare, physician services can only
be performed by a physician. Thus, we believe the exception applies
only to services that are provided personally by a physician who is a
member of the same group practice as the referring physician or that
are provided by a nonmember physician who is personally supervised by a
group practice physician. We would interpret ``personal supervision''
to mean that the group practice physician is legally responsible for
monitoring the results of any test or other designated health service
and is available to assist the individual who is furnishing the
service, even though the member physician need not be present while the
service is being furnished.
2. Exception for In-office Ancillary Services
This exception applies to services other than parenteral and
enteral nutrients, equipment and supplies and durable medical equipment
(although it does apply to infusion pumps) that are referred by a solo
practitioner or group practice member within his or her own practice.
The exception requires that the services be performed by the referring
physician or group practice member, or by another member of the same
group practice as the referring physician, or be directly supervised by
one of these physicians (we discussed the direct supervision
requirement in section III.A.2 of this preamble), that the services be
furnished in certain locations, and that the services be billed in a
particular way. We discuss these last two requirements below.
a. The site requirement
Where a service is actually ``furnished.'' Section
1877(b)(2)(A)(ii)(I) requires, for a solo or group practice, that the
services be furnished in a building in which the referring physician or
another member of the group practice furnishes physician services
unrelated to the furnishing of designated health services. It is our
view that a service is furnished wherever a procedure is actually
performed upon a patient or in the location in which a patient receives
and begins using an item.
For example, if a patient receives an MRI (magnetic resonance
image) in a physician's office, the service has been furnished there.
If a patient is fitted for and receives a brace in the physician's
office, the brace has been furnished there. The same rule would apply
to a prosthetic device that is implanted in a physician's office.
However, any item that is given to a patient but is meant to be used at
home or outside the physician's office, or any item that is delivered
to the patient's home, has not been ``furnished'' in the physician's
office.
What constitutes the ``same building'' in which the physician is
practicing. We are interpreting ``the same building'' to mean one
physical structure, with one address, and not multiple structures that
are connected by tunnels or walkways. In addition, we believe ``the
building'' consists of parts of the physical structure that are used as
office or other commercial space. For example, a mobile X-ray van that
is pulled into the garage of a building would not be part of that
building.
When a physician is furnishing physician services ``unrelated to
the furnishing of designated health services.'' To meet this criterion,
we believe that a physician must be providing in the same building any
amount of physician services (as defined in Sec. 410.20(a)) other than
those listed as designated health services as we have defined them in
Sec. 411.351. Thus, we would regard as ``unrelated to designated health
services'' a physician's examination of a patient and diagnosis, even
if these lead to the physician requesting a designated health service,
such as an X-ray or laboratory test.
[[Page 1696]]
The location test for group practices. In the case of a group
practice, the group has the option of meeting a location test other
than the one requiring that the designated health services be provided
in the same building in which a group member provides physician
services. The group can provide clinical laboratory services in any
other building that is used by the group for the provision of some or
all of the group's clinical laboratory services.
A group can furnish the other designated health services in another
building that is used by the group for the centralized provision of the
group's designated health services. We believe that a location meets
this ``centralized'' requirement if it services more than one of a
group's offices, and if it furnishes one or any combination of
designated health services. It is also our view that a group can have
more than one of these centralized locations. To meet the in-office
ancillary exception, a group would be required to have a physician
member present in the ``centralized'' location to perform or directly
supervise the performance of designated health services, but the
physician would not be required to perform physician services that are
unrelated to the designated health services in this location.
b. The billing requirement
Section 1877(b)(2)(B) requires that in-office ancillary services be
billed by the physician performing or supervising the services, by the
referring or supervising physician's group practice under a billing
number assigned to the group, or by an entity that is wholly owned by
the physician or group practice. For a group practice that bills, we
discussed a similar requirement for a group billing number in section
III.A.6 of this preamble, where we covered the definition of a group
practice. There, as here, we are interpreting this provision to allow a
single group to bill under any billing number that has been assigned to
the group in situations in which a group has more than one number, and
to allow an agent to bill for the group in the group's name, using the
group's number, provided the arrangement meets the requirements in
Sec. 424.80(b)(6).
In situations in which a ``wholly-owned'' entity bills for a group,
we do not believe the statute requires that the service be billed under
the group number, if the wholly owned entity can bill under its own
provider number. Also, we are interpreting ``a wholly-owned'' entity
that bills to cover an entity that provides billing or administrative
services to a physician or group practice. Alternatively, this entity
can be a wholly-owned provider of designated health services, such as a
laboratory or radiology facility that is wholly owned by a physician or
group, but bills for its own services. However, because the provision
refers to an entity that is ``wholly owned,'' we do not believe that it
covers billing entities that are owned jointly by a physician or group
practice with any other individuals or entities.
We also believe that a group practice member cannot use the in-
office ancillary services exception to refer to other group practice
members for services he or she intends to bill independently. Section
1877(b)(2)(B) states that the services must be billed by the physician
performing or supervising the services or by a group practice of which
the physician is a member, or by entities wholly owned by the physician
or the group. Nonetheless, under the definition of who qualifies as a
``member'' of a group practice in Sec. 411.351, a group practice
physician billing under his or her own provider status would be
considered a solo practicing physician for purposes of the in-office
ancillary exception.
In Sec. 411.351, we defined who can qualify as a ``member'' of a
group practice broadly in order to accommodate the many part-time and
contract physicians who often participate in one or more group
practices. The definition of a ``member'' covered physician partners
and full and part-time physician contractors and employees. Physicians
under the definition qualify as ``members'' only during the time they
furnish services to patients of the group practice that are furnished
through the group and are billed in the name of the group. Therefore,
whenever a physician bills separately for a lab service the physician
has personally performed or supervised, he or she is functioning as a
solo practitioner and not as a group member. (We are currently
proposing to amend the definition of a ``member'' to exclude
independent contractors and to regard a physician as a member during
the time he or she furnishes ``patient care services'' to the group.
These changes would not affect our interpretation.)
If a physician bills for a service independently, other group
members cannot directly supervise those services for the referring
physician. In addition, if a group member bills for too many services
independently, the group practice may fail to meet the ``substantially
all'' test under the definition of a group practice in section
1877(h)(4)(A)(ii). That provision requires that substantially all of
the services provided by group members be billed under a billing number
assigned to the group.
c. Designated health services that do not trigger the in-office
exception
The location requirements for this exception specify that
designated health services must be provided in a building in which a
solo practitioner or a group practice physician also provides physician
services unrelated to the furnishing of designated health services or,
for group practices, in a building that serves as a centralized
location in which a group provides designated health services. Thus,
this exception would not cover services provided elsewhere, such as
home health services.
If services are furnished in a hospital or skilled nursing
facility, we believe they can be covered under this exception if these
locations serve as a centralized location in which a group provides
designated health services or if the referring physician or a member of
the same group practice furnishes unrelated physician services in the
building, and the physicians can meet the requirement for direct
supervision and billing.
3. Exception for Services Provided Under Prepaid Health Plans
We are aware that the health care world is evolving rapidly,
consisting of a broad spectrum that ranges from traditional practices
using fee-for-service billing all the way to fully capitated managed
care systems, many of which are excepted under the ``prepaid''
provision in the statute. In between these extremes exist a host of
``hybrid'' systems that display a mixture of fee-for-service and
managed care characteristics. Section 1877 addresses some of these
systems directly; most others we believe can continue to function by
meeting the exceptions in the statute and in this proposed regulation.
We specifically solicit comments on whether our assessment is accurate.
In this section we describe how we propose to interpret the law in
a manner that we believe will help to safeguard the Medicare and
Medicaid programs from abuse, while facilitating the evolution of
integrated delivery and other health care delivery systems. We also
discuss how we believe the law affects referrals for designated health
services provided under demonstration projects and waivers.
a. Physicians, suppliers, and providers that contract with prepaid
organizations
The ``prepaid plan'' exception covers services furnished by certain
specified organizations to their enrollees. Under
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section 1877(b)(3), these include health maintenance organizations and
competitive medical plans that have a contract with Medicare, certain
prepaid organizations functioning under a demonstration project, and
Federally qualified health maintenance organizations. We have
incorporated this exception into the regulations at Sec. 411.355(c). We
are aware that a number of these organizations do not furnish services
directly but often contract with outside physicians, providers, or
suppliers to furnish items or services to their enrollees, for which
the organizations bill. The outside physicians, providers, or suppliers
may, in turn, contract with other physicians or entities for certain
supplies or services. In order to accommodate these situations, we are
interpreting this exception broadly to cover not only services
furnished by the organizations themselves, but also those furnished to
the organization's enrollees by outside physicians, providers, or
suppliers under contract with these organizations. The exception would
also cover services furnished to enrollees by those with whom the
outside physicians, providers, or suppliers have contracted.
b. Managed care organizations under the Medicaid program
We propose to add to the regulation a new exception in
Sec. 435.1012(b) for designated health services provided by managed
care entities analogous to those listed in section 1877(b)(3) that
provide services to Medicaid eligible enrollees under contracts with
State Medicaid agencies. We are basing this addition on our analysis of
section 1903(s) of the Act. Under section 1903(s), a State can receive
no FFP for expenditures for medical assistance under the State plan
consisting of a designated health service furnished to an individual on
the basis of a referral that would result in a denial of payment for
the service under Medicare if Medicare covered the service to the same
extent and under the same terms and conditions as under the State plan.
We read this provision to mean that the Medicare-based rules in section
1877 must be applied to services furnished under a State's Medicaid
program to determine when a referral is a ``prohibited'' one.
Section 1877(b)(3) excepts from the referral prohibition services
furnished to enrollees of certain ``prepaid'' plans; however, all of
the entities listed in that exception provide services to Medicare
patients. As a result, the exception for prepaid arrangements has no
meaning for physicians who wish to refer in the context of the Medicaid
program. In order to give some meaning to this provision in the
Medicaid context, when it is read in conjunction with section 1903(s),
we are adding an exception for services furnished by the Medicaid
counterparts of the Medicare managed care contracts expressly
referenced in section 1877(b).
In section 1877(b)(3), Congress exempted all types of Medicare
contracts with prepaid managed care health plans. We propose to extend
this exemption to the categories of Medicaid-contracting managed care
plans analogous to those exempted for Medicare in section 1877(b)(3).
Like the section 1876 Medicare contracts exempted under section
1877(b)(3)(A), section 1903(m) governs Medicaid HMO contracts
(specifically, comprehensive risk contracts), and requires that
contracting HMOs comply with the physician incentive plan requirements
in section 1876(i)(8).
The type of Medicare prepaid health plan exempted under section
1877(b)(3)(B) is an entity with a less than comprehensive contract
(involving only Part B, or outpatient, services) under section
1833(a)(1)(A) of the Act and regulations at 42 CFR Part 417, Subpart U.
These entities are known as ``health care prepayment plans'' (HCPPs).
The Medicaid equivalent of a Medicare HCPP is a ``prepaid health
plan,'' or PHP. Like an HCPP, PHPs generally contract for less than a
comprehensive range of services (a PHP can also be a nonrisk
comprehensive contract, since section 1903(m) only governs
comprehensive risk contracts). Like HCPPs, PHPs are not subject to the
full range of requirements that HMOs must satisfy under section 1876 or
section 1903(m).
Section 1877(b)(3)(C) exempts entities receiving payment on a
prepaid basis under a demonstration project under section 402(a) of the
Social Security Amendments of 1967 or section 222(a) of the Social
Security Amendments of 1972. The Medicaid counterpart of section 402(a)
is section 1115(a) of the Social Security Act. Indeed, several
demonstration projects under section 402(a) involving Medicaid-eligible
Medicare beneficiaries also involve Medicaid capitation payments under
the authority in section 1115(a). We accordingly are proposing to
exempt entities receiving payments on a prepaid capitation basis under
a demonstration project under section 1115(a) of the Act.
Finally, in order to cover the full range of Medicaid managed care
contractors paid on a prepaid basis, as Congress did for Medicare, it
is also necessary to exempt ``Health Insuring Organizations'' (HIOs) if
they furnish or arrange for services as a managed care contractor. We
are accordingly proposing to exempt these entities as well.
c. Evolving structures of integrated delivery and other health care
delivery systems
As described above, the statute directly excepts from the referral
prohibition all of the services provided by ``prepaid'' entities
described in section 1877(b)(3) to the entities' enrollees. We realize
that a host of organizations and integrated systems are not
specifically excepted under the statute, so the services they provide
to Medicare and Medicaid patients may be subject to the referral
prohibition. For example, Medicare may provide secondary coverage to
patients who participate in employer group health plans and are treated
by HMOs that do not have contracts with Medicare or are not Federally
qualified. Also, there are nontraditional systems that use both fee-
for-service and capitated billing and are not specifically excepted
under the law. We can find no grounds to create a blanket exception for
these arrangements; we see no guarantee that these ``hybrid''
structures will all be free from any risk of patient or program abuse.
It is our view that a large percentage of the new and evolving
structures will continue to thrive by meeting the exceptions in the
statute and in this proposed regulation. For example, entities such as
preferred provider organizations (PPOs) and physician hospital
organizations (PHOs) that are not excepted under section 1877(b)(3)
normally contract with physicians to provide services to the
organization's patients, including Medicare or Medicaid patients. These
physicians can continue to refer Medicare and Medicaid patients to the
organization for designated health services, provided the physicians'
arrangements with the organization qualify for the personal services
exception in section 1877(e)(3) (and in Sec. 411.357(d) of this
proposed regulation).
This exception provides, among other things, that the arrangement
must be for at least 1 year, the physician's compensation must be based
on fair market value and cannot reflect the volume or value of the
physician's referrals, except as allowed under certain physician
incentive plans. We have defined ``fair market value'' in Sec. 411.351
to allow payment that is consistent with the general market value of
the services; that is, the compensation that would be included in a
comparable service agreement, as the result of bona
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fide bargaining between well-informed parties, at the time the
agreement takes place.
If a physician has contracted with an organization for less than 1
year, the arrangement could meet the new general exception for
compensation arrangements that we have added in Sec. 411.357(l). We
have added this new exception to accommodate the many complex
arrangements that we believe exist between physicians and entities, as
described below in section II.E.1. Also, as described in section
II.E.3, we have interpreted the ``volume or value of referrals''
standard (one of the standards in the personal services exception and
in many of the compensation-related exceptions) in a manner that we
believe will not obstruct physicians who are required to refer for
certain services within a network when the entity furnishing the
services is at substantial financial risk for their cost. In section
IV, in which we answer questions about the law, we present a discussion
about physicians who have contracted with HMOs or other prepaid
organizations, but who wish to refer fee-for-service patients to the
HMO or to other physicians or providers who are affiliated with the
HMO.
d. Designated health services furnished under a demonstration project
or waiver
We propose to interpret section 1877 in a manner that we believe
will allow most Medicare or Medicaid patients to continue to receive
designated health services under demonstration projects or waivers. Our
analysis of this issue depends upon whether the organization is paid on
a prepaid basis under section 1115(a) of the Social Security Act or
under one of the demonstration authorities specified in section
1877(b)(3)(C).
Prepaid demonstration contracts. Entities receiving payment on a
prepaid basis under section 402(a) of the Social Security Amendments of
1967 or section 222 of the Social Security Amendments of 1972, have
been exempted from the referral prohibition by section 1877(b)(3)(C).
Entities receiving payment on a prepaid basis under a Medicaid
demonstration project under section 1115(a) of the Social Security Act
would be exempt under the proposed Medicaid analogue, as discussed
earlier in this section.
We would note that the exemption for Medicare prepaid demonstration
contractors extends not only to demonstration projects initiated by the
Secretary under her discretionary authority in sections 402(a) and 222,
but to all demonstrations that incorporate or rely upon section 402
authority, including such congressionally-mandated demonstrations as
the PACE (``Program for All-inclusive Care for the Elderly'')
demonstration projects, under which a public or non-profit entity
contracts to provide comprehensive care to frail elderly Medicare
beneficiaries, including dual eligibles who have been certified for
skilled nursing facility level care, and the ``Social HMO'' (SHMO)
demonstration projects, including the ESRD SHMO demonstration.
Demonstration projects that are not prepaid. If a demonstration
project does not involve an organization receiving payments on a
prepaid basis, the Medicare ``prepaid'' exception in section
1877(b)(3)(C) and the Medicaid analogue we are proposing in this rule
would not apply.
We believe that the referral prohibition applies to services
furnished under a demonstration project or waiver that does not qualify
under section 1877(b)(3)(C) or the Medicaid prepaid demonstration
exception proposed in this rule; however, the Secretary can exercise
authority to waive or otherwise alter the requirements in sections 1877
or 1903(s). For example, section 402(a) of the Social Security
Amendments of 1967 permits the Secretary to conduct demonstrations for
a variety of purposes specified in section 402(a)(1)(A) through (K)
(for example, to test whether changes in methods of reimbursement and
payment for services, or covering additional services, would have the
effect of increasing efficiency and economy without adversely affecting
quality). Section 402(b) of these amendments permits the Secretary to
waive compliance with the requirements of the Medicare statute for such
research, insofar as these requirements are related to reimbursement or
payment. We have determined that the requirements in section 1877
constitute requirements related to reimbursement and payment and thus
may be waived for the kind of demonstration project described above,
when there are no prepaid payments.
In the Medicaid context, where a demonstration project does not
fall within the general exception proposed in this rule, the Secretary
has the authority under section 1115(a)(2) to consider as expenditures
under the State plan costs of the demonstration project that would not
otherwise be included as expenditures under section 1903, to the extent
and for the period prescribed by the Secretary. Hence, section 1115
could allow the Secretary to provide to a State the FFP that would
otherwise be precluded under section 1903(s).
D. Exceptions That Apply Only to Ownership or Investment Interests
1. Exception for Ownership in Publicly Traded Securities
To qualify for the securities exception under section 1877(c)(1),
the statute originally required that a physician's or family member's
investment had to be in securities ``which were purchased on terms
generally available to the public * * *.'' (Emphasis added.) OBRA '93
amended this provision to require that the securities be those ``which
may be purchased on terms generally available to the public.''
(Emphasis added.) This amendment went into effect retroactively to
January 1, 1992, and is reflected in the August 1995 final rule. We did
not, however, interpret this change in the final rule.
We believe the purpose of this exception is to allow physicians or
family members to acquire stock in large companies if the transaction
does not particularly favor the physicians over other purchasers. In
keeping with this purpose, we propose to interpret ``may be purchased''
to mean that, at the time the physician or family member obtained the
securities, they could be purchased on the open market, even if the
physician or family member did not actually purchase the securities on
those terms. For example, the physician or family member may have
inherited the securities or otherwise acquired them without actually
purchasing them. We have reflected this interpretation in
Sec. 411.356(a).
Section 1877(c)(1) also requires that the securities be in a
corporation that had, at the end of the corporation's most recent
fiscal year, or on average during the previous 3 fiscal years,
stockholder equity exceeding $75,000,000. In proposed 411.356(a)(2), we
define stockholder equity as the difference in value between a
corporation's total assets and total liabilities.
2. Exception for Hospital Ownership
Section 1877(d)(3) excepts designated health services ``provided by
a hospital'' (other than a hospital located in Puerto Rico) if the
referring physician is authorized to perform services at the hospital,
and the ownership or investment interest is in the hospital itself (and
not merely in a subdivision of the hospital). We believe that this
exception applies only to designated health services that are furnished
by a hospital, and not to services furnished by any other health care
providers the hospital owns, such as a hospital-owned home health
agency or SNF. It is our view that services ``provided by a hospital''
corresponds only to those
[[Page 1699]]
services provided by an entity that qualifies as a ``hospital'' under
the Medicare conditions of participation. We further believe that
section 1877(d)(3) covers any ``designated health services'' provided
by a hospital, rather than just ``inpatient or outpatient hospital
services,'' because hospitals can provide services to individuals who
are neither inpatients nor outpatients (for example, they provide
laboratory services to outside patients).
E. Exceptions That Apply Only to Compensation Arrangements
1. A new exception for all compensation arrangements that meet certain
standards
Section 1877 of the Act contains a number of exceptions to the
referral prohibition that apply only to compensation arrangements.
Section 1877(e) contains eight exceptions to the referral prohibition
based specifically on various kinds of compensation arrangements, and
these are reflected in Sec. 411.357 of the August 1995 final rule. If a
physician's (or family member's) arrangement with an entity falls
within one of the categories covered by these exceptions, and the
arrangement meets the specific criteria listed for that category, the
physician is not prohibited from making referrals to the entity.
It has come to our attention that the statutory categories, because
of their specificity, do not encompass some compensation arrangements
even though they may be common in the provider community, are based on
fair market value or are otherwise commercially reasonable, and do not
reflect the volume or value of a physician's referrals. For example, a
physician can continue to make referrals to an entity under section
1877(e)(8)(B) even if the physician purchases items from the entity,
provided the items are furnished at fair market value. On the other
hand, the law does not exempt from the referral prohibition situations
in which entities purchase items from a physician, even if the purchase
price is comparably fair.
In light of the increase in recent years of integrated delivery
systems, and the complex nature of financial arrangements between
physicians and entities, it is our view that any compensation
arrangements that are based on fair value, and that meet certain other
criteria, should be excepted. Therefore, we are proposing to establish
a new paragraph (l) in Sec. 431.357 to provide an additional exception
for compensation arrangements under the authority of section
1877(b)(4). This provision allows the Secretary to establish exceptions
for any other financial relationship that she determines, and specifies
in regulations, does not pose a risk of program or patient abuse. To
meet this requirement, we are proposing an exception for any
compensation arrangement between a physician (or immediate family
member), or any group of physicians (even if the group does not qualify
as a group practice) and an entity, provided the arrangement meets the
following criteria, which we believe by their terms will prevent
program or patient abuse. The arrangement must--
Be in writing, be signed by the parties, and cover only
identifiable items or services, all of which are specified in the
agreement;
Cover all of the items and services to be provided by the
physician or immediate family member to the entity or, alternatively,
cross refer to any other agreements for items or services between any
of these parties.
Specify the timeframe for the arrangement, which can be
for any period of time and contain a termination clause, provided the
parties enter into only one arrangement covering the same items or
services during the course of a year. An arrangement made for less than
1 year may be renewed any number of times if the terms of the
arrangement and the compensation for the same items or services do not
change;
Specify the compensation that will be provided under the
arrangement, which has been set in advance. The compensation must be
consistent with fair market value and not be determined in a manner
that takes into account the volume or value of any referrals (as
defined in Sec. 411.351), payments for referrals for medical services
that are not covered under Medicare or Medicaid, or other business
generated between the parties;
Involve a transaction that is commercially reasonable and
furthers the legitimate business purposes of the parties; and
Meet a safe harbor under the anti-kickback statute or
otherwise be in compliance with the anti-kickback provisions in section
1128B(b) of the Act.
We would advise the parties involved in a compensation arrangement
to use this exception if they have any doubts about whether they meet
the requirements in the other exceptions listed in Sec. 411.357.
2. A new exception for certain forms of ``de minimis'' compensation
We are aware that there are a number of situations in which
physicians or their immediate family members receive compensation in
the form of incidental benefits that are not part of a formal, written
agreement. For example, a physician might receive free samples of
certain drugs or chemicals from a laboratory, training sessions for his
or her staff before entering into an agreement with a facility that
furnishes a designated health service, or training sessions that are
not considered part of the agreement. Also, a provider might furnish a
physician with free coffee mugs or note pads. We are exercising our
authority under section 1877(b)(4) to create a new exception that we
believe will allow physicians or their family members to receive de
minimis amounts of compensation, without a risk that the compensation
will result in any Medicare program or patient abuse.
We have drafted the exception, which would appear at
Sec. 411.357(k), to apply to noncash items or services. Items cannot
include cash equivalents, such as gift certificates, stocks or bonds,
or airline frequent flier miles. We propose to limit the exception to a
value of $50 per gift, with a $300 per year aggregate. This exception
would apply only in situations in which the entity providing the
compensation makes it available to all similarly situated individuals,
regardless of whether these individuals refer patients to the entity
for services. In addition, any compensation a physician or family
member receives from an entity cannot be based in any way on the volume
or value of the physician's referrals. We believe the criteria for this
exception, by their terms, will prevent patient or program abuse.
3. The ``volume or value of referrals'' standard
Most of the exceptions in the law covering specific kinds of
compensation arrangements state that the compensation involved cannot
reflect the volume or value of any referrals. (We have included a
similar standard in the two new compensation exceptions described
above.) We are applying our interpretation of that standard as it
appears in section III.A.6 under our discussion of the criteria a group
of physicians must meet to qualify as a ``group practice.'' In that
section, we describe what constitutes a ``referral'' for purposes of
the ``volume or value'' standard.
The volume or value of referrals standard appears in the exceptions
for the rental of space or equipment, bona fide employment
relationships, personal services arrangements, physician recruitment,
isolated transactions, and group practice arrangements with a
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hospital. It also appears in the definition of ``remuneration,'' which
excepts certain payments made by an insurer or self-insured plan to a
physician to satisfy a claim, and in the definition of a group
practice. The exceptions for the rental of office space, rental of
equipment, personal service arrangements, and group practice
arrangements with a hospital also state that the compensation cannot
reflect, directly or indirectly, the volume or value of referrals or
any other business generated between the parties.
It is our view that Congress intended to except arrangements in
which a physician or family member receives fair market compensation
for providing a particular item or service. We believe Congress may not
have wished to except arrangements that include additional compensation
for other business dealings. We also believe that it would be
administratively difficult for us to sort out, from a particular
business arrangement, different strands of payment that are meant to
compensate an individual for things other than the items or services
that qualify for the exception. In sum, we believe that the ``or other
business generated between the parties'' merely clarifies this concept.
As a result of this analysis, we are proposing to interpret the
``volume or value'' standard that appears in the compensation
exceptions and elsewhere as a standard that uniformly is meant to cover
(and thus exclude from an exception) other business generated between
the parties. We are doing so under our authority, in each of the
compensation exceptions and under the definitions, to add other
requirements that we may impose by regulation as needed to protect
against patient and program abuse. If a party's compensation contains
payment for other business generated between the parties, we would
expect the parties to separately determine if this extra payment falls
within one of the exceptions.
The volume or value standard also varies from exception to
exception in terms of simply precluding compensation that takes into
account the volume or value of referrals, as opposed to not taking into
account, directly or indirectly, the volume or value of referrals. We
regard these provisions as essentially equivalent, since we believe not
accounting for referrals can be interpreted as not accounting for them
in any way.
We have been asked whether an arrangement fails to meet the
``volume or value'' of referrals standard only in situations in which a
physician's payments from an entity fluctuate in a manner that reflects
referrals. It is our view that an arrangement can also fail to meet
this standard in some cases when a physician's payments from an entity
are stable, but predicated, either expressly or otherwise, on the
physician making referrals to a particular provider. For example, a
hospital might include as a condition of a physician's employment the
requirement that the physician refer only within the hospital's own
network of ancillary service providers, such as to the hospital's own
home health agency. We believe that in these situations, a physician's
compensation reflects the volume or value of his or her referrals in
the sense that the physician will receive no future compensation if he
or she fails to refer as required.
However, we do not intend to include, in this interpretation,
situations in which physicians are not required to refer within the
entity's network, but choose to on their own. Nor do we believe the
volume or value standard is violated in those situations in which
physicians refer patients within a network at the patients' own
request, rather than under an entity's mandate, even if the entity has
encouraged patients to remain within the network through various
incentives.
In addition, we do not believe that an arrangement affects the
volume or value standard for any designated health services a physician
is required to refer within a network, provided the entity itself is,
through a risk sharing arrangement, at substantial financial risk for
the cost or utilization of items or services that the entity is
obligated to provide. In these situations, we believe the requirement
that a physician refer within the network addresses the issue of where
a physician must refer, rather than whether the physician is encouraged
or discouraged from making a referral (resulting in under or
overutilization).
4. The commercial reasonableness standard
A number of the compensation-related exceptions in section 1877(e)
include the requirement that remuneration provided under an agreement
``would be commercially reasonable'' even if no referrals were made
between the parties. We are interpreting ``commercially reasonable'' to
mean that an arrangement appears to be a sensible, prudent business
agreement, from the perspective of the particular parties involved,
even in the absence of any potential referrals.
5. The Secretary's authority to create additional requirements
Several of the statutory exceptions (particularly the compensation-
related exceptions) permit the Secretary to impose additional
conditions if the conditions are needed to protect against program or
patient abuse. In promulgating these regulations, the Secretary has
taken into account the fact that many of the excepted arrangements are
also subject to the Medicare and Medicaid anti-kickback statute. The
Secretary believes that the proposed regulatory exceptions, in
conjunction with the independent requirements of the anti-kickback
statute, are such that in most cases no additional conditions are
necessary at this time to protect against program or patient abuse (we
have included in this proposed regulation several specific new
requirements that we believe are necessary). However, with respect to
those exceptions for which the Secretary has authority to impose
additional requirements, the Secretary invites comments from interested
parties on whether additional conditions are necessary and if so, what
conditions would be appropriate.
6. Exception for bona fide employment relationships
Section 1877(e)(2) excepts from a ``compensation arrangement'' any
amount paid by an employer to a physician (or immediate family member)
who has a bona fide employment relationship for the provision of
services if the employment arrangement meets certain standards (these
appear in Sec. 411.357(c)). One standard specifies that remuneration
under the employment cannot be determined in a manner that takes into
account (directly or indirectly) the volume or value of referrals by
the referring physician. Nonetheless, this exception specifically
allows remuneration in the form of a productivity bonus based on
services performed personally by the physician or an immediate family
member. Thus, under the terms of the statute, physician or family
member employees can receive payments based on any work they actually
personally perform, including designated health services that a
physician refers to him or herself. Under such a scheme, the more a
physician self-refers, the more profit he or she will make.
Because we regard this provision as an open-ended invitation for
physicians to generate self-referrals for designated health services,
we are proposing to equalize this provision with the one
[[Page 1701]]
allowing productivity bonuses under the definition of a group practice
in section 1877(h)(4)(B)(i). This provision allows group practices to
pay members a productivity bonus only if the bonus is not directly
related to the volume or value of a physician's own referrals. We are
equalizing the provisions in this regard under the authority in section
1877(e)(2)(D), which allows the Secretary to impose by regulation other
requirements as are needed to protect against patient or program abuse.
Without this change, we believe that physicians have an incentive to
overutilize designated health services, since they can be compensated
directly for every self referral they make.
We would like to point out that because we have interpreted the
concept of a ``referral'' to involve only a physician's requests for
designated health services covered under Medicare or Medicaid, the new
requirement will in no way affect a physician's ability to receive a
productivity bonus for any nondesignated health services or noncovered
services he or she refers or performs, or designated health services
referred by another physician.
The bona fide employment exception does not, by its terms, allow
for indirect compensation based on profit sharing and productivity
bonuses for a physician's ``incident to'' services. The group practice
definition does allow for such compensation. We do not believe that we
can equalize the provisions in this regard, since it is our view that
there are situations in which compensating a physician even indirectly
for his or her self referrals could encourage overutilization and
abuse.
7. Exception for personal services arrangements
Section 1877(e)(3) excepts from the referral prohibition situations
involving remuneration from an entity under a personal services
arrangement if certain criteria are met. The statute does not specify
to whom the remuneration must be paid or for what kinds of services,
although we believe the services must be ``personal services.''
One of the criteria for this exception requires that the
arrangement cover all of the services to be furnished to the entity by
the referring physician or an immediate family member of the physician.
Therefore, we are interpreting this exception as covering services
furnished by these individuals. We believe there is nothing in the
statute to preclude a physician or family member from having personal
services arrangements with several entities. (For example, a physician
might have a contract to serve as a hospital's medical director and
another contract with an unrelated group practice to perform surgery.)
However, the statute does appear to require, in section
1877(e)(3)(A)(ii), that an excepted arrangement with one entity cover
all of the services to be provided by the physician (or family member)
to that entity.
We are aware that at times it will not be logical for all of a
physician's or family member's contracts for personal services to be in
one agreement. However, we are also aware that entities have used
multiple contracts, at times, in devising schemes to reward physicians
for their referrals. In order to provide physicians and entities with
more flexibility than the statutory requirement that all services
appear in one agreement, we propose to allow multiple agreements,
provided that the agreements each meet all of the requirements
described in section 1877(e)(3) and all separate agreements between the
entity and the physician and the entity and any family members
incorporate each other by reference. We base our proposal on section
1877(b)(4), which allows the Secretary to specify, in regulations, an
exception for any other financial relationship that she determines does
not pose a risk of patient or program abuse. In this case, because all
excepted agreements will be subject to the fair market value and other
standards, and because each agreement will make us aware of all other
agreements, we see no potential risk for abuse.
It is our view that ``personal services'' are not simply the
generic Medicare services (which are defined in Sec. 400.202 to include
``items'') but are services of any kind performed personally by an
individual for an entity (but not including any items or equipment). We
are using the broader, more common notion of what constitutes a
``service'' based on the fact that all kinds of business relationships
can trigger the referral prohibition; hence, the exception should be
read to apply to business-oriented services in general.
We are also interpreting the exception to mean that the physician
or family member can actually perform the services, or that these
individuals can enter into an agreement to provide the services through
technicians or others whom they employ. A physician or family member
cannot, though, include equipment or other items as part of an excepted
personal services arrangement. For example, if a hospital contracts
with a nephrologist to provide dialysis services to its patients, the
physician could have a personal services arrangement with the hospital
even if the dialysis services are actually furnished by technicians
whom the physician employs. However, if the physician also provides
dialysis equipment to the hospital, this arrangement would have to
separately meet the exception for the rental of equipment in section
1877(e)(1), since we do not regard items or equipment as ``personal
services.''
The personal services exception specifies that compensation under
an arrangement cannot be determined in a manner that takes into account
the volume or value of any referrals or other business generated
between the parties. However, this requirement is qualified to allow
compensation to reflect these under certain situations in which there
is a physician incentive plan between a physician and an entity. We
would like to emphasize that the physician incentive plan aspect of
section 1877(e)(3) applies only in the context of personal services
arrangements, and not to any other compensation arrangements.
``Physician incentive plans'' are defined in section
1877(e)(3)(B)(ii) as certain compensation arrangements between an
entity and a physician or physician group. We have defined a physician
group for purposes of the physician incentive rules more broadly than a
group practice under section 1877, so that a group practice is a subset
of physician groups. (A final rule with comment period governing
physician incentive plans was published on March 27, 1996, at 61 FR
13430. This rule was amended on December 31, 1996, at 61 FR 69034.)
A physician incentive plan is any compensation arrangement between
an entity and a physician or physician group that may directly or
indirectly have the effect of reducing or limiting services provided
with respect to individuals enrolled with the entity. We believe that
the incentive plan qualification applies only when the entity paying
the physician or physician group is the kind of entity that enrolls its
patients, such as a health maintenance organization. Section
1877(b)(3), the exception for prepaid plans, does exempt from the
referral prohibition almost all designated health services provided by
these entities to Medicare patients who are enrollees. In addition,
this regulation proposes to exempt services provided to Medicaid
patients by analogous kinds of entities (see our discussion of this
issue earlier in this preamble). Nonetheless, the personal services
exception, with its physician incentive aspect, is still a viable
exception. This exception could
[[Page 1702]]
apply, for example, to situations in which a physician refers a fee for
service patient covered under Medicare to an HMO when he or she also
has a contract to provide services to the HMO's enrollees. The
physician's contract with the HMO is an underlying financial
relationship and, in order for the physician to refer fee-for-service
patients to the HMO, the financial relationship must meet an exception.
In order to qualify for the personal services exception, the
physician's payments from the HMO for treating HMO enrollees cannot
vary with the volume or value of his or her referrals, except under a
physician incentive plan, as described in section 1877(e)(3)(B).
The personal services exception in section 1877(e)(3) as a whole is
silent about to whom an entity must be paying remuneration or with whom
it must have an arrangement. As a result, we are interpreting the
personal services exception to apply to situations in which an entity
has an arrangement with either an individual physician (or family
member) or a group practice to provide personal services. For example,
a hospital could use the exception if it contracts with a group
practice for purposes of having group members serve as the hospital's
staff.
8. Exception for remuneration unrelated to the provision of designated
health services
Section 1877(e)(4) provides for an exception for remuneration that
is provided by a hospital to a physician if the remuneration does not
relate to the provision of designated health services. (As we have
noted earlier in this preamble, this exception does not apply to
remuneration from entities other than hospitals, nor does it apply to
payments to a physician's family members.) We are interpreting this
provision to except any remuneration that is completely unrelated to
the furnishing of designated health services. By this we mean that the
parties must be able to demonstrate that the remuneration does not in
any direct or indirect way involve these services, and that the
remuneration in no way reflects the volume or value of a physician's
referrals for designated health services. If a physician is receiving
payments from a hospital that appear to be inordinately high for an
``unrelated'' item or service and is also making referrals to the
hospital for designated health services, we will presume that the
overpayments relate to the designated health services because they
reflect the volume or value of the physician's referrals.
On the other hand, we realize there can be situations in which a
hospital's payments are completely unrelated to the provision of
designated health services. For example, a teaching hospital might pay
a physician rental payments for his or her house in order to use the
house as a residence for a visiting faculty member. If the parties
involved can demonstrate that the rental payments are based on fair
market value and in no way reflect the physician owner's referrals to
the hospital, we believe this exception would apply. Similarly a
physician might receive compensation for teaching or for providing an
entity with general utilization review or administrative services.
We do not intend to apply this exception in any situation involving
remuneration that might have a nexus with the provision of, or
referrals for, a designated health service. For example, if a hospital
pays a physician to supply a heart valve that the physician has
perfected, we believe that the exception does not apply. It is our
position that the physician is receiving payment for an item that will
likely be used by the hospital in furnishing inpatient hospital
services, which are a designated health service. Similarly, if a
hospital pays for a physician's malpractice insurance or other general
costs to enable the physician to provide a designated health service,
such as radiology, the payments are related to furnishing a designated
health service. Nonetheless, these financial relationships could still
be excepted under one of the statutory exceptions or under the new
exception we would include in Sec. 431.357(l), which covers any
compensation arrangement that meets certain criteria.
9. Exception for a hospital's payments for physician recruitment
Section 1877(e)(5) includes an exception for remuneration provided
by a hospital to an individual physician to induce the physician to
relocate to the geographic area served by the hospital in order to be a
member of the medical staff of the hospital. We believe that the terms
of the statute dictate that this exception applies just to those
situations in which a physician resides outside the geographic area and
must actually relocate in order to join the hospital's staff.
We considered a number of ways to define the concept of a
hospital's ``geographic area,'' including mileage requirements or the
likelihood that the physician would be able to bring patients along
when he or she relocates. Because we believe that what constitutes a
hospital's ``geographic area'' may depend on a variety of
circumstances, we are specifically soliciting comments on how to define
this term.
If a hospital makes recruitment payments to physicians who are
living in the hospital's geographic area (for example, to retain
residents) or to a group practice that intends to employ the physician
and contracts with the hospital, these payments might be excepted under
the new compensation-related exception that we have included in
Sec. 431.357(l).
10. Exception for certain group practice arrangements with a hospital
Under section 1877(e)(7), this exception applies to only a limited
number of arrangements; that is, arrangements that began before
December 19, 1989, and have continued in effect without interruption
since that date. We are interpreting this provision to mean that the
arrangement between the hospital and the specific group practice must
have been in effect within the timeframe specified in the statute.
However, we realize that most agreements do not remain static over
time. As a result, it is our view that this criterion may still be met,
even if the agreement between the parties has changed over time so that
it covers different services or so that the services are provided by
different individuals within the same group practice.
We also intend in this provision to make an editorial change that
we believe removes an ambiguity in the statutory language. Existing
Sec. 411.357(h)(2) states ``[t]he arrangement began before December 19,
1989, and has continued in effect without interruption since then.''
Upon closer consideration, we believe that ``since then'' is ambiguous.
(Does it mean since the actual date before December 19, 1989 on which
the arrangement began, or does it mean since December 19, 1989?) We
believe that by revising this provision to read ``[t]he arrangement
began before, and has continued in effect without interruption since,
December 19, 1989,'' we have provided a reasonable interpretation that
removes this ambiguity.
Section 1877(e)(7)(A)(ii) requires that, with respect to the
designated health services covered under the arrangement, substantially
all of the services furnished to patients of the hospital are furnished
by the group under the arrangement. We believe this standard means that
whatever portion of a particular designated health service the
agreement covers, the group must actually provide ``substantially all''
of that portion. For example, if the group
[[Page 1703]]
has agreed to provide 35 percent of a hospital's laboratory services,
the group must actually provide a substantial part of this percentage.
In keeping with our interpretation of the term ``substantially
all'' in other parts of section 1877, we are interpreting that term
here as being 75 percent of all the services at issue.
11. Exception for payments by a physician for items and services
Section 1877(e)(8) excepts payments that a physician makes to a
laboratory in exchange for clinical laboratory services (we have
discussed this provision in some detail in section III.A.8 of this
preamble). In addition, the statute excepts payments that a physician
makes to any entity for other items or services if these are furnished
at fair market value. We are proposing to interpret ``other items or
services'' to mean any kinds of items or services that a physician
might purchase, but not including clinical laboratory services or those
specifically listed under the other compensation exceptions. For
example, we do not believe that Congress meant for the ``items or
services'' exception to cover a rental agreement as a service that a
physician might purchase, when it has already included in the statute a
specific rental exception, with specific standards, in section
1877(e)(1).
F. The Reporting Requirements
1. Which financial relationships must be reported
Under section 1877(f), each entity providing Medicare-covered
services must provide the Secretary with information concerning the
entity's ownership, investment, and compensation arrangements,
including the names and UPINs (unique physician identification numbers)
of all physicians with an ownership or investment interest (as
described in section 1877(a)(2)(A)) in the entity or with a
compensation arrangement (as described in section 1877(a)(2)(B)) with
the entity, or whose immediate relatives have such a relationship. The
information must be provided in such form, manner, and at such times as
the Secretary specifies.
Section 411.361 currently states that entities must submit the
required information on a HCFA-prescribed form within the time period
specified by the servicing carrier or intermediary. Entities are given
at least 30 days from the date of the request to provide the
information. Thereafter, entities must provide updated information
within 60 days from the date of any change in the submitted
information.
At this time, we are still developing a procedure for implementing
the reporting requirements and plan to notify affected parties about
the procedure at a later date. Until that time, physicians and entities
are not required to report to us. In addition, we are aware that the 60
day timeframe for updated information could be onerous, especially for
large entities that must collect information about their employees,
owners, and contractors and who would then have to update that
information approximately every two months. As a result, we are
proposing to modify Sec. 411.361 to require that entities report to us
once a year on all of the changes that have occurred in the previous 12
months.
Under the reporting regulation in Sec. 411.361(d), a ``reportable
financial relationship'' is any ownership or investment interest or any
compensation arrangement, as described in section 1877 of the Act.
Under section 1877(a)(2), a financial relationship of a physician (or
family member) with an entity is defined as an ownership or investment
interest in the entity, except as provided in subsections (c) and (d),
or a compensation arrangement between the physician (or family member)
and the entity, except as provided in subsection (e). Subsections (c)
and (d) contain lists of ownership interests that ``shall not be
considered to be an ownership or investment interest described in
subsection (a)(2)(A).'' Subsection (e) contains a list of arrangements
that are not to be considered as ``compensation arrangements described
in (a)(2)(B).'' Thus, entities must only report their ownership or
investment interests, or compensation arrangements, if these
relationships do not meet the exceptions in subsections (c), (d), or
(e) of section 1877. However, if an entity's financial relationship is
excepted under subsection (b) of section 1877 (which contains
exceptions for physician services, in-office ancillary services,
services furnished under certain prepaid plans, or other new exceptions
included by the Secretary) the entity must still report.
As the rule reads now, an entity can decide that it is excepted
under (c), (d), or (e) and not report any data. As a result, we will
have no opportunity to scrutinize the entity's arrangements to see if
its assessment is correct. We believe that the statute allows us to
gather a broader scope of data. We base this interpretation on the
opening paragraph in section 1877(f), which states that each entity
providing any covered items or services for which payment may be made
under Medicare shall provide the Secretary ``with the information''
concerning the entity's ownership, investment, and compensation
arrangements, including the names and UPINs of all physicians with an
ownership interest (as described in (a)(2)(A)), or with a compensation
arrangement (as described in (a)(2)(B)). Thus, we believe the statute
allows us to gather any data on financial relationships, including,
but not necessarily limited to, relationships for which there are no
exceptions under (a)(2)(A) or (B). Therefore, we are proposing to amend
the rule, at Sec. 411.361(d), to reflect our authority to ask for a
broader scope of information than the regulation currently allows.
A number of entities have pointed out to us that the amounts of
data they are required to report under the statute will, in some
circumstances, be overwhelming and perhaps almost impossible to
acquire. In addition, if we require every entity that is subject to the
referral rules to report on every financial relationship, excepted or
not, the administrative burden could be enormous. For example, a large
publicly-held enterprise would be required to report (and hence retain
records documenting) all of its owners who are physicians, all owners
who are relatives of physicians, all physicians with whom it has
compensation arrangements of any kind, and all relatives of physicians
with whom it has compensation arrangements.
A publicly traded corporation with thousands of stockholders may
find it extremely difficult to identify all of its owners and their
relatives, and to identify which of these owners and relatives are
physicians. In addition, such a corporation could be owned by mutual
funds which in turn have hundreds of thousands of additional owners,
some of whom may be physicians or have relatives who are physicians. In
order to make the reporting requirements more manageable, we intend to
develop a streamlined ``reporting'' system that does not require
entities to retain and submit large quantities of data. However, we
believe that entities should retain enough records to demonstrate, in
the event of an audit, that they have correctly determined that
particular relationships are excepted under the law.
We are proposing to limit the information that an entity must
acquire, retain and, at some later point, possibly submit to us. We
would include only those records covering information that the entity
knows or should know about, in the course of prudently conducting
business, including records that the
[[Page 1704]]
entity is already required to retain to meet Internal Revenue Service
and Securities and Exchange Commission rules, and other rules under the
Medicare or Medicaid programs. We are circumscribing these records
under the Secretary's discretion in section 1877(f) to ask entities to
provide information in such form, manner, and at such times as the
Secretary specifies. When we develop a form for reporting information
to us, we plan to first publish it as a proposed notice in order to
receive public comment. If we later find that this plan is inadequate
and elect to change the scope of the requirement, we will provide
entities with adequate notice to comply. We specifically solicit
comments on this proposal.
2. What entities outside the United States must report
Section 1877(f) states that the reporting requirements do not apply
to designated health services furnished outside the United States. The
reporting requirements in general apply to each entity furnishing
services covered under Medicare, and not just to those furnishing
designated health services. Arguably, then, the statute relieves an
entity from the reporting requirements involved when it furnishes
designated health services, but not when it furnishes other covered
services. Because we believe that referrals for designated health
services are the focus of section 1877, and because Medicare covers
only a limited number of services when they are furnished outside of
the United States, we are interpreting section 1877(f) to relieve an
entity from reporting any Medicare services it has furnished outside of
the United States.
G. How the Referral Prohibition Applies to the Medicaid Program
1. Who qualifies as a ``physician'' for purposes of section 1903(s)
Under the Medicare definition of ``physician'' in section 1861(r),
paragraphs (r)(1) through (r)(5) cover a doctor of medicine or
osteopathy, a doctor of dental surgery or of dental medicine, a doctor
of podiatric medicine, a doctor of optometry, and a chiropractor. Under
the Medicaid statute in section 1905(a)(5)(A), physician services are
those furnished by a physician as defined in section 1861(r)(1), which
covers only a doctor of medicine or osteopathy.
In determining whether an individual is a ``physician'' for
purposes of section 1903(s), we believe that it is the Medicare
definition that would apply. That is because this provision prohibits
the Secretary from paying FFP to a State for services that result from
a referral for a designated health service that would be prohibited
under Medicare if Medicare covered the service in the same way (to the
same extent and under the same terms and conditions) as under the State
plan. A referral by any of the ``physicians'' listed in section 1861(r)
could result in a prohibited referral under Medicare.
We believe that a physician is still a physician for purposes of
section 1903(s), even if he or she does not participate in the Medicaid
program. For example, a provider of designated health services may
participate in and bill Medicaid when the referring physician, who has
an interest in the entity, does not participate. The rules in section
1877 apply to services furnished under Medicaid in the same manner as
they would apply if furnished under Medicare. As a general rule under
section 1877(a)(1), if a physician (or immediate family member) has a
financial relationship with an entity, then the physician may not make
a referral to the entity to furnish designated health services for
which payment may otherwise be made under Medicare. This provision
appears to apply to all physicians, regardless of whether they
participate in either the Medicare or Medicaid programs, as long as the
services involved are covered services under Medicare or Medicaid.
2. How the referral prohibition and sanctions affect Medicaid providers
Absent an exception, section 1877(a)(1) in general prohibits a
physician from making a referral to an entity with which he or she has
a financial relationship for the furnishing of a designated health
service covered under Medicare. The entity, in turn, may not present a
claim to Medicare or bill any other individual or entity for the
service furnished as the result of a prohibited referral. If physicians
or entities violate these rules, they are subject to certain sanctions
under section 1877(g). However, we do not believe these rules and
sanctions apply to physicians and providers when the referral involves
Medicaid services. The first part of section 1903(s) prohibits the
Secretary from paying FFP to a State for designated health services
furnished on the basis of a referral that would result in a denial of
payment under Medicare if Medicare covered the services in the same way
as the State plan. This part of the provision is strictly an FFP
provision. It imposes a requirement on the Secretary to review a
Medicaid claim, as if it were under Medicare, and deny FFP if a
referral would result in the denial of payment under Medicare. Section
1903(s) does not, for the most part, make the provisions in section
1877 that govern the actions of Medicare physicians and providers of
designated health services apply directly to Medicaid physicians and
providers. As such, these individuals and entities are not precluded
from referring Medicaid patients or from billing for designated health
services. A State may pay for these services, but cannot receive FFP
for them. However, States are free to establish their own sanctions for
situations in which physicians refer to related entities.
3. How the referral rules apply when Medicaid-covered designated health
services differ from the services covered under Medicare
The statute specifically provides that a State cannot receive FFP
for a designated health service if it is furnished to an individual on
the basis of a referral that would result in a denial of payment for
the service under Medicare if Medicare covered the services to the same
extent and under the same terms and conditions as under the State plan.
We believe this means that Congress was aware of differences in the two
programs and specifically intended to cover under section 1877
designated health services as they are covered under a State's Medicaid
plan whenever this coverage differs from coverage under Medicare.
4. How the reporting requirements apply under the Medicaid program
Section 1903(s) states that subsections (f) and (g)(5) of section
1877 shall apply to a provider of Medicaid-covered designated health
services in the same manner as these subsections apply to a provider of
Medicare-covered designated health services. Section 1877(f) requires
that each entity providing Medicare-covered items or services must
provide the Secretary with certain information about the entity's
ownership, investment, and compensation arrangements. The information
must include the covered items and services the entity provides, and
the names and UPINs of all physicians who have (or whose immediate
relatives have) an ownership or investment interest in or compensation
arrangement with the entity. These requirements do not apply to
designated health services furnished outside of the United States, or
to entities the Secretary determines furnish Medicare-covered services
infrequently.
Section 1903(s) could be read to mean that section 1877(f) must
apply identically to Medicare and Medicaid providers, so that Medicaid
entities
[[Page 1705]]
must furnish information to the Secretary (that is, to HCFA). However,
we are taking the position that the provision allows us to require that
entities report directly to the States. Section 1903(s) provides that
section 1877(f) applies ``in the same manner'' in the Medicaid program
as it does in Medicare. In Medicare, the reports are made to the
Secretary, the official who is responsible for making payment under
Medicare. ``In the same manner,'' in the context of the Medicaid
program, would mean that the reports would be made to the entity that
makes payment; that is, the State, thus maintaining a symmetry between
reporting in the two programs.
We have taken this position because, under section 1903(s), it is
the States that are at risk of losing FFP for paying improper claims
for designated health services submitted by entities that have
financial relationships with physicians. Therefore, in order to ensure
that FFP will be available, States must determine whether a physician
has a financial relationship with an entity that would prohibit
referrals under Medicare. Our interpretation will allow States to
protect themselves and to avoid any duplication of effort with HCFA.
We are amending the regulations to create a new Subpart C,
``Disclosure of Information by Providers for Purposes of the
Prohibition on Certain Physician Referrals.'' In Sec. 455.108,
``Basis,'' we state that, based on section 1903(s), we are applying the
reporting requirements of section 1877(f) and (g) to Medicaid providers
of designated health services. Section 455.109(a) would state that the
Medicaid agency must require that each entity that furnishes designated
health services submit information to the Medicaid agency concerning
its financial relationships, in such form, manner, and at such times as
the agency specifies. Although the statute requires that entities
submit information to the Secretary, we believe that the State should
receive this information in the Medicaid context, in order to help
States ensure that they will receive FFP.
Section 455.109(b) would specify that the requirements of
Sec. 455.109(a) do not apply to entities that provide 20 or fewer
designated health services under the State plan during a calendar year,
or to any entity for items or services provided outside the United
States. We have derived the limit of 20 or fewer designated health
services from the Medicare regulation interpreting section 1877(f)
(Sec. 411.361).
Section 455.109(c) would specify that the information submitted to
the Medicaid agency under Sec. 455.109(a) must include at least the
following:
The name and Medicaid State Specific Identifier (MSSI) of
each physician who has a financial relationship with the entity that
provides services.
The name and MSSI of each physician who has an immediate
relative (as defined in Sec. 411.351) who has a financial relationship
with the entity.
The covered items and services furnished by the entity.
With respect to each physician identified above, the
nature of the financial relationship (including the extent and/or value
of the ownership or investment interest or the compensation
arrangement), if requested by the Medicaid agency.
Section 455.109(d) would define a reportable financial relationship
as an ownership or investment interest or any compensation arrangement,
as defined in Sec. 411.351, including relationships that qualify for an
exception described in Secs. 411.355 through 411.357.
Section 455.109(e) would specify that--
Entities that are subject to the reporting requirements
must submit the required information on a prescribed form within the
time period specified by the Medicaid agency. Similarly, entities must
report to the Medicaid agency all changes in the submitted information
within a timeframe specified by the State. We believe that States have
the discretion to determine these deadlines in line with
Sec. 455.109(a), which requires that the Medicaid agency gather
information on financial relationships in such form, manner, and at
such times as the agency specifies.
Entities must retain documentation sufficient to verify
the information provided on the forms and, upon request, must make that
documentation available to the Medicaid State agency, HCFA, or the OIG.
Section 455.109(f) would reflect section 1877(g)(5), specifying
that any entity that is required, but has failed, to meet the reporting
requirements of Sec. 455.109(a), is subject to a civil money penalty of
not more than $10,000 for each day of the period beginning on the day
following the applicable deadline until the information is submitted.
It would further specify that assessment of the penalty will comply
with the applicable provisions of 42 CFR part 1003.
IV. Our Responses to Questions About the Law
In this section of the preamble, we have included some of the most
common questions concerning physician referrals that we have received
from physicians, providers, and others in the health care community.
(Note that, in this section, we are using the term ``provider'' in the
generic sense to include all providers of health care services. That
is, we are not using the term with the special meaning given in our
regulations at Sec. 400.202.) We summarize these questions below and
present our interpretation of how we believe the law applies in the
situations that have been described to us. We have organized this
section so that the issues raised by the questions appear in the order
in which they appear in the regulation.
A. Definitions
1. Compensation Arrangement
What is an ``indirect'' compensation arrangement? We defined a
``compensation arrangement'' in the August 1995 final rule, in line
with the statute, as any arrangement involving any remuneration, direct
or indirect, between a physician (or family member) and an entity. This
means that a compensation arrangement can result when remuneration
flows from an entity to a physician or family member, or from a
physician or family member to an entity. We have received a number of
inquiries on what constitutes an ``indirect'' compensation arrangement.
We believe that a physician or family member can receive compensation
from an entity, even if the payment is ``funneled through'' a business
or other entity or association and even if the payment changes form
before the physician actually receives it.
For example, suppose that a hospital has contracted with a group
practice for the group to furnish physician services and to otherwise
staff the hospital. The hospital pays the group practice, which might
be a professional corporation or a similar association or entity, for
the physician services under a personal services arrangement, rather
than directly compensating the individual physicians. The group
practice, in turn, pays the individual physicians a salary that in some
way reflects the hospital's payments.
It is our position that, in such a scenario, each physician has
been indirectly compensated by the hospital for his or her own
services. As a result, the physicians have a compensation arrangement
with the hospital. In the absence of an exception, the physicians would
be prohibited from referring to the hospital for the furnishing of
designated health services.
We believe that a physician has received indirect compensation
whether the ``intervening'' professional
[[Page 1706]]
association, corporation, or other entity directly receiving payment is
a group practice or any other type of physician or nonphysician owned
entity. We also believe a physician can receive indirect compensation
through a nonprofit enterprise if that enterprise is controlled by an
individual who is in a position to influence the physician's referrals.
For example, the owner of a clinical laboratory who also serves as the
director of a nonprofit research facility could provide a physician
with research grants in exchange for referrals to the laboratory. We
are considering regarding as indirect compensation any payment to a
physician that passes from an entity that provides for the furnishing
of designated health services, no matter how many intervening
``levels'' the payment passes through or how often it changes form. We
directly solicit comments on this approach.
We would also like to reiterate a point that we made in the
preamble to the August 1995 final rule. Just because a hospital or
similar entity is affiliated with a physician or group of physicians
does not automatically mean that the hospital or similar entity is
compensating the physicians. Physicians and entities can have joint
ventures and similar relationships in which the hospital or similar
entity and the physicians share profits, but do not compensate each
other.
Which exceptions apply in indirect situations? We have also
received questions about which exception applies when an indirect
payment changes form. For example, in the situation described above, a
hospital makes payments to a group practice under a personal services
arrangement. The group practice, in turn, passes the payments on in the
form of salary payments to its physician employees. We believe that the
compensation at issue involves a personal services arrangement between
the hospital and the group practice (see the discussion in III.E.6 of
this preamble about personal services arrangements between entities and
group practices, rather than between entities and individual
physicians).
We are interpreting the statute to focus on the payment the entity
furnishing designated health services initially makes to determine the
appropriate exception. In this case, the hospital is making a payment
under a personal services arrangement, and is not in any way making a
salary payment to its own employees. Thus, we believe the physicians
could make referrals to the hospital if the group practice's personal
services arrangement with the hospital meets the criteria under the
personal services exception.
It is our view that the salary payment from the group practice to
its physician employees is a payment separate from the remuneration
flowing indirectly from the hospital to the physicians. As a result,
this payment, as a payment from the group practice, should itself have
no additional effect on a physician's ability to refer to the hospital.
(The nature of the payment might, however, affect whether the
physicians qualify as a group practice. See the discussion in section
III.A.6 of this preamble covering the characteristics of a group
practice.)
2. Entity
What are the characteristics of an ``entity'' that provides for the
furnishing of designated health services? We have received a number of
questions about what constitutes an ``entity'' involved in the
furnishing of designated health services and who owns that entity. For
example, a group of individuals asked us whether they own a hospital
based solely on the fact that they own the building that houses the
hospital. We believe that an ``entity'' for purposes of section 1877 is
the business, organization, or other association that actually
furnishes, or provides for the furnishing of, a service to a Medicare
or Medicaid patient and bills for that service (or receives payment for
the service from the billing entity as part of an ``under
arrangements'' or similar agreement).
An ``entity,'' therefore, does not include any person, business, or
other organization or association that owns the components of the
operation--such as owning the building that houses the entity or the
equipment the entity uses--without owning the operation itself. For
example, a physician might own and operate an MRI machine in his or her
office. If this physician enters into a lease arrangement for the use
of the MRI machine every Tuesday by the physician down the hall, who
bills for the services, we believe that the physician down the hall is
the entity providing MRI services to his or her patients on Tuesday.
This physician could refer patients for MRI services if he or she
qualifies for an exception, such as the in-office ancillary services
exception.
When is an entity furnishing, or providing for the furnishing of,
designated health services? Section 1877(a)(1)(A) prohibits a physician
from making a referral to an entity ``for the furnishing of designated
health services'' if the physician or a family member has a financial
relationship with that entity. The health care community has expressed
some confusion about when an entity is one involved in the ``furnishing
of'' designated health services.
We have, for example, received questions about which entities are
the relevant ones when some entities only bill for services, while
others actually directly ``furnish'' the services. For example in an
``under arrangements'' situation, a hospital, rural primary care
hospital, skilled nursing facility (SNF), home health agency, or
hospice program contracts with a separate provider to furnish services
to the hospital's, SNF's, or other contracting entity's patients, for
which the hospital, SNF or other contracting entity ultimately bills.
The statutory provisions that mention ``under arrangements'' draw a
distinction between services that are actually furnished by the
hospital or SNF and those that are actually furnished by the separate,
outside entity. (Under section 1861(w)(1), HCFA's payment to the
hospital, SNF, or other contracting entity discharges the beneficiary's
liability. ``Under arrangements'' situations are further referenced in
sections 1861(b)(3) and 1862(a)(14).) We are aware that there are
comparable agreements in the community between entities other than
hospitals, SNFs, and the other contracting entities listed above, such
as agreements between group practices that furnish services to HMO
patients, with the HMO billing for the services.
We believe that, absent an exception, the referral prohibition
applies to a physician's referrals to any entity that directly
furnishes designated health services to Medicare or Medicaid patients.
We believe the prohibition also applies to referrals to any entities
that arrange ``for the furnishing of'' these services to Medicare or
Medicaid patients by contracting with other providers, whenever it is
the arranging entity that bills for the services.
This interpretation is consistent with the intent of the statute.
Congress intended, in enacting section 1877, to prohibit referrals in
situations in which a physician has a financial incentive to
overutilize the various designated health services and to steer
patients toward certain providers of these services. For example, a
physician might routinely refer patients to a SNF in which he has a
financial interest and prescribe occupational therapy (OT) services.
The SNF, in turn, might contract with a separate, unrelated entity to
furnish SNF patients with the OT, for which the SNF bills. Even if the
physician has no relationship with the separate OT provider, he does
have a
[[Page 1707]]
financial relationship with the SNF that is providing for ``the
furnishing of'' OT to referred patients. As a result, the physician can
potentially profit from each referral he or she makes for OT, even if
the SNF must first purchase those services from an outside source
before passing on the cost to its patients.
If, however, the unrelated OT entity itself bills for the services
under Part B, so that the SNF only helps to make these services
available to its patients, our conclusion would be different. In this
situation, we do not believe that the physician has a financial
incentive to overutilize OT services. As a result, we would not regard
the SNF as an entity involved in ``the furnishing of'' a designated
health service.
We also believe that a physician can have an incentive to
overutilize services if he or she has a financial relationship with the
entity that directly furnishes designated health services, even if this
is not the entity ultimately billing for the services. In these
situations, the physician can potentially recognize a profit from each
referral based on the fact that the designated health services will, in
essence, be sold to the entity that bills.
For example, a physician who is a member of a group practice might
work in a hospital as a staff physician and refer patients to the
group's own outside laboratory in which the physician has an ownership
interest. The laboratory, in turn, furnishes services to hospital
patients under arrangements. The hospital will therefore be billing
Medicare for laboratory services furnished by the physician's own
laboratory. In this case, the physician is in a position to influence
how many services the laboratory will be able to ``sell'' to the
hospital. Thus, the physician should be prohibited from making these
referrals, unless one of the exceptions applies.
We believe our policy of including entities that contract for
services as those that provide for ``the furnishing of'' designated
health services is consistent with the structure of section 1877 and
the way the exceptions are drafted. For example, under section
1877(b)(3), services are excepted if furnished by an organization that
functions under a prepaid plan, such as an HMO. It is our understanding
that such services are very often made available in a manner that is
comparable to ``under arrangements'' situations; that is, the prepaid
organization contracts with a broad range of independent suppliers and
providers to furnish services to its enrollees. This exception makes no
distinction between services that are furnished directly by the HMO and
those that are furnished under contract by outside providers: all such
services appear to be considered as furnished by the HMO, and would be
excepted.
Similarly, section 1877(d)(3) excepts certain ``designated health
services provided by a hospital,'' but makes no distinctions between
services the hospital itself furnishes and those furnished by the
hospital under arrangements.
3. Financial Relationship
How do equity and debt qualify as ownership? The statute states
that an ownership interest can be through equity or debt. We have
received a number of inquiries about what this provision means and what
kinds of debt situations constitute a form of ownership. We believe
that ``ownership through equity'' refers to a direct ownership interest
that does not involve debt; for example, one in which the physician or
family member has actually purchased assets of a business entity with
cash or other property. This interest could be in the form of stock in
a publicly-held entity or an investment (such as a capital
contribution) in a partnership.
We believe that a physician or family member holds an ownership
interest in an entity ``through debt'' anytime the physician or family
member has lent money or given other valuable consideration to the
entity and the debt is secured (in whole or in part) by the entity or
by the entity's assets or property. For example, the physician could
hold such an interest by providing the entity with a note, a mortgage
or by purchasing bonds. This interpretation is consistent with the
definition of an ownership or control interest in section 1124(a)(3) of
the Act, which governs which suppliers and providers must disclose
these interests to us for purposes other than the referral prohibition.
Section 1124(a)(3)(A)(ii) defines a person with an ownership or control
interest as a person who is the owner of a whole or part interest in
any mortgage, deed of trust, note, or other obligation secured (in
whole or in part) by the entity or any of the entity's property or
assets, if the interest is worth a certain amount.
We also believe that ownership through debt can exist in any other
debtor-creditor relationships that have some indicia of ownership. For
example, such indicia could include the creditor's participation in
revenue or profits, subordinated payment terms, low or no interest
terms, or ownership of convertible debentures (bonds that a physician
or family member can convert into the common stock of the issuer or an
affiliate until the convertible feature expires).
However, if a physician or family member has made an unsecured or
nonconvertible loan to an entity, or a loan with no other indicia of
ownership, we do not believe the loan is an ownership interest. The
loan would likely qualify as a compensation arrangement, to which an
exception might apply.
We do not believe that a physician or family member has ``ownership
through debt'' when either of them has received a loan from an entity.
In ordinary business transactions, when a debtor receives a loan, this
transaction in no way establishes for the debtor an ownership interest
in the creditor. We also assume that in providing the loan, the
creditor entity has provided remuneration to the physician or family
member, resulting in a compensation arrangement. This kind of
compensation arrangement could meet one of the exceptions to the
prohibition. For example, the loan might be one form of payment an
entity makes to a physician to recruit the physician or as part of the
physician's employment contract. The loan would be an excepted
arrangement if it met the fair market value and other standards in
these exceptions.
Is membership in a nonprofit corporation an ownership or investment
interest? We have received a number of inquiries concerning whether
membership in a nonprofit corporation constitutes an ownership or
investment interest in that corporation. (We are assuming that a
``member'' is someone who establishes, sponsors, directs, or controls a
nonprofit corporation.) Most nonprofit health care corporations that
are exempt from Federal income taxation are exempt under section
501(c)(3) or (4) of the Internal Revenue Code. These provisions state
that the net earnings of such a corporation cannot inure to the benefit
of any private shareholder or individual. Therefore, while members of
such a nonprofit corporation may exercise control over the activities
of the corporation, they do not have the pecuniary incentive that for-
profit investors have to enhance their investment interests. As such,
we do not regard being a member of these kinds of nonprofit
corporations as an ownership or investment interest analogous to being
a shareholder in a for-profit corporation. However, any remuneration
that the physician or family member receives from the corporation, such
as a salary, would be compensation and must meet an exception.
[[Page 1708]]
Do stock options and nonvested interests constitute ownership? We
have been asked whether a physician or family member has an ownership
interest in an entity if he or she receives an option to purchase the
stock of the entity or an affiliate, such as when an employee has a
stock option that constitutes part of his or her pay. We have also
received questions about retirement funds or similar options that do
not vest until a future date. For example, a physician might hold an
option to purchase stock at a particular price, but not be able to
exercise that option until he or she retires. Similarly, a physician
might be entitled to certain retirement funds only after he or she has
retired after having worked a specified number of years.
The statute defines an ownership interest in section 1877(a)(2) as
an interest held through equity, debt, or other means. It is our view
that options and nonvested interests are inchoate or partial ownership
interests that qualify as ``ownership'' for purposes of this law. We
base our interpretation on the fact that a physician has a tremendous
incentive to refer to an entity in which he or she is invested, whether
the interest is a present or future one. For example, if a physician
has an option to buy stock at a certain price in a clinical laboratory,
the physician will have an interest in generating business for the
entity in order to enhance the value of that stock.
4. Group practice
What is the ``full range of services'' test? One of the criteria in
the statutory definition of a group practice is that each member must
furnish substantially the full range of services that the physician
routinely furnishes, including medical care, consultation, diagnosis,
and treatment through the joint use of shared office space, facilities,
equipment, and personnel. We have been asked about the meaning and
purpose of this provision, and how it will affect a physician's normal
practice patterns. only token tasks, for the group. It is our view that
this standard should not alter a physician's ordinary schedule or
practice habits. For example, one physician described himself as having
two specialty areas, which resulted in his providing dermatology
services to one group one day a week, and another kind of service to
another group on a different day. We believe that different kinds of
services such as these on different days can reflect a physician's
normal ``routine of services.'' That is, a physician can furnish one
type of service that is that physician's ``full range of services'' on
a particular day, as long as the physician is legitimately practicing
medicine for the group practice on that day.
5. Immediate family member or member of a physician's immediate family
How does the prohibition affect a physician's referrals to
immediate family members? The referral prohibition in section 1877(a)
states that if a physician, or immediate family member, has a financial
relationship with an entity, the physician cannot refer a Medicare
patient to that entity for the furnishing of designated health
services, unless an exception applies. In Sec. 411.351 of the August
1995 final rule, we listed the individuals who qualify as a physician's
``immediate'' family members. These individuals include, among others,
spouses and children of a referring physician.
We have received a number of inquiries from physicians about
whether the statute precludes a physician from referring patients to a
family member to receive designated health services, if the referring
physician has no financial relationship with the entity furnishing the
services. We believe the answer to this question depends upon the
nature of the family member's financial relationship with the
furnishing entity.
If a family member has a compensation arrangement with the entity
furnishing the designated health services, the physician cannot refer
to the entity, unless the arrangement meets one of the exceptions under
the statute. For example, a physician might wish to refer a patient to
her husband for occupational therapy services. The husband furnishes OT
services as an employee of an occupational therapy facility. The
husband, who is an immediate family member of the referring physician,
has a compensation arrangement with an entity that furnishes a
designated health service (the OT facility pays him a salary). However,
the referral would be acceptable if the arrangement meets the
requirements in section 1877(e)(2), which excepts bona fide employment
relationships between employers and physicians or immediate family
members if the relationship meets fair market value and other
standards.
The situation is similar if a physician refers a patient to an
immediate family member who has an ownership or investment interest in
the facility that furnishes the designated health services. For
example, the physician may wish to refer a patient to his wife, who is
a solo practicing physician who herself furnishes OT. If the wife owns
the practice, she would have a financial relationship with the entity
that furnishes the designated health services. The husband's referral
would not be prohibited if the wife's relationship qualifies for one of
the exceptions under the statute. For example, the wife's practice
might qualify as a rural entity, the ownership of which is excepted
under section 1877(d)(2) of the Act. However, if an exception does not
apply, the referring physician would be precluded from referring to his
spouse.
Physicians have also asked us whether the in-office ancillary
services exception in section 1877(b)(2) applies to those situations in
which a physician refers a patient to an immediate family member who
furnishes designated health services outside of the referring
physician's practice. The ancillary services exception applies when a
physician refers a patient for a service that the referring physician
either will personally perform or directly supervise, or that will be
personally performed or directly supervised by another member of the
referring physician's group practice. As a result, referring physicians
can refer patients to and among themselves, within their own practices,
if they meet the section 1877(b)(2) requirements. However, the
exception does not apply when physicians refer to their spouses or to
other close relatives who furnish services outside of the practice.
In creating the in-office ancillary services exception, we believe
that Congress made a policy decision not to restrict certain referrals
that occur within the confines of one practice. We are not aware of any
rationale for extending this ``single practice'' exception to any
outside entities, whether or not those entities have a financial
relationship with an immediate family member.
We would also like to point out that a physician may send a patient
to an immediate relative without actually ``referring'' that patient
for a designated health service. A referral is defined in section 1877
for purposes of Part B services as, with an exception for certain
specialized services, the request by a physician for an item or
service, including the request for a consultation with another
physician (including any test or procedure ordered by, or to be
performed by (or under the supervision of) that other physician). We
have interpreted this provision in section III.A.7 of this preamble to
apply to just requests by the physician for designated health services
covered under Part B, rather than any Part B item or service. For other
kinds of items and services, a referral is, with an exception for
certain specialized services, the request or establishment of a plan of
care by a
[[Page 1709]]
physician, which includes the provision of a designated health service.
We believe a referral would be acceptable where the referral is not
for a designated health service. For example, a physician who is a
general practitioner might believe that a patient has a neurological
problem, but be unsure of a diagnosis. This physician could refer the
patient to his or her neurologist spouse, if the referral is not a
``consultation'' (see our discussion of ``consultations'' in section
III.A.7 of this preamble). That is because the referring physician has
not requested a designated health service or established a plan of care
including one, nor has he or she requested a consultation. We believe
the referral, in this case, is for physician services, which are
generally not designated health services. If the spouse, in turn,
determines that the patient requires an MRI, the spouse would be the
one making the referral for this designated health service.
If one member of a group practice cannot make a referral to an
entity, are all other group practice physicians also precluded? Group
practices have informed us that they are concerned about the definition
of a ``referring physician'' in Sec. 411.351, and how it affects a
group when one member is precluded from referring to a particular
entity that furnishes designated health services. In particular,
several groups wondered whether having a physician member whose
immediate relative has an unexcepted ownership interest in an entity
would preclude all group practice members from referring to that
entity. Groups believe that the preamble to the final rule covering
referrals to clinical laboratories implied that the referral
prohibition would be imputed to all physician members.
Section 411.351 defines a ``referring physician'' as a physician
(or group practice) who makes a referral (as defined elsewhere in the
regulations). We interpreted this definition to mean that when an
individual group member refers, the entire group has referred. As a
result, any member of a group who has an unexcepted financial
relationship (or whose relative has such a relationship) with an entity
could ``taint'' the referrals of the entire group.
We have reconsidered this issue and now propose to amend the
definition to exclude any reference to the entire group practice. We
believe that the statute was drafted to cover the referral behavior of
individual physicians and to regulate the entities to which they refer.
There does not appear to us to be any clear reason to extend the
effects of one physician's relationships and behaviors to other
physicians, just because they are all members of the same group
practice. As several practices have pointed out to us, being members of
the same group practice does not mean that physicians automatically
have the opportunity, power, or incentive to exert pressure on each
other to refer to their related entities.
However, in any instance in which a group member is in a position
to exert influence or control over the referrals of other group
physicians, the prohibition could still apply. For example, group
members could be subject to sanctions if their referral patterns reveal
a circumvention scheme between them. Similarly, if a group practice
owner conditions payment to his or her employee members on referrals to
the owner's laboratory, the employment could be a compensation
arrangement that triggers the prohibition.
6. Remuneration
Do payments qualify as remuneration only if they result in a net
benefit? Certain members of the provider community have requested that
we interpret a payment as remuneration only if it is made in exchange
for identifiable property or services. Under this theory, if the
physician or entity making the payment has no expectation of or
entitlement to something of value in return for the payment, there
would be no compensation arrangement, even if other physicians or
entities might benefit from the exchange.
In the August 1995 final regulation, we defined remuneration as
``any payment, discount, forgiveness of debt, or other benefit made
directly or indirectly, overtly or covertly, in cash or in kind,''
except for a narrow list of remuneration excluded from the definition
by section 1877(h)(1)(C). We believe that remuneration generally
involves any payment of cash, property, or services, whether or not
either or both parties receive a net benefit. For example, we would
regard as remuneration the repayment of a loan, even if there are no
accompanying interest payments.
We base this interpretation on the statute, which excepts from
compensation arrangements under section 1877(h)(1)(C) only very limited
and specific types of remuneration. Among the list is the forgiveness
of amounts for the correction of minor billing errors; that is, small
amounts that are excused by one party in order to even out the parties'
accounts. However, the statute does not except amounts that are
forgiven to even out larger billing errors, nor does it contain a
general exception for remuneration that does not result in a net
benefit for one or both of the parties. (The correction of a large
billing error might, however, qualify as an ``isolated transaction'' or
qualify for the new exception in Sec. 411.357(l) as part of a fair
market value exchange.)
We believe that the statute is designed to prohibit referrals
whenever a physician makes a payment to an entity or an entity makes a
payment to a physician, regardless of who profits or gains. The
statute, in our view, contains a presumption that if there has been a
payment of any kind, a physician should not refer. As a result, the
agency need not ``look behind'' each transaction to ascertain whether
the physician has gained some benefit as a result of the transaction,
has realized little or no net benefit, or has benefitted too much. The
law does, however, designate certain very specific compensation
arrangements that require that the Secretary ``look behind'' them and
except them if the exchanges of payment meet fair market value and
certain other standards.
It is our view that the one-way payments described by the providers
are remuneration. If a payment does not reflect an actual fair market
value exchange, it could easily serve as the vehicle for referral
payments. We believe the law was meant to prevent a physician from
referring to an entity if that physician (or a family member) is
receiving payments of any kind that cannot be accounted for as part of
a fair exchange.
B. General Prohibition--What Constitutes a Prohibited Referral
Does the prohibition apply only if a physician refers directly to a
particular related entity? As we mentioned in the section above
covering the definition of ``entity,'' section 1877(a)(1) prohibits a
physician from making a referral to an entity for the furnishing of
designated health services if the physician or immediate family member
of the physician has a financial relationship with that entity. Section
1877(h)(5) defines a referral very broadly: A referral is the request
by a physician for a Part B item or service (including certain
consultations). In addition, ``the request or establishment of a plan
of care by a physician that includes the provision of [a] designated
health service'' constitutes a ``referral'' by a ``referring
physician.'' We have interpreted this provision in Sec. 411.351 of the
August 1995 final clinical laboratory rule to mean that a physician has
made a referral if he or she has made a request for a Part B item or
service or a request for other items or services that includes the
provision of laboratory services or if he or she has
[[Page 1710]]
established a plan of care that includes the provision of laboratory
services.
The ``referral'' provision requires that a physician only request
an item or service or include it in a plan of care; it does not require
that the physician directly send a patient to a particular entity or
specifically indicate in a plan of care that the service must be
provided by a particular entity. However, section 1877(h)(5) must be
read in conjunction with the prohibition in section 1877(a)(1). The
general prohibition applies only when a physician makes a referral to
an entity for the furnishing of a designated health service if the
physician or a family member has a financial relationship with that
entity.
For example, a physician might have a small noncontrolling
ownership interest in a provider of a designated health service, such
as a physical therapy (PT) facility. The physician does not directly
refer patients to this provider. However, the physician does establish
plans of care for patients in a hospital setting, which include PT
services. When a particular patient leaves the hospital, the physician
may refer the patient to an unrelated skilled nursing facility (SNF)
that, in turn, refers the patient to the related PT provider. The PT
facility bills the patient separately. As a result, the patient may
receive services prescribed by the physician from an entity with which
the physician has a financial relationship.
In situations such as this one, the physician has prescribed a plan
of care that includes designated health services, an action that
constitutes a referral. However, the physician has not made the
referral to an entity with which he or she has a financial
relationship. Instead, the physician has made the referral to an SNF
with which he or she has no financial relationship. As such, the
referral prohibition would generally not apply. Nonetheless, if there
was any evidence that the physician has an agreement with the SNF that
involves the SNF systematically referring the physician's Medicare
patients to the physician's PT facility, we would likely investigate
the situation as a possible circumvention scheme.
When is the owner of a designated health services provider
considered as equivalent to that provider? We have received several
comments about when a physician who has an ownership interest in an
entity that furnishes designated health services should be equated with
that entity. For example, suppose that a physician regularly refers
patients to an SNF in which the physician has no investment interest.
The SNF, in turn, buys PT services from a PT facility that also
provides other noncovered items and services to the SNF and is owned
solely by the physician. Arguably the referring physician, as sole
proprietor of the PT facility, is related to the SNF because the
physician's PT facility sells PT and other, noncovered services to the
SNF. We believe that it is likely, in this situation, that the
physician is in a position to negotiate or influence the terms of the
arrangement, as well as to initiate patient referrals to the SNF.
We believe that there is a potential for abuse in such situations.
For example, the physician may be referring as many patients as
possible to the SNF in exchange for inflated rates from the SNF for the
variety of noncovered items and services that the PT facility
furnishes, or for any covered services that are not subject to a fee
schedule. Although the SNF may be negotiating with the PT facility as a
corporate or other business entity, we would equate the referring
physician and the PT facility with each other when the referring
physician (or a family member) has a significant ownership or
controlling interest that allows him or her to determine how the PT
facility conducts its business and with whom. We will consider a number
of factors in these situations, such as whether the physician or the
physician in combination with his or her immediate family members owns
all or a controlling amount of the stock of an entity, and whether the
physician and/or the family members are making decisions for the
entity, particularly on a day-to-day basis. Our analysis will depend
upon the entire record of the interrelationship between the physician
and/or immediate family members and the entity, whether the
relationships are direct or indirect, and the totality of the
circumstances.
We believe the analysis is similar when a referring physician
receives compensation from an entity that is owned or controlled by a
party that also owns a designated health services provider. For
example, suppose that a physician owns a controlling interest in a
general practice clinic, and also independently owns a controlling
interest in an outside laboratory in which the clinic itself has no
interest. The clinic also employs a number of physicians who receive
salaries from the clinic corporation.
Arguably, the employee physicians in this situation have no
financial relationship with the outside laboratory. That is, they do
not themselves own any part of the laboratory, nor do they receive
compensation from or pay compensation to the laboratory entity.
However, if we were to take the position that there is no financial
relationship, and hence no referral prohibition, the physician owner of
the laboratory, by controlling the clinic, could arrange to compensate
the employee physicians with inflated salaries based directly on the
number of referrals they make to the outside laboratory.
In order to avoid this result, we propose to equate the owner
physician with the outside laboratory and with the clinic when he or
she owns or controls them. Under this interpretation, we would regard
the employee physicians as receiving compensation from the laboratory.
Although this compensation is indirect, we believe it is covered by the
statute. Section 1877(h)(1) defines a ``compensation arrangement'' as
any arrangement involving any remuneration (with certain narrow
exceptions). ``Remuneration,'' in turn, is defined as any remuneration
paid directly or indirectly.
If the physician, on the other hand, has a noncontrolling interest
in the outside laboratory, we would not equate the owner physician with
the laboratory. However, we would regard this situation as a potential
circumvention scheme. That is, we would regard the physician owner in
this situation as referring indirectly, through the employee
physicians, to a designated health services provider to which the owner
physician cannot personally refer. The inflated salaries of the
employee physicians, in fact, could serve as evidence of the existence
of such a circumvention scheme.
The analysis would vary somewhat if the referring physicians are
compensated by an entity, rather than an individual physician. Suppose,
for example, that a hospital hires physicians to serve on its staff.
The hospital compensates the physicians for their services, but
inflates their salaries to reflect all the referrals they make to a
separate MRI subsidiary that is not part of the hospital but is owned
by it. If the hospital owns a controlling share of the MRI entity, we
would regard the hospital and the entity as equivalent.
The analysis would be different if the hospital owns less than a
controlling interest in the MRI facility. Arguably, the physicians are
compensated by an entity (the hospital) that is technically separate
from the one providing the referred MRI services. The physicians do not
own the MRI facility, nor do they receive payment from it. Nonetheless,
if the physicians receive payments from the hospital that exceed fair
market value for the services they are otherwise providing, we propose
to presume that they are being indirectly compensated by the MRI
facility, through the hospital, for their referrals.
[[Page 1711]]
Has a physician made a referral to a particular entity if another
individual directs the patient there?
We have received inquiries about situations in which a physician
requests a designated health service, but it is another individual,
such as a discharge planner, who follows the physician's plan of care
and refers the patient directly to a specific provider. We discussed
this issue in the August 1995 final rule. In the preamble to that rule
at 60 FR 41941, we stated that a physician who establishes a plan of
care or requests an item or service is responsible for the referral,
even if it is another individual or an institutional entity that
carries out that plan of care for the physician. For example, we stated
that we would not allow a hospital physician to avoid the referral
prohibition by claiming that it is the hospital that actually makes the
referral or selects the provider in his or her place. We took this
position in order to prevent a physician from disavowing all referrals
by having personnel or employers carry them out.
In light of our analysis in the responses to the last two
questions, we would like to refine our position on this issue. That is,
we want to qualify our position to ``impute'' a physician's referrals
to others only in those situations in which the physician has the
ability to control or influence the individuals who select an entity.
We would also ``impute'' referrals if a physician is him or herself in
a position to be compensated for the referrals by those who can control
or influence the actions of the person who actually selects the entity.
For example, suppose that a physician works for a hospital and
refers a patient to the hospital's discharge planner for laboratory
tests. The discharge planner in turn refers the patient to the
hospital's laboratory. We would regard the physician's request and
referral to the discharge planner as a referral to an agent of the
entity that owns the laboratory; that is, to an agent of the entity
that furnishes designated health services. We believe that such a
referral would be governed by the rules in section 1877. Suppose, on
the other hand, that the discharge planner refers the patient to an
outside laboratory that happens to be owned by the hospital. The
physician in this situation may not be able to compensate the discharge
planner or otherwise in any way influence that individual's actions.
Nonetheless, if the hospital pays the physician to order as many
laboratory tests as possible, and in turn pays the discharge planner to
refer patients directly to a hospital-owned provider, we would impute
the referral to the physician.
We can translate these rules into a group practice setting. For
example, a group practice member might request a designated health
service, but allow a nonphysician employee to direct the patient to a
particular provider. If the nonphysician refers the patient to the
group's own provider, we would regard the referral as the physician's
own referral to an agent of a provider of designated health services.
This arrangement, we believe, would be subject to the referral rules.
For outside referrals, we would gauge whether the physician member is
in any position to control the actions of the nonphysician. In order to
gauge whether a physician is in a position to affect a nonphysician's
actions, we propose to use the same ownership and control rules that we
mentioned above. We would also impute the referral to the physician if
the entity compensating the physician is in a position to both
compensate the physician for his or her referrals and to control the
actions of the individual who selects the provider.
How will HCFA interpret situations in which it is not clear whether
a physician has referred to a particular entity?
A physician might request or order a designated health service for
a patient without establishing a record of whether he or she referred
the patient to a specific provider. If the patient receives the
designated health service from an entity with which the physician (or a
family member) has a financial relationship, as the result of the
referral, we will presume that the service results from the physician
referring to that specific entity. We will allow physicians to rebut
that presumption by establishing that they mentioned no specific
provider or supplier or that the patient was directly referred by some
other independent individual or through an unrelated entity.
C. General Exceptions That Apply to Ownership or Investment Interests
and to Compensation Arrangements
1. The in-office ancillary services exception
Can a physician supply crutches as in-office ancillary services?
The in-office ancillary services exception in section 1877(b)(2)
applies to services that meet the requirements for supervision,
location, and billing, but not to any parenteral and enteral nutrients,
equipment and supplies or to durable medical equipment (DME) (although
the exception does apply to infusion pumps). Many physicians have
brought to our attention the problems with excluding crutches from the
exception. That is, an orthopaedist might diagnose a patient with a
broken leg, set the leg, personally furnish the patient in his or her
own office with crutches, and then bill for those crutches. If the
patient will use the crutches at home, they qualify as DME. Physicians
have pointed out that this exclusion will cause great inconvenience to
such patients, who will have to obtain crutches or similar equipment
elsewhere.
We agree that excluding crutches from the section 1877(b)(2)
exception could cause great inconvenience to patients, and disrupt the
efficient delivery of health care services. We regard crutches as
different from other DME in that a patient very often needs them
immediately after treatment for an injury that has resulted from an
unexpected traumatic event. Thus, patients may often be precluded from
arranging to receive crutches in advance from other, unrelated
entities. Nonetheless, the Secretary does not have the authority to
simply create a blanket exception for crutches. The Secretary only has
the authority, under section 1877(b)(4), to create new exceptions in
the case of any other financial relationship that the Secretary
determines, and specifies in regulations, does not pose a risk of
program or patient abuse. We have no evidence that allowing physicians
a blanket exception to self-refer for crutches will be free from abuse.
In the ownership context, for example, each referral will inherently
increase a physician's or group practices' profits.
We are thus proposing to create an exception, at Sec. 411.355(e),
that we believe will remedy this problem, while meeting the statutory
condition. That is, the exception would apply only to situations in
which a physician furnishes crutches in a manner that meets the in-
office ancillary services requirements in section 1877(b)(2) (and in
Sec. 411.355(b)), provided the physician realizes no direct or indirect
profit from furnishing the crutches. In other words, Medicare will pay
for the crutches if the physician bills only for the cost he or she
incurred to acquire and supply the crutches or to create or manufacture
the crutches. We believe that there is no threat of abuse in these
situations, since physicians will have no incentive to overutilize
crutches.
2. Exception for services furnished by organizations operating under
prepaid plans
Can a physician refer non-enrollees to a related prepaid
organization or to its physicians and providers?
[[Page 1712]]
We have been asked about situations in which a physician furnishes
services to managed care patients under a personal services contract,
but wishes to refer his or her own outside, fee-for-service Medicare
patients for designated health services to the managed care entity, or
to physicians, suppliers, or providers that are affiliated with the
managed care entity. If the physician refers to an otherwise unrelated
physician, provider, or supplier that is affiliated with the managed
care entity, but is not part of it and accepts the fee-for-service
patient independently, the referral prohibition should not apply. That
is, the physician would not be referring to the managed care entity
with which he or she has a financial relationship.
The analysis would be different, however, if the other physician,
provider, or supplier is functioning as part of the managed care
entity. For example, a physician might provide services to enrollees of
a Federally qualified HMO under a contract arrangement. These services
are excepted from the referral prohibition by section 1877(b)(3).
However, when the physician wishes to refer a fee-for-service Medicare
patient to the HMO's laboratory, the physician is making a referral to
an entity with which the physician has a financial relationship. That
is, the physician's personal services contract constitutes a
compensation arrangement with the HMO.
In order for the physician in this situation to refer, the
financial relationship must meet one of the compensation-related
exceptions in section 1877 or in this proposed rule. For example, the
physician could continue to refer if his or her arrangement meets the
criteria in the personal services exception in section 1877(e)(3) and
in Sec. 411.357(d) of this proposed rule. The compensation the
physician receives from the HMO would have to be, among other things,
consistent with fair market value, and could not reflect the volume or
value of the physician's referrals (except as allowed under a physician
incentive plan). We have proposed to define the concept of a
``referral,'' for purposes of section 1877, as limited to a referral
for a designated health service that may be covered under Medicare or
Medicaid (see our discussion of the definition in section III.A.7 of
this preamble). Thus, the ``volume or value'' standard would
automatically be met if (in the context of the physician's HMO
practice) the physician treated and referred only non-Medicare or non-
Medicaid HMO enrollees (that is, the physician's HMO compensation would
never reflect the volume or value of Medicare or Medicaid referrals).
If, on the other hand, the physician is compensated by the HMO for
treating HMO enrollees who are covered by Medicare or Medicaid, the
compensation would be subject to the ``volume or value'' standard.
Hence, the arrangement could still meet the personal services exception
if the physician's compensation does not reflect Medicare or Medicaid
covered referrals or reflects them only as part of a physician
incentive plan, as these plans are described in section 1877(e)(3)(B),
and in Sec. 411.351 of this proposed rule.
As noted earlier in this preamble, we believe that, for the most
part, physicians working for managed care organizations or as part of
an integrated delivery system will be able to refer Medicare and
Medicaid patients within these systems, provided their arrangements
with these entities meet certain standards. However, we anticipate that
there may be some unusual situations in which an exception does not
apply. One example of providers in a delivery system who may be
adversely affected by the referral prohibition involves providers under
Medicaid primary care case management (PCCM) programs.
We are aware that, under certain circumstances, some providers
contracting under these managed fee-for-service programs may not be
eligible for any of the existing exceptions written into the law or
proposed in this rule. Because the Secretary can only create new
exceptions for financial relationships which she determines pose no
risk of program or patient abuse, we have not created a blanket
exception for Medicaid PCCM programs. However, we do not wish, as an
unintended consequence of this decision, to discourage the
participation of Medicaid providers in PCCM programs, thereby
threatening Medicaid beneficiaries' access to care. Therefore, we are
soliciting comments from States and others on the potential impact of
the referral prohibition on Medicaid PCCM programs and the providers
who contract under them.
One example of a situation in which a PCCM provider might be
prohibited from making a referral involves HMOs that contract as
primary care case managers. While HMO participation in PCCM programs is
relatively rare, HMOs in some States have contracted to serve as case
managers to the disabled population. Such contracts allow the HMO to
gain experience in serving the disabled without having to accept the
financial risk that an HMO would normally accept under a capitation
contract. As States move to enroll more of their disabled populations
into capitated programs, involving HMOs in PCCM programs could serve as
a transitionary method of developing a managed care provider network
that is experienced in caring for the disabled.
If an HMO physician who is required by contract to refer within the
HMO's network wishes to refer a PCCM patient within that network, his
or her financial relationship with the HMO would have to meet one of
the existing exceptions in the law or in this proposed rule. Because
the HMO in the above example is paid on a fee-for-service basis under
the PCCM program, none of the exceptions for services furnished by pre-
paid risk plans would be appropriate.
The manner in which we have interpreted the volume or value of
referrals standard in this proposed rule could prevent the financial
relationship from qualifying for one of the compensation-related
exceptions. Most of these exceptions can be satisfied only if a
physician's compensation does not reflect the volume or value of his or
her referrals. Certain provider contracts that require a physician to
refer within a defined network of providers could violate that
standard. (We discuss our interpretation of this standard in section
III.E.3.) That is, regardless of whether the physician's income
actually varies based on the volume or value of referrals, the
physician's income reflects the referrals because it could be lost
entirely if the physician repeatedly refers patients out-of-network. If
the financial relationship does not qualify for an exception, there may
be no Federal matching funds for any in-network referral of PCCM
patients made by this physician.
3. Other permissible exceptions for financial relationships that do not
pose a risk of program or patient abuse
Should situations that meet a safe harbor under the anti-kickback
statute be automatically excepted? We have received inquiries about the
Secretary's authority under section 1877(b)(4) to create additional
exceptions for financial relationships which the Secretary determines,
and specifies in regulations, do not pose a risk of program or patient
abuse. We have had some requests that the Secretary create an exception
for any financial relationship that meets a safe harbor under the anti-
kickback statute. As we have stated elsewhere in this preamble, the
anti-kickback statute in section 1128B(b) and section 1877 are totally
independent laws, with separate
[[Page 1713]]
requirements. In order for a physician who has a financial relationship
with an entity to refer to that entity, the arrangement must meet the
requirements in both laws. However, we are willing to consider this
option and specifically solicit comments on whether meeting a safe
harbor would qualify an arrangement as one that involves no risk of
program or patient abuse.
D. Exceptions That Apply Only to Ownership or Investment Interests
1. Exception for ownership in publicly traded securities or mutual
funds
Does the exception for publicly traded securities apply to stock
options? We have been asked whether ownership of an option to purchase
stock in an entity that furnishes a designated health service
constitutes an excepted ownership interest in the entity. As we stated
in section IV.A.3 above, we regard the option to purchase stock in an
entity as an inchoate ownership interest that could subject a physician
to the referral prohibition. As such, all of the exceptions that
ordinarily apply to ownership interests would apply. However, the
exception for publicly traded securities would not apply if the stock
option involves investment securities that may not be purchased on
terms generally available to the public, as required by section
1877(c)(1).
2. Exception for services provided by a hospital in which a physician
or family member has an interest
Can a physician or family member own an interest in a chain of
hospitals? Section 1877(d)(3) contains an exception for designated
health services provided by a hospital (other than a hospital in Puerto
Rico) if the referring physician is authorized to perform services
there, and the ownership or investment interest is in the hospital
itself (and not merely in a subdivision of the hospital). We discussed
at some length in the August 1995 final rule how we believe an
individual can hold an interest in a subdivision of a hospital.
We have received inquiries about whether this exception applies if
a physician or family member holds an interest in a company or network
that owns a chain of hospitals, rather than an interest in the one
hospital to which the physician makes referrals. It is our view that a
physician can have an ownership or investment interest in a hospital
that is part of a chain by virtue of holding an interest in the
organization that owns the chain. We base our position on the language
of the exception, which does not require that the physician have a
direct interest in the hospital. In addition, we believe that the
exception in section 1877(d)(3) must be read in conjunction with
section 1877(a)(2), which states that a physician's or family member's
ownership or investment interest in an entity that provides a
designated health service constitutes a financial relationship with
that entity. This provision further defines an ownership or investment
interest in an entity to include an interest in an entity that holds an
ownership or investment interest in any entity providing the designated
health services. Thus, by definition, a physician who has an ownership
interest in a health system that owns a hospital that provides
designated health services has an ownership interest in that individual
hospital. If that indirect interest is in the hospital as a whole, and
not in a subdivision, then the exception should apply. In fact, we
believe that it would be illogical to specifically apply the referral
prohibition in section 1877(a)(1) to any indirect ownership interest,
yet deny an exception in section 1877(d) that is based on ownership
just because the interest is indirect, especially when the exception
itself does not require a direct interest.
Nonetheless, in order to meet the hospital ownership exception, we
believe the law requires that the physician be authorized to perform
services at the hospital to which he or she wishes to refer. We do not
believe that this last requirement is met if the physician has these
privileges with any one of the other hospitals in the chain, but not
with the referral hospital.
We also wish to make the point that any ownership interest a
physician or family member has in a hospital could involve a separate
compensation arrangement. For example, if a physician acquires an
interest in a hospital from a health care network, this acquisition
could constitute remuneration from an entity that provides designated
health services. Consequently, for the physician to refer to the
entity, the arrangement would have to meet a compensation-related
exception.
E. Exceptions That Apply Only to Compensation Arrangements
1. Compensation arrangements in general
Can a lease or arrangement for items or services have a termination
clause? The lease exceptions for space and equipment and a number of
the other compensation exceptions require that, among other things, the
arrangement be in writing and provide for a term of at least 1 year. We
believe that this requirement has been met as long as the arrangement
clearly establishes a business relationship that will last for at least
1 year. Nonetheless, it is our view that the arrangement can still
qualify for the exception even if it also includes a clause allowing
the parties to terminate sooner for good cause, provided the parties do
not enter into a new arrangement within the originally established 1
year time period.
We believe that Congress included the 1 year requirement with the
intention of excepting stable arrangements that cannot be renegotiated
frequently to reflect the current volume or value of a physician's
referrals. Nonetheless, we do not believe that Congress intended, in
creating this requirement, to bind parties to an arrangement once that
arrangement has become unsatisfactory to some or all of the parties.
Therefore, we are interpreting all of the exceptions with the 1 year
requirement to allow terminations for good cause, provided the parties
do not, within the 1 year period, enter into a new arrangement. We also
believe that a lease or arrangement must be renewed in at least 1 year
increments, so that it is always an agreement that provides for a term
of at least 1 year. That is, once the first year of an agreement
expires, it cannot be converted into, for example, a month-by-month
arrangement that could fluctuate with a physician's referrals.
Will a physician's referrals be prohibited if an entity pays for
certain incidental benefits? Entities, such as hospitals, often provide
physicians with certain incidental benefits, such as their malpractice
insurance, or with reduced or free parking, meals, or other incidental
benefits. We believe the answer to this question hinges on the nature
of any other financial relationship the physician has with the entity.
For example, if a physician receives free ``extras'' such as
malpractice insurance, parking, or meals while he or she serves as the
entity's employee, then these extras might qualify as part of the
compensation that the physician receives under a bona fide employment
relationship, provided they are specified in the employment agreement.
If the physician or entity can demonstrate that the extras constitute
part of the payment that such entities typically provide to physicians,
regardless of whether they make referrals to the entity, the extras
might constitute payment that is consistent with fair market value and
that furthers the entity's legitimate business purposes. If an
incidental benefit cannot meet the requirements under a statutory
exception or the new general exception
[[Page 1714]]
for compensation arrangements we have included in Sec. 411.357(l), it
might still meet the de minimis exception we have added in
Sec. 411.357(k) if it has limited value. We have also been asked about
parking spaces that a hospital provides to physicians who have
privileges to treat their patients in the hospital. It is our view
that, while a physician is making rounds, the parking benefits both the
hospital and its patients, rather than providing the physician with any
personal benefit. Thus, we do not intend to regard parking for this
purpose as remuneration furnished by the hospital to the physician, but
instead as part of the physician's privileges. However, if a hospital
provides parking to a physician for periods of time that do not
coincide with his or her rounds, that parking could constitute
remuneration.
2. Exception for agreements involving the rental of office space or
equipment
Can a lessee sublet office space or equipment? Section 1877(c)(1)
and (2) excepts from compensation arrangements that trigger the
referral prohibition, payments made by a lessee to a lessor for the use
of premises or equipment if certain criteria are met. We have listed
these requirements in the regulation at Sec. 411.357(a) and (b). Among
these is the requirement that the office space or equipment be ``used
exclusively by the lessee when being used by the lessee.'' We believe
Congress included this requirement to ensure that excepted rental
agreements are valid ones, rather than ``paper'' leases that might
involve payments passing between the lessor and lessee, when the lessee
is not actually using or intending to use the space or the equipment.
As a result, we believe that this requirement precludes the lessee from
subletting the space or equipment during any portion of a lease during
which the lessee is expected to be using them.
A sublease arrangement might nonetheless qualify under the new
compensation exception that we are proposing under Sec. 411.357(l).
That exception requires, among other things, that the rental payments
be consistent with fair market value and not take into account the
volume or value of any referrals between the parties. In addition, the
lease arrangement must be commercially reasonable and further the
legitimate business purposes of the parties. We envision that there
could be arrangements in which both the lease arrangement and the
sublease would meet all of these criteria.
Does the lease exception apply to any kind of lease covering space
or equipment? As we understand general accounting principles, there are
differences between operational leases and capital leases that may be
relevant to our application of section 1877. Operational leases are
basic, simple leases in which the lessee makes rental payments to the
lessor in order to use the lessor's property or space. These kinds of
leases, we believe, could fall within the exceptions in section
1877(e)(1)(A) and (B) because they constitute payments made by the
lessee for the use of space or equipment.
Capital leases, on the other hand, are very much like installment
sales purchases. Upon entering into such a lease, the lessee receives
all of the benefits and obligations of ownership of the property. That
is, the lessee (and not the lessor) can depreciate the property and
record it on its books as a capital asset and the long-term capital
lease payments as a liability (very much like the way the lessee would
record a loan). In most cases, the title to the property at issue will
pass to the lessee at the end of the term of the lease. In other words,
the property that is covered by capital leases is treated by
accountants as property that a lessee has purchased or is in the
process of purchasing. We believe that such leases go beyond the
section 1877(e)(1) exceptions, which except only payments for the use
of equipment or space.
Can a lease provide for payment based on how often the equipment is
used? We have been asked about situations in which a physician rents
equipment to an entity that furnishes a designated health service, such
as a hospital that rents an MRI machine, with the physician receiving
rental payments on a ``per click'' basis (that is, rental payments go
up each time the machine is used). We believe that this arrangement
will not prohibit the physician from otherwise referring to the entity,
provided that these kinds of arrangements are typical and comply with
the fair market value and other standards that are included under the
rental exception. However, because a physician's compensation under
this exception cannot reflect the volume or value of the physician's
own referrals, the rental payments cannot reflect ``per click''
payments for patients who are referred for the service by the lessor
physician.
3. Exception for personal services arrangements
How does the physician incentive plan exception apply when an
enrolling entity contracts with a group practice? The exception for
personal services arrangements includes the criteria that any
compensation paid by an entity under the arrangement cannot reflect the
volume or value of a physician's referrals, unless the compensation is
paid under a physician incentive plan, as that term is defined in
section 1877(e)(3)(B). A physician incentive plan is defined by this
provision as any compensation arrangement between an entity and a
physician or physician group that may directly or indirectly have the
effect of reducing or limiting services furnished with respect to
individuals enrolled with the entity. We have defined ``physician
group'' broadly in our March 27, 1996, final rule (61 FR 13430)
interpreting physician incentive plans under section 1876(i)(8), of
which group practices as defined under section 1877(h) are a subset.
Although an entity can compensate a physician group to reflect the
volume or value of referrals under a physician incentive plan, the
definition of a group practice under section 1877(h)(4)(A)(iv)
precludes the group, with certain exceptions, from compensating its
members based directly or indirectly on the volume or value of their
referrals (it does not contain the exception for physician incentive
plans). As we have described earlier in this preamble, we believe the
volume or value standard applies only to a physician's own referrals
for designated health services covered under Medicare or Medicaid.
Several interested parties have asked us whether these provisions
contain contradictory standards, which could make it difficult for
entities that enroll patients to continue their common practice of
contracting with group practices to provide services to the entities'
enrollees. We believe that the two provisions need not be read as
contradictory. While the group practice definition in general precludes
a group from compensating its physician members based on their
referrals, it does allow groups to pay physicians a share of the
overall profits of the group, or a productivity bonus based on services
personally performed or services incident to such personally performed
services, so long as the share or bonus is not determined in a manner
that is directly related to the volume or value of a physician's own
referrals. We have discussed our interpretation of these principles
elsewhere in this preamble. In the context of a physician incentive
plan, a physician group as a whole could be compensated more by an
entity based on providing or referring for fewer services. We believe
that the group practice could then pass any additional compensation it
receives from a physician incentive plan on to the individual physician
members via overall profit sharing, which would only
[[Page 1715]]
indirectly compensate them for the volume of their referrals. Also, the
physicians could receive a productivity bonus for their decreased
utilization of any services that are not designated health services
covered under Medicare or Medicaid.
V. Regulatory Impact Statement
A. Background
We have examined the impacts of this proposed rule as required by
Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Public
Law 96-354). Executive Order 12866 directs agencies to assess all costs
and benefits of available regulatory alternatives and, when regulation
is necessary, to select regulatory approaches that maximize net
benefits (including potential economic, environmental, public health
and safety effects, distributive impacts, and equity). The RFA requires
agencies to analyze options for regulatory relief of small businesses.
For purposes of the RFA, most hospitals, and most other providers,
physicians, and health care suppliers are small entities, either by
nonprofit status or by having revenues of $5 million or less annually.
Section 202 of the Unfunded Mandates Reform Act provides for
``Regulatory Accountability and Reform.'' It requires the agency to
engage in certain procedures, including a cost benefit analysis and
consultation with affected State and local governments, for proposed
and certain final rules that include ``Federal mandates'' that may
result in the expenditure by State, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more
annually. Section 201 of the Unfunded Mandates Reform Act requires this
assessment only to the extent that a regulation incorporates
requirements other than those specifically set forth in the law.
Section 1102(b) of the Social Security Act requires us to prepare a
regulatory impact analysis for any proposed rule that may have a
significant impact on the operations of a substantial number of small
rural hospitals. This analysis must conform to the provisions of
section 603 of the RFA. For purposes of section 1102(b) of the Act, we
define a small rural hospital as a hospital that is located outside a
Metropolitan Statistical Area and has fewer than 50 beds.
Sections 1877 and 1903(s) of the Act were enacted in order to
correct an abuse highlighted by a number of studies: The ordering by
some physicians of unnecessary services because they have a financial
incentive do so. (See section I.A. of this preamble for citations to
the studies.) The legislation identified those types of services
(referred to as ``designated health services'') where the existence of,
or potential for, abuse appeared to be the greatest. The approach taken
in the legislation was to assume that, in general, if a financial
relationship exists between a physician or a physician's immediate
family member and an entity that provides designated health services,
an incentive to overutilize those services also exists. The statute
defined a financial relationship as an ownership or investment interest
in, or compensation arrangement with, an entity. Congress created a
number of exceptions to the prohibition in recognition of certain
existing business practices. In addition, the legislation provides the
Secretary with authority to create new exceptions. However, we must
first determine, and specify in regulations, that any new exception
will not pose a risk of program or patient abuse.
Because of its exceptions, the current law is complicated. However,
the essence of the prohibition in section 1877 is clear: If a physician
or a physician's immediate family member has a financial relationship
with an entity, the physician cannot refer patients to that entity for
the furnishing of a designated health service for which payment
otherwise may be made under Medicare. Unlike the anti-kickback statute
discussed in the preamble, the law is triggered by the mere fact that a
financial relationship exists; the intention of the referring physician
is not taken into consideration.
Section 1903(s) denies Federal financial participation payment
under the Medicaid program to a State for designated health services
furnished to an individual on the basis of a physician referral that
would result in a denial of payment under the Medicare program if
Medicare covered the services to the same extent and under the same
terms and conditions as under the State Medicaid plan.
The goal of this proposed rule is to integrate section 1877 (as
amended by OBRA '93 and SSA '94) into the Medicare regulations and
section 1903(s) into the Medicaid regulations, and to interpret the
statute in accordance with its language and intent.
B. Anticipated Effects and Alternatives Considered
For the reasons described below, we believe any estimate of the
individual or aggregate economic impact of the provisions of this
proposed rule would be purely speculative. Although the provisions
proposed in this rule do not lend themselves to a quantitative impact
estimate, for reasons discussed below and elsewhere in the preamble, we
do not anticipate that they would have a significant economic impact on
a substantial number of small entities. However, to the extent that our
proposals may have significant effects on some health care
practitioners or be viewed as controversial, we believe it is desirable
to inform the public of what we view as the possible effects of the
proposals. This analysis, together with the other sections of the
preamble, constitutes a regulatory flexibility analysis and analysis
for purposes of section 1102(b) of the Act.
We expect that some kinds of entities could be affected to varying
degrees by this proposed rule. Following are the groups we believe are
most likely to experience some economic impact:
1. Physicians
A physician can be financially related to an entity either through
an ownership or investment interest in the entity, or through a
compensation arrangement with the entity. We begin by first discussing
ownership/investment interests.
Ownership or investment interests. A physician who has (or whose
immediate family member has) an ownership or investment interest in an
entity and does not qualify for an exception is prohibited from
referring Medicare patients to that entity for the provision of
designated health services. Also, when a physician with such an
ownership or investment interest makes a prohibited referral, there is
a risk that the entity will receive no Medicare payment for those
designated health services. Under Medicaid, a State may receive no FFP
for services that result from a referral that would be prohibited under
Medicare, if Medicare covered the same designated health services as
are covered under the State plan. The State may, in turn, choose not to
pay the furnishing entity.
The American Medical Association's (AMA) Center for Health Policy
Research (hereafter, the Center) reviewed three studies that analyze
self-referral: (1) ``Financial Arrangements Between Physicians and
Health Care Businesses: Report to Congress,'' Office of Inspector
General, DHHS, pages 18 and 21 (May 1989); (2) ``Joint Ventures Among
Health Care Providers in Florida,'' State of Florida Health Care Cost
Containment Board (Sept. 1991); and (3) ``Frequency and Costs of
Diagnostic Imagining in Office Practice--A Comparison of Self-Referring
and Radiologist-Referring
[[Page 1716]]
Physicians,'' Bruce J. Hillman and others, The New England Journal of
Medicine (December 1990; pp. 1604-1608). As reported in the Journal of
the American Medical Association (JAMA, May 6, 1992, Vol 267. No. 17),
the Center found that approximately 10 percent of physicians nationwide
have ownership interests in health care entities that have been
associated with potential self-referral issues. It pointed out,
however, that not all of these physicians engage in self-referral. The
Center also reported that there was no evidence in the studies they
reviewed on the extent to which physicians may profit from self-
referrals. Therefore, it concluded that the degree of conflict of
interest presented by a physician's investment in entities to which he
or she refers patients is unknown.
If we were to assume that the 10 percent figure cited above is
currently true, this would mean, based on the number of active
physicians in 1995, that approximately 79,000 physicians have an
ownership interest in health care entities that furnish designated
health services. Note, however, that others cite higher percentages.
For example, the 1991 study issued by the Florida Health Care Cost
Containment Board found that at least 40 percent of Florida physicians
involved in direct patient care had an investment in a health care
business to which they could--in the absence of prohibiting
legislation--refer patients for services. We would also like to point
out that ownership information or information on the investments of
physicians and all of their immediate family members in the entities
that furnish any of eleven designated health services constitutes an
enormous amount of data that is continually subject to change.
In 1991, the AMA's Council on Ethical and Judicial Affairs had
concluded that physicians should not refer patients to a health care
facility outside their office at which they do not directly provide
services if they have an investment interest in the facility. The
Council stated that physicians have a special fiduciary responsibility
to their patients and that there are some activities involving their
patients that physicians should avoid whether or not there is evidence
of abuse. In December 1992, the AMA voted to declare self-referral
unethical, with a few exceptions. Exceptions are allowed if there is a
demonstrated need in the community and alternative financing is not
available.
As of October 1994, 27 States had enacted legislation that
restricts or qualifies self-referral. There is great variation among
the States. Some only require disclosure of the financial relationship
to the patient, while others prohibit such referrals.
We believe that this increased examination of self-referral
arrangements and enactment of both Federal and State laws prohibiting
such arrangements has led to a decline in self-referral activity and
financial relationships between physicians and entities. However, we
lack the data necessary to either confirm or refute this supposition.
We also lack data that would tell us how many of the financial
relationships that physicians have with an entity that furnishes a
designated health service would be exempted under the statute. We would
welcome receiving current relevant data.
One exception that may have broad application is the in-office
ancillary services exception. With regard to this exception, which
applies to both ownership/investment interests and compensation
arrangements, we offer the following discussion.
To qualify as in-office ancillary services, the services must,
among other things, be furnished personally by the referring physician
or another physician in the same group practice as the referring
physician, or be furnished by individuals who are directly supervised
by one of these physicians. How we interpret a number of elements in
this provision would affect whether certain referrals qualify for the
in-office ancillary services exception. These include how we define
``group practice,'' ``members of the group,'' and ``direct
supervision.'' We discuss these definitions below.
The in-office ancillary services exception allows physicians who
are members of a group practice to supervise designated health services
referred by any group member. Paragraph (h)(4)(A) of section 1877
provides a definition of a ``group practice.'' That definition,
however, consists of elements that require interpretation--for example,
what qualifies a group of physicians as ``a legal entity,'' what is
meant by the ``full range of a physician's services,'' which must be
furnished through group arrangements, and what constitutes
``substantially all'' of a physician's services, which must also be
furnished through the group. We discuss these elements in section
III.A.6 of this preamble. As noted in that discussion, we propose to
modify some of the interpretations that we made in the August 1995
final rule. We believe that these modifications, which recognize
established business practices that do not pose the risk of program or
patient abuse, will enable more physicians to meet the definition of a
group practice than would the interpretations in the August 1995 rule.
If a group of physicians qualifies as a group practice, services can be
furnished by certain individuals other than the referring physician and
still qualify for the in-office ancillary services exception. We are
unable, however, to make an estimate of the economic impact of these
modifications.
Also affecting the in-office ancillary services exception is how we
would define ``members of the group.'' Again, this proposed rule would
modify the definition we established in the August 1995 final rule.
This modification, discussed in detail in section III.A.6 of this
preamble, would not regard independent contractors as members of the
group. This interpretation may make it easier for a group of physicians
to meet the ``substantially all'' test to qualify as a group practice
than would the interpretation in the August 1995 rule. On the other
hand, independent contractors could not supervise the provision of
designated health services. We are unable to estimate the impact of
these opposing effects.
The in-office ancillary services exception provides both solo
practitioners as well as group practice physicians with the ability to
refer within their own practices. As we discussed in detail in the
August 1995 final rule, this provision can except solo practitioners
with certain shared arrangements who do not wish to become a group
practice. For example, two solo practitioners who share one office and
jointly own a laboratory can continue to refer to that laboratory, as
long as each physician furnishes physician services unrelated to the
designated health services in the office, directly supervises the
laboratory services for his or her own Medicare and Medicaid patients
while they are being furnished, and bills for the services. If only one
of the solo practitioners owns the laboratory in a shared office, the
non-owning physician can refer to the laboratory as long as he or she
is not receiving compensation from the owner in exchange for referrals.
We are aware, however, that this exception may not accommodate the
variety of different arrangements physicians have entered into to share
facilities or otherwise group together without losing their status as
solo practitioners. We directly solicit comments on the effects of the
referral prohibition on these arrangements.
The proposed regulation defines the statutory requirement for a
physician's ``direct supervision'' of individuals furnishing designated
health services
[[Page 1717]]
under the in-office ancillary services exception. Under the definition,
``direct supervision'' requires that a physician be present in the
office suite and immediately available to provide assistance and
direction during the time services are being performed.
One option for defining ``direct supervision'' would be to say that
it means that the service is furnished under the physician's overall
supervision and control but that the physician need not be physically
present in the office suite in which the services are performed while
they are being performed. This rule would not adopt such a definition,
however. We believe that the supervision requirement is meant to
establish as ``in-office ancillary'' services those services that are
integral to the physician's own practice and that are conducted within
his or her own sphere of activity. We believe Congress intended this
exception to apply to services that are closely attached to the
activities of the referring physician.
If we were to allow physicians to supervise the furnishing of
designated health services from a distance, we believe that we would be
creating an opportunity for physicians to refer to entities outside
their own practices, for services which are not actually ``in-office
ancillary'' in nature. Although our proposed definition may result in
fewer referrals qualifying for the ``in-office'' exception than a more
liberal definition, we believe our definition is necessary to achieve
the purposes of the statute. We are not, however, proposing that there
must be a particular configuration of rooms for an office to qualify as
a ``suite,'' for example, that the rooms be contiguous. As stated in
section III.A.2 of this preamble, the question of physician proximity
for purposes of meeting the direct supervision requirement is a
decision that would be made by the local carrier based on the
circumstances. We have also proposed to liberalize the concept of
``present in the office suite,'' as we interpreted it in the August
1995 final rule, to allow brief absences from the office under certain
conditions.
Because we do not have data on how many physicians have financial
relationships that already qualify for the in-office exception, and how
many would have to alter their practices, even given the modifications
discussed immediately above, we cannot judge the economic impact of our
definition. We specifically solicit information on this issue.
As already stated, we do not have current data on the number of
physicians with ownership/investment interests in entities that furnish
designated health services. Nor do we know how many of these physicians
would qualify for an exception to the referral prohibition. However,
even if we were to assume that a substantial number of physicians have
nonexcepted ownership interests in entities that furnish a designated
health service, we do not believe that, in general, the economic impact
on these physicians necessarily has to be substantial, for the
following reasons:
If a physician's ownership interest in an entity would lead to a
prohibition on his or her referrals to that entity, the physician has
three options: First, he or she can stop making referrals to that
entity and make referrals to another unrelated entity. Second, the
physician can divest him or herself of the interest. Third, the
physician can, if possible, position him or herself to qualify for an
exception. Below we discuss the economic impact of each of these
options.
While the impact on an individual physician may be significant, we
do not believe that physicians, in general, will be significantly
affected if they have to stop making referrals to an entity in which
they have an ownership interest. We come to this conclusion because we
assume that the majority of physicians receive most of their income
from the services they personally furnish, not from those they refer.
In addition, we assume that unless the physician established the entity
to serve only his or her own patients, the entity receives referrals
from other sources. Thus, the physician may still receive a return on
the investment. Further, it is possible that, if physician ownership of
entities providing the particular designated health services is
prevalent in the area, what may occur is a ``shifting'' of referrals;
that is, the loss of a physician's own referrals to the entity might be
offset by other physicians shifting referrals to unrelated entities.
These shifts would be acceptable under section 1877, provided they do
not result from circumvention schemes.
We do not believe the second option, divesting of the ownership
interest, would necessarily have a significant economic effect.
However, we assume, that, at least from an economic standpoint, most
physicians invest in entities because they are income-producing. If an
investment is successful, a physician may not have difficulty finding
new investors willing to take over the physician's investment. The
physician, in turn, can then invest the monies received in some other
investment. We believe the cost of divesting will vary from situation
to situation. (A search of the literature on this issue resulted in
only anecdotal information that indicated that some physicians
sustained a loss in divesting, while others did not.) We do see the
possibility of a significant effect in the case of a physician who has,
at considerable expense, established an entity to serve only his or her
own patients, with the expectation of future return on that investment.
We believe, however, that the exceptions in the statute and regulation
allowing physicians to refer within their own practices (primarily the
in-office ancillary services exception) will greatly reduce the number
of physicians otherwise subject to the prohibition.
It is difficult to estimate how many physicians would select the
third option of changing the circumstances of their practices in order
to meet an exception to the referral prohibition. It is also difficult
to estimate the extent of the changes that would be necessary or the
potential economic impact of any modifications. As an example of one
modification, a physician maintains with other independently-practicing
physicians a nonrural facility for furnishing X-rays. The physicians
share premises, equipment, employees, and overhead costs. If an
individual physician does not meet the requirements for the in-office
ancillary exception found in section 1877(b)(2), the physician's
Medicare referrals to that entity would be prohibited. In such a
situation, as an alternative to options 1 and 2 above (stopping
referrals or divesting), the physician could choose to form a group
practice with the other physicians in order to qualify for the in-
office ancillary services exception. By forming a group practice, the
referrals would not be prohibited if the services were furnished
personally by the referring physician, personally by another physician
who is a member of the same group practice as the referring physician,
or if they are furnished personally by individuals who are directly
supervised by any of these physicians and the billing and location
requirements specified in the in-office ancillary exception are met.
Although we realize that a physician reorganizing his or her
practice in this way may be subject to various economic and noneconomic
effects, we believe those effects will differ widely from case to case.
Some physicians may need to make major alterations in their practices,
while others may need only minor changes, with minimal or no help from
legal or financial advisors. It is possible that some physicians would
profit from reorganizing, while others might suffer losses. Thus, we
cannot
[[Page 1718]]
judge whether any particular physician, or physicians in general, will
sustain a significant economic impact because they have reconfigured
their practices.
Compensation arrangements: The statute defines a compensation
arrangement very broadly as any arrangement involving any remuneration
between a physician (or an immediate family member) and an entity, with
certain narrowly defined exceptions. We believe that this definition
involves almost every situation in which a physician or relative
receives payment from an entity or makes payments to an entity,
including payments under personal services contracts, employment
agreements, sales contracts, and rentals or leases. The amount of data
we would need to account for every compensation arrangement that might
be affected by the law would likely be overwhelming, as well as subject
to the constant changes inherent in the business world. As a result, it
is difficult for us to assess how many physicians (or their relatives)
are currently involved in compensation arrangements.
We believe that most physicians who have compensation, rather than
ownership, arrangements with an entity and are receiving fair payments
will qualify for one of the many compensation-related exceptions set
forth in this proposed rule, especially since we propose to exercise
our authority to create several additional exceptions related to
compensation. We expect that those who do not will be few in number,
and, thus, this rule would not have an impact on a substantial number
of physicians whose financial relationships are based on compensation.
2. Entities, Including Hospitals
We lack the data to determine the number of entities that would be
affected by this proposed rule. However, even if we were to assume that
a substantial number of entities would be affected, we do not believe
that, in general, the impact would be significant. In order for the
effect on a substantial number of entities to be significant, this rule
would have to result in a very significant decline in utilization of
the designated health services. The statute was enacted to curb an
abusive practice: the ordering by some physicians of unnecessary
services because they have a financial incentive to do so. We do not
believe, however, that the abuse is so prevalent that the survival of
entities would be threatened because a physician's financial incentive
to make referrals is removed. It is our view that most health care
entities exist because they provide medically necessary services and
that these services will continue to be furnished.
In addition, the statute contains a number of exceptions to the
referral prohibition that will allow physicians to continue to refer to
any entity furnishing designated health services if certain criteria
are met. These exceptions are set forth in this proposed rule. For
example, Sec. 411.356(c) includes exceptions for ownership or
investment interests in certain hospitals or in certain rural entities.
Sections 411.357(c) and (d) include relevant exceptions related to
compensation arrangements: Paragraph (c) provides an exception for bona
fide employment relationships that meet certain conditions, and
paragraph (d) provides an exception for remuneration for personal
service arrangements that meet certain conditions. Also, this proposed
rule would provide an additional exception for any compensation that
is, among other things, based on fair market value. We believe many, if
not most, of the financial relationships between physicians and
entities, including hospitals, are covered by these exceptions.
C. Conclusion
For the reasons stated above, we have determined, and the Secretary
certifies, that, based on the limited data currently available to us,
this proposed rule would not result in a significant economic impact on
a substantial number of small entities or on the operations of a
substantial number of small rural hospitals. In addition, for purposes
of the Unfunded Mandates Reform Act, we believe that any significant
economic results of this proposed rule originate from the general
referral prohibition in the statute and not from an agency mandate. We
have, in fact, liberalized the requirements in the law by adding new
exceptions. In the relatively few instances in which we have added
additional requirements, as authorized by the statute, our data is too
limited for us to ascertain whether these new provisions alone may
result in the expenditure by State, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year. In terms of requirements on State governments, it is the
statute that applies aspects of the referral prohibition to State
Medicaid agencies. This proposed rule does interpret the statute to
apply the reporting requirements in section 1877(f) of the Act to
States, but does not mandate any action. The proposed rule allows
States to collect financial information from Medicaid providers in any
form, manner, and at whatever times they choose.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
VI. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995, we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (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 comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Sections 411.360 and 411.361 of this proposed rule contain
information collection requirements that are subject to the Paperwork
Reduction Act of 1995. However, we are not requiring the public to
comply with these reporting requirements at this time. Instead we are
seeking public comment to determine possible methods of implementing
these information collection and recordkeeping requirements. Once we
have determined how to impose these requirements in the least
burdensome method, while meeting program requirements, we will publish
a separate 60-day notice in the Federal Register seeking comments on
the proposed information collection before it is submitted to OMB for
review.
Below is a discussion of the information collection requirements
referenced in Secs. 411.360 and 411.361.
As stated earlier in this preamble, a number of entities have
pointed out to us that the amounts of data they are required to report
under the statute as reflected in our current regulations will, in some
circumstances, be overwhelming and perhaps almost impossible to
acquire. Therefore, in order to make the reporting requirements more
manageable, we intend to develop a streamlined ``reporting'' system
that does not require entities to retain and submit large
[[Page 1719]]
quantities of data. We believe, however, that entities should retain
enough records to demonstrate, in the event of an audit, that they have
correctly determined that particular relationships are excepted under
the law.
We are proposing to limit the information that an entity must
acquire, retain and, at some later point, possibly submit to us. We
would include only those records covering information that the entity
knows or should know about, in the course of prudently conducting
business, including records that the entity is already required to
retain to meet Internal Revenue Service and Security Exchange
Commission rules, and other rules under the Medicare or Medicaid
programs. We are circumscribing these records under the Secretary's
discretion in section 1877(f) to ask entities to provide information in
such form, manner, and at such times as the Secretary specifies. As
stated above, when we develop a form for reporting information to us,
we plan to first publish it as a proposed notice in order to receive
public comment. If we later find that this plan is inadequate and elect
to change the scope of the requirement, we will provide entities with
adequate notice to comply.
While we are not at this time proposing to impose reporting
requirements, we do propose to make modifications to the existing
information collection requirements referenced in this proposed rule.
Existing Sec. 411.361 reflects the reporting requirements in section
1877(f) of the Act. Specifically, Sec. 411.361 requires, with certain
exceptions, that all entities furnishing services for which payment may
be made under Medicare submit information to us concerning their
financial relationships (as described in Sec. 411.361(d)). The
requirement does not apply to entities that furnish 20 or fewer Part A
and Part B services during a calendar year, or to designated health
services furnished outside the United States. Paragraph (a) of
Sec. 411.361 requires that all entities furnishing services for which
payment may be made under Medicare submit information to us concerning
their financial relationships in the form, manner, and at the times we
specify. We would revise this to add that this information must be
submitted on a HCFA-prescribed form. As stated above, this form would
first be published as a proposed notice in order to receive public
comment.
Paragraph (c) of Sec. 411.361 requires that the entity submit
information that includes at least the following with regard to each
physician who has, or whose immediate family member has, a financial
relationship with the entity: The name and unique physician
identification number (UPIN) of the physician, the covered services
furnished by the entity, and the nature of the financial relationship.
We now propose to specify that the entity submit information that may
include the information described above depending upon the process we
select.
Existing Sec. 411.361(d) provides that a reportable financial
relationship is any ownership or investment interest or any
compensation arrangement, as described in section 1877 of the Act. This
proposed, would revise this section to specify that a financial
relationship is any ownership or investment interest or any
compensation arrangement, as defined in Sec. 411.351, including those
relationships excepted under Secs. 411.355 through 411.357.
We would also revise existing Sec. 411.361(e) as follows. Currently
that paragraph requires that an entity provide updated information
within 60 days from the date of any change in the submitted
information. We propose to require instead that an entity report to
HCFA once a year all changes in the submitted information that occurred
in the previous 12 months.
OBRA '93 amended section 1903 of the Act by adding a new
paragraph(s) that, among other things, applied the reporting
requirements of 1877(f) to a provider of a designated health service
for which payment may be made under Medicaid in the same manner as
those requirements apply to a Medicare provider. Therefore, at
Sec. 455.109(a) of this proposed rule, we would specify that the
Medicaid agency must require that each provider of services that
furnishes designated health services that are covered by Medicaid
submit information to the Medicaid agency concerning its financial
relationships in such form, manner, and at such times as the agency
specifies. Paragraph (c) of Sec. 445.109 would specify that the entity
submit the same information identified with regard to Medicare
providers/suppliers except that, instead of the UPIN, the entity would
report the Medicaid State Specific Identifier of each physician who
has, or whose immediate relative has, a financial relationship with the
entity. Paragraph (d) of Sec. 445.109 would establish the same
definition of what constitutes a reportable financial relationship as
under Medicare, and paragraph (e) would give States the discretion to
establish the timeframes within which providers must submit and update
information. We solicit comments on these proposed changes to the
existing reporting requirements.
This proposed rule would also retain existing Sec. 411.360, which
requires that a group practice that wants to be identified as such
submit a written statement to its carrier annually to attest that it
meets the ``substantially all'' test, one of the criteria that
qualifies a group of physicians as a group practice (the criteria are
set forth under the definition of a group practice in Sec. 411.351).
This provision would now apply to any group of physicians who refer for
or furnish designated health services and who wish to qualify as a
group practice. We believe that, since this requirement has already
been established by the August 1995 final rule, a significant number of
physician groups may already be subject to the reporting requirements.
We base this conclusion on the fact that many groups have their own
clinical laboratories and will already be prepared to attest for
purposes of complying with the final regulation covering referrals for
clinical laboratory services. Once a group is identified as a group
practice for purposes of laboratory services, it is identified as a
group practice for all services. Thus it was the August 1995 final rule
that established the burden for those groups. However, we have no way
of estimating how many other groups of physicians will want to try to
qualify as group practices exclusively for purposes of referring for
some or all of the other designated health services. We specifically
solicit information on this issue. A group of physicians must submit
the attestation required by Sec. 411.360 within 60 days after receiving
attestation instructions from its carrier.
If you comment on these information collection and recordkeeping
requirements, please mail copies directly to the following:
Health Care Financing Administration, Office of Financial and Human
Resources, Management Planning and Analysis Staff, Attention: HCFA-
1809-P, Room C2-26-17, 7500 Security Boulevard, Baltimore, MD 21244-
1850.
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn: Allison Herron Eydt, HCFA Desk Officer.
VII. Response to Comments
Because of the large number of items of correspondence we normally
receive on a proposed rule, we are not able to acknowledge or respond
to them individually. We will, however, consider all comments that we
receive by the date specified in the DATES section of this preamble
and, if we
[[Page 1720]]
proceed with a final rule, we will respond to the comments in the
preamble of the final rule. We will also respond, in that final rule,
to comments that we received on the August 1995 final rule with comment
covering referrals for clinical laboratory services.
List of Subjects
42 CFR Part 411
Kidney diseases, Medicare, Physician referral, Reporting and
recordkeeping requirements.
42 CFR Part 424
Emergency medical services, Health facilities, Health professions,
Medicare.
42 CFR Part 435
Aid to Families with Dependent Children, Grant programs-health,
Medicaid, Reporting and recordkeeping requirements, Supplemental
Security Income (SSI), Wages.
42 CFR Part 455
Fraud, Grant programs-health, Health facilities, Health
professions, Investigations, Medicaid, Reporting and recordkeeping
requirements.
42 CFR chapter IV would be amended as set forth below:
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT
A. Part 411 is amended as follows:
1. The authority citation for part 411 continues to read as
follows:
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
2. In Sec. 411.1, paragraph (a) is revised to read as follows:
Sec. 411.1 Basis and scope.
(a) Statutory basis. Sections 1814(a) and 1835(a) of the Act
require that a physician certify or recertify a patient's need for home
health services, but in general, prohibit a physician from certifying
or recertifying the need for services if the services will be furnished
by a home health agency in which the physician has a significant
ownership interest, or with which the physician has a significant
financial or contractual relationship. Sections 1814(c), 1835(d), and
1862 of the Act exclude from Medicare payment certain specified
services. The Act provides special rules for payment of services
furnished by Federal providers or agencies (sections 1814(c) and
1835(d)), by hospitals and physicians outside the United States
(sections 1814(f) and 1862(a)(4)), and by hospitals and SNFs of the
Indian Health Service (section 1880). Section 1877 sets forth
limitations on referrals and payment for designated health services
furnished by entities with which the referring physician (or an
immediate family member of the referring physician) has a financial
relationship.
* * * * *
3. In Sec. 411.350, paragraphs (a) and (c) are revised, and
paragraph (b) is republished, to read as follows:
Sec. 411.350 Scope of subpart.
(a) This subpart implements section 1877 of the Act, which
generally prohibits a physician from making a referral under Medicare
for designated health services to an entity with which the physician or
a member of the physician's immediate family has a financial
relationship.
(b) This subpart does not provide for exceptions or immunity from
civil or criminal prosecution or other sanctions applicable under any
State laws or under Federal law other than section 1877 of the Act. For
example, although a particular arrangement involving a physician's
financial relationship with an entity may not prohibit the physician
from making referrals to the entity under this subpart, the arrangement
may nevertheless violate another provision of the Act or other laws
administered by HHS, the Federal Trade Commission, the Securities and
Exchange Commission, the Internal Revenue Service, or any other Federal
or State agency.
(c) This subpart requires, with some exceptions, that certain
entities furnishing covered services under Part A or Part B report
information concerning their ownership, investment, or compensation
arrangements in the form, manner, and at the times specified by HCFA.
4. Section 411.351 is revised to read as follows:
Sec. 411.351 Definitions.
As used in this subpart, unless the context indicates otherwise:
Clinical laboratory services means the biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Compensation arrangement means any arrangement involving any
remuneration, direct or indirect, between a physician (or a member of a
physician's immediate family) and an entity.
Designated health services means any of the following services
(other than those provided as emergency physician services furnished
outside of the United States), as they are defined in this section:
(1) Clinical laboratory services.
(2) Physical therapy services.
(3) Occupational therapy services.
(4) Radiology services and radiation therapy services and supplies.
(5) Durable medical equipment and supplies.
(6) Parenteral and enteral nutrients, equipment, and supplies.
(7) Prosthetics, orthotics, and prosthetic devices and supplies.
(8) Home health services.
(9) Outpatient prescription drugs.
(10) Inpatient and outpatient hospital services.
Direct supervision means supervision by a physician who is present
in the office suite in which the services are being furnished,
throughout the time they are being furnished, and immediately available
to provide assistance and direction. ``Present in the office suite''
means that the physician is actually physically present. However, the
physician is still considered ``present'' during brief unexpected
absences as well as during routine absences of a short duration (such
as during a lunch break), provided the absences occur during time
periods in which the physician is otherwise scheduled and ordinarily
expected to be present and the absences do not conflict with any other
requirements in the Medicare program for a particular level of
physician supervision.
Durable medical equipment has the meaning given in section 1861(n)
of the Act and Sec. 414.202 of this chapter.
Employee means any individual who, under the usual common law rules
that apply in determining the employer-employee relationship (as
applied for purposes of section 3121(d)(2) of the Internal Revenue Code
of 1986), is considered to be employed by, or an employee of, an
entity. (Application of these common law rules is discussed at 20 CFR
404.1007 and 26 CFR 31.3121(d)-1(c).)
Enteral nutrients, equipment, and supplies means items and supplies
needed to provide enteral nutrition to a patient with a functioning
gastrointestinal tract who, due to pathology to or nonfunction of the
structures that normally permit food to reach the digestive tract,
cannot maintain weight and strength
[[Page 1721]]
commensurate with his or her general condition, as described in section
65-10 of the Medicare Coverage Issues Manual (HCFA Pub. 6).
Entity means a physician's sole practice or a practice of multiple
physicians that provides for the furnishing of designated health
services, or any other sole proprietorship, trust, corporation,
partnership, foundation, not-for-profit corporation, or unincorporated
association.
Fair market value means the value in arm's-length transactions,
consistent with the general market value. ``General market value''
means the price that an asset would bring, as the result of bona fide
bargaining between well-informed buyers and sellers, or the
compensation that would be included in a service agreement, as the
result of bona fide bargaining between well-informed parties to the
agreement, on the date of acquisition of the asset or at the time of
the service agreement. Usually the fair market price is the price at
which bona fide sales have been consummated for assets of like type,
quality, and quantity in a particular market at the time of
acquisition, or the compensation that has been included in bona fide
service agreements with comparable terms at the time of the agreement.
With respect to the rentals and leases described in Sec. 411.357(a) and
(b), fair market value means the value of rental property for general
commercial purposes (not taking into account its intended use). In the
case of a lease of space, this value may not be adjusted to reflect the
additional value the prospective lessee or lessor would attribute to
the proximity or convenience to the lessor when the lessor is a
potential source of patient referrals to the lessee.
Financial relationship means a direct or indirect ownership or
investment interest (including an option or nonvested interest) in any
entity that exists through equity, debt, or other means and includes
any indirect ownership or investment interest no matter how many levels
removed from a direct interest (for example, a financial relationship
in an entity furnishing designated health services exists if the
individual has an ownership or investment interest in an entity that
holds an ownership or investment interest in an entity that furnishes
designated health services), or a compensation arrangement with an
entity.
Group practice means a group of two or more physicians, legally
organized as a single partnership, professional corporation,
foundation, not-for-profit corporation, faculty practice plan, or
similar association, with the exception that a group can consist of
physicians who are also individually incorporated as professional
corporations. To qualify as a group practice, a group must meet the
following conditions:
(1) Each physician who is a member of the group, as defined in this
section, furnishes substantially the full range of patient care
services that the physician routinely furnishes, including medical
care, consultation, diagnosis, and treatment, through the joint use of
shared office space, facilities, equipment, and personnel.
(2) Except as provided in paragraphs (2)(i) and (2)(ii) of this
definition, substantially all of the patient care services of the
physicians who are members of the group (that is, at least 75 percent
of the total patient care services of the group practice members) are
furnished through the group and billed under a billing number assigned
to the group and the amounts received are treated as receipts of the
group. ``Patient care services'' are measured by the total patient care
time each member spends on these services (for example, if a physician
practices 40 hours a week and spends 30 hours on patient care services
for a group practice, the physician has spent 75 percent of his or her
time providing countable patient care services).
(i) The ``substantially all'' test does not apply to any group
practice that is located solely in an HPSA, as defined in this section.
(ii) For group practices located outside of an HPSA (as defined in
this section) any time spent by group practice members providing
services in an HPSA should not be used to calculate whether the group
practice located outside the HPSA has met the ``substantially all''
test, regardless of whether the members' time in the HPSA is spent in a
group practice, clinic, or office setting.
(3) The overhead expenses of and income from the practice are
distributed according to methods that are determined prior to the time
period during which the group has earned the income or incurred the
costs.
(4) The overhead expenses of and the income from the practice are
distributed according to methods that indicate that the practice is a
unified business. That is, the methods must reflect centralized
decision making, a pooling of expenses and revenues, and a distribution
system that is not based on each satellite office operating as if it
were a separate enterprise.
(5) No physician who is a member of the group directly or
indirectly receives compensation based on the volume or value of
referrals by the physician, except that a physician in a group practice
may be paid a share of overall profits of the group or a productivity
bonus based on services he or she has personally performed or services
incident to these personally performed services, as long as the share
or bonus is not determined in any manner that is directly related to
the volume or value of referrals by the physician.
(6) Members of the group personally conduct no less that 75 percent
of the physician-patient encounters of the group practice.
(7) In the case of faculty practice plans associated with a
hospital, institution of higher education, or medical school that has
an approved medical residency training program in which faculty
practice plan physicians perform specialty and professional services,
both within and outside the faculty practice, as well as perform other
tasks such as research, this definition applies only to those services
that are furnished within the faculty practice plan.
Home health services means the services described in section
1861(m) of the Act and part 409, subpart E of this chapter.
Hospital means any entity that qualifies as a ``hospital'' under
section 1861(e) of the Act, as a ``psychiatric hospital'' under section
1861(f) of the Act, or as a ``rural primary care hospital'' under
section 1861(mm)(1) of the Act, and refers to any separate legally-
organized operating entity plus any subsidiary, related entity, or
other entities that perform services for the hospital's patients and
for which the hospital bills. However, a ``hospital'' does not include
entities that perform services for hospital patients ``under
arrangements'' with the hospital.
HPSA means, for purposes of this subpart, an area designated as a
health professional shortage area under section 332(a)(1)(A) of the
Public Health Service Act for primary medical care professionals (in
accordance with the criteria specified in 42 CFR part 5, appendix A,
Part I-Geographic Areas). In addition, with respect to dental, mental
health, vision care, podiatric, and pharmacy services, an HPSA means an
area designated as a health professional shortage area under section
332(a)(1)(A) of the Public Health Service Act for dental professionals,
mental health professionals, vision care professionals, podiatric
professionals, and pharmacy professionals, respectively.
Immediate family member or member of a physician's immediate family
means husband or wife; natural or adoptive parent, child, or sibling;
stepparent, stepchild, stepbrother, or
[[Page 1722]]
stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law; grandparent or grandchild; and spouse
of a grandparent or grandchild.
Inpatient hospital services are those services defined in section
1861(b) of the Act and Sec. 409.10(a) and (b) of this chapter, and
include inpatient psychiatric hospital services listed in section
1861(c) of the Act and inpatient rural primary care hospital services,
as defined in section 1861(mm)(2) of the Act. ``Inpatient hospital
services'' do not include emergency inpatient services provided by a
hospital located outside the United States and covered under the
authority in section 1814(f)(2) of the Act and part 424, subpart H of
this chapter and emergency inpatient services provided by a
nonparticipating hospital within the United States, as authorized by
section 1814(d) of the Act and described in part 424, subpart G of this
chapter. These services also do not include dialysis furnished by a
hospital that is not certified to provide end stage renal dialysis
(ESRD) services under subpart U of 42 CFR 405.
Inpatient hospital services include services that a hospital
provides for its patients that are furnished either by the hospital or
by others under arrangements with the hospital. They do not encompass
the services of other physicians, physician assistants, nurse
practitioners, clinical nurse specialists, certified nurse midwives,
and certified registered nurse anesthetists and qualified psychologists
who bill independently.
Laboratory means an entity furnishing biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Entities only collecting or preparing specimens (or both) or only
serving as a mailing service and not performing testing are not
considered laboratories.
Members of the group means physician partners and other physician
owners (including physicians whose interest is held by an individual
professional corporation), and full-time and part-time physician
employees. These physicians are ``members'' during the time they
furnish ``patient care services'' to the group.
Occupational therapy services means those services described at
section 1861(g) of the Act and Sec. 410.100(c) of this chapter.
Occupational therapy services also include any other services with the
characteristics described in Sec. 410.100(c) that are covered under
Medicare Part A or B, regardless of who furnishes them, the location in
which they are furnished, or how they are billed.
Orthotics means leg, arm, back, and neck braces, as listed in
section 1861(s)(9) of the Act.
Outpatient hospital services means the therapeutic, diagnostic, and
partial hospitalization services listed under section 1861(s)(2)(B) and
(C) of the Act; outpatient services furnished by a psychiatric
hospital, as defined in section 1861(f); and outpatient rural primary
care hospital services, as defined in section 1861(mm)(3); but
excluding emergency services covered in nonparticipating hospitals
under the conditions described in section 1835(b) of the Act and
subpart G of part 424 of this chapter.
Outpatient prescription drugs means those drugs (including
biologicals) defined or listed under section 1861(t) and (s) of the Act
and part 410 of this chapter, that a patient can obtain from a pharmacy
with a prescription (even if the patient can only receive the drug
under medical supervision), and that are furnished to an individual
under Medicare Part B, but excluding erythropoietin and other drugs
furnished as part of a dialysis treatment for an individual who
dialyzes at home or in a facility.
Parenteral nutrients, equipment, and supplies means those items and
supplies needed to provide nutriment to a patient with permanent,
severe pathology of the alimentary tract that does not allow absorption
of sufficient nutrients to maintain strength commensurate with the
patient's general condition, as described in section 65-10 of the
Medicare Coverage Issues Manual (HCFA Pub. 6).
Patient care services means any tasks performed by a group practice
member that address the medical needs of specific patients or patients
in general, regardless of whether they involve direct patient
encounters, or tasks that generally benefit a particular practice. They
can include, for example, the services of physicians who do not
directly treat patients, such as time spent by a physician consulting
with other physicians or reviewing laboratory tests, or time spent
training staff members, arranging for equipment, or performing
administrative or management tasks.
Physical therapy services means those outpatient physical therapy
services (including speech-language pathology services) described at
section 1861(p) of the Act and at Sec. 410.100(b) and (d) of this
chapter. Physical therapy services also include any other services with
the characteristics described in Sec. 400.100(b) and (d) that are
covered under Medicare Part A or B, regardless of who provides them,
the location in which they are provided, or how they are billed.
Physician incentive plan means any compensation arrangement between
an entity and a physician or physician group that may directly or
indirectly have the effect of reducing or limiting services furnished
with respect to individuals enrolled with the entity.
Plan of care means the establishment by a physician of a course of
diagnosis or treatment (or both) for a particular patient, including
the ordering of services.
Prosthetic device and supplies: Prosthetic device means a device
(other than a dental device) listed in section 1861(s)(8) that replaces
all or part of an internal body organ, including colostomy bags and
including one pair of conventional eyeglasses or contact lenses
furnished subsequent to each cataract surgery with insertion of an
intraocular lens. Prosthetic supplies are supplies that are necessary
for the effective use of a prosthetic device (including supplies
directly related to colostomy care).
Prosthetics means artificial legs, arms, and eyes, as described in
section 1861(s)(9) of the Act.
Radiology services and radiation therapy and supplies means any
diagnostic test or therapeutic procedure using X-rays, ultrasound or
other imaging services, computerized axial tomography, magnetic
resonance imaging, radiation, or nuclear medicine, and diagnostic
mammography services, as covered under section 1861(s)(3) and (4) of
the Act and Secs. 410.32(a), 410.34, and 410.35 of this chapter,
including the professional component of these services, but excluding
any invasive radiology procedure in which the imagingmodality is used
to guide a needle, probe, or a catheter accurately.
Referral--
(1) Means either of the following:
(i) Except as provided in paragraph (2) of this definition, the
request by a physician for, or ordering of, or the certifying or
recertifying of the need for, any designated health service for which
payment may be made under Medicare Part B (or, for purposes of the
Medicaid program, a comparable service covered under the Medicaid State
plan), including a request for a consultation
[[Page 1723]]
with another physician and any test or procedure ordered by or to be
performed by (or under the supervision of) that other physician.
(ii) Except as provided in paragraph (2) of this definition, a
request by a physician that includes the provision of any other
designated health service for which payment may be made under Medicare
(or, for purposes of the Medicaid program, a comparable service covered
under the Medicaid State plan) the establishment of a plan of care by a
physician that includes the provision of such a designated health
service, or the certifying or recertifying of the need for such a
designated health service.
(2) Does not include a request by a pathologist for clinical
diagnostic laboratory tests and pathological examination services, by a
radiologist for diagnostic radiology services, and by a radiation
oncologist for radiation therapy, if--
(i) The request results from a consultation initiated by another
physician; and
(ii) The tests or services are furnished by or under the
supervision of the pathologist, radiologist, or radiation oncologist.
Referring physician means a physician who makes a referral as
defined in this section.
Remuneration means any payment, discount, forgiveness of debt, or
other benefit made directly or indirectly, overtly or covertly, in cash
or in kind, except that the following are not considered remuneration:
(1) The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
(2) The furnishing of items, devices, or supplies that are used
solely to collect, transport, process, or store specimens for the
entity furnishing the items, devices, or supplies or are used solely to
order or communicate the results of tests or procedures for the entity.
(3) A payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual
who is covered by a policy with the insurer or by the self-insured
plan, if--
(i) The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
plan and the physician;
(ii) The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual; and
(iii) The amount of the payment is set in advance, does not exceed
fair market value, and is not determined in a manner that takes into
account directly or indirectly the volume or value of any referrals or
other business generated between the parties.
Transaction: A transaction is an instance or process of two or more
persons or entities doing business. An isolated transaction is one
involving a single payment between two or more persons or entities. A
transaction that involves long-term or installment payments is not
considered an isolated transaction.
5. Section 411.353 is revised to read as follows:
Sec. 411.353 Prohibition on certain referrals by physicians and
limitations on billing.
(a) Prohibition on referrals. Except as provided in this subpart, a
physician who has a financial relationship with an entity, or who has
an immediate family member who has a financial relationship with the
entity, may not make a referral to that entity for the furnishing of
designated health services for which payment otherwise may be made
under Medicare.
(b) Limitations on billing. An entity that furnishes designated
health services under a referral that is prohibited by paragraph (a) of
this section may not present or cause to be presented a claim or bill
to the Medicare program or to any individual, third party payer, or
other entity for the designated health services performed under that
referral.
(c) Denial of payment. No Medicare payment may be made for a
designated health service that is furnished under a prohibited
referral.
(d) Refunds. An entity that collects payment for a designated
health service that was performed under a prohibited referral must
refund all collected amounts on a timely basis, as defined in
Sec. 1003.101 of Chapter V.
6. Section 411.355 is revised to read as follows:
Sec. 411.355 General exceptions to the referral prohibition related to
both ownership/investment and compensation.
The prohibition on referrals set forth in Sec. 411.353 does not
apply to the following types of services:
(a) Physician services, as defined in Sec. 410.20(a), that are
furnished personally by (or under the personal supervision of) another
physician in the same group practice as the referring physician.
(b) In-office ancillary services. Services (including infusion
pumps and crutches, but excluding all other durable medical equipment
and parenteral and enteral nutrients, equipment, and supplies), that
meet the following conditions:
(1) They are furnished personally by one of the following
individuals:
(i) The referring physician.
(ii) A physician who is a member of the same group practice as the
referring physician.
(iii) Individuals who are directly supervised by the referring
physician or, in the case of group practices, by another physician
member of the same group practice as the referring physician.
(2) They are furnished in one of the following locations:
(i) The same building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
physician services unrelated to the furnishing of designated health
services. The ``same building'' means the same physical structure, with
one address, and not multiple structures connected by tunnels or
walkways.
(ii) A building that is used by the group practice for the
provision of some or all of the group's clinical laboratory services.
(iii) A building that is used by the group practice for the
centralized provision of the group's designated health services (other
than clinical laboratory services).
(3) They are billed by one of the following:
(i) The physician performing or supervising the service.
(ii) The group practice of which the performing or supervising
physician is a member under a billing number assigned to the group
practice.
(iii) An entity that is wholly owned by the physician or the
physician's group practice.
(4) In the case of crutches, the physician realizes no direct or
indirect profit from furnishing the crutches.
(c) Services furnished to prepaid health plan enrollees by one of
the following organizations:
(1) An HMO or a CMP in accordance with a contract with HCFA under
section 1876 of the Act and part 417, subparts J through M of this
chapter.
(2) A health care prepayment plan in accordance with an agreement
with HCFA under section 1833(a)(1)(A) of the Act and part 417, subpart
U of this chapter.
(3) An organization that is receiving payments on a prepaid basis
for Medicare enrollees through a demonstration project under section
402(a) of the Social Security
[[Page 1724]]
Amendments of 1967 (42 U.S.C. 1395b-1) or under section 222(a) of the
Social Security Amendments of 1972 (42 U.S.C. 1395b-1 note).
(4) A qualified health maintenance organization (within the meaning
of section 1310(d) of the Public Health Service Act).
(d) Services furnished under certain payment rates. (1) Services
furnished in an ambulatory surgical center (ASC) or ESRD facility or by
a hospice if payment for those services is included in the ASC payment
rate, the ESRD composite payment rate, or as part of the hospice
payment rate, respectively; and
(2) Services furnished under other payment rates that the Secretary
determines provide no financial incentive for under or overutilization,
or any other risk of program or patient abuse.
7. Section 411.356 is revised to read as follows:
Sec. 411.356 Exceptions to the referral prohibition related to
ownership or investment interests.
For purposes of Sec. 411.353, the following ownership or investment
interests do not constitute a financial relationship:
(a) Publicly-traded securities. Ownership of investment securities
(including shares or bonds, debentures, notes, or other debt
instruments) that at the time they were obtained could be purchased on
the open market and that meet the requirements of paragraphs (a)(1) and
(a)(2) of this section.
(1) They are either--
(i) Listed for trading on the New York Stock Exchange, the American
Stock Exchange, or any regional exchange in which quotations are
published on a daily basis, or foreign securities listed on a
recognized foreign, national, or regional exchange in which quotations
are published on a daily basis, or
(ii) Traded under an automated interdealer quotation system
operated by the National Association of Securities Dealers.
(2) They are in a corporation that had stockholder equity exceeding
$75 million at the end of the corporation's most recent fiscal year or
on average during the previous 3 fiscal years. ``Stockholder equity''
is the difference in value between a corporation's total assets and
total liabilities.
(b) Mutual funds. Ownership of shares in a regulated investment
company as defined in section 851(a) of the Internal Revenue Code of
1986, if the company had, at the end of its most recent fiscal year, or
on average during the previous 3 fiscal years, total assets exceeding
$75 million.
(c) Specific providers. Ownership or investment interest in the
following entities, for purposes of the services specified:
(1) A rural provider, in the case of designated health services
furnished in a rural area by the provider. A ``rural provider'' is an
entity that furnishes substantially all (not less than 75 percent) of
the designated health services that it furnishes to residents of a
rural area (that is, an area that is not an urban area as defined in
Sec. 412.62(f)(1)(ii) of this chapter).
(2) A hospital that is located in Puerto Rico, in the case of
designated health services furnished by such a hospital.
(3) A hospital that is located outside of Puerto Rico, in the case
of designated health services furnished by such a hospital, if the
referring physician is authorized to perform services at the hospital,
and the physician's ownership or investment interest is in the entire
hospital and not merely in a distinct part or department of the
hospital.
8. Section 411.357 is revised to read as follows:
Sec. 411.357 Exceptions to the referral prohibition related to
compensation arrangements.
For purposes of Sec. 411.353, the following compensation
arrangements do not constitute a financial relationship:
(a) Rental of office space. Payments for the use of office space
made by a lessee to a lessor if there is a rental or lease agreement
that meets the following requirements:
(1) The agreement is set out in writing, is signed by the parties,
and specifies the premises it covers.
(2) The term of the agreement is at least 1 year.
(3) The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee, except that the lessee may make payments for the use of
space consisting of common areas if the payments do not exceed the
lessee's pro rata share of expenses for the space based upon the ratio
of the space used exclusively by the lessee to the total amount of
space (other than common areas) occupied by all persons using the
common areas.
(4) The rental charges over the term of the agreement are set in
advance and are consistent with fair market value.
(5) The charges are not determined in a manner that takes into
account the volume or value of any referrals or other business
generated between the parties.
(6) The agreement would be commercially reasonable even if no
referrals were made between the lessee and the lessor.
(b) Rental of equipment. Payments made by a lessee to a lessor for
the use of equipment under the following conditions:
(1) A rental or lease agreement is set out in writing, is signed by
the parties, and specifies the equipment it covers.
(2) The equipment rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee.
(3) The agreement provides for a term of rental or lease of at
least 1 year.
(4) The rental charges over the term of the agreement are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
(5) The agreement would be commercially reasonable even if no
referrals were made between the parties.
(c) Bona fide employment relationships. Any amount paid by an
employer to a physician (or immediate family member) who has a bona
fide employment relationship with the employer for the provision of
services if the following conditions are met:
(1) The employment is for identifiable services.
(2) The amount of the remuneration under the employment is--
(i) Consistent with the fair market value of the services; and
(ii) Except as provided in paragraph (c)(4) of this section, is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician or
other business generated between the parties.
(3) The remuneration is provided under an agreement that would be
commercially reasonable even if no referrals were made to the employer.
(4) Paragraph (c)(2)(ii) of this section does not prohibit payment
of remuneration in the form of a productivity bonus based on services
performed personally by the physician (or immediate family member of
the physician) if the bonus is not directly related to the volume or
value of a physician's own referrals.
(d) Personal service arrangements--(1) General. Remuneration from
an entity under an arrangement or multiple arrangements to a physician,
an immediate family member of the physician, or to a group practice,
including remuneration for specific physician services furnished to a
[[Page 1725]]
nonprofit blood center, if the following conditions are met:
(i) Each arrangement is set out in writing, is signed by the
parties, and specifies the services covered by the arrangement.
(ii) The arrangement(s) covers all of the services to be furnished
by the physician (or an immediate family member of the physician) to
the entity, and all separate arrangements between the entity and the
physician and the entity and any family members incorporate each other
by reference. A physician or family member can ``furnish'' services
through employees whom they have hired for the purpose of performing
the services.
(iii) The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement(s).
(iv) The term of each arrangement is for at least 1 year.
(v) The compensation to be paid over the term of each arrangement
is set in advance, does not exceed fair market value, and, except in
the case of a physician incentive plan, is not determined in a manner
that takes into account the volume or value of any referrals or other
business generated between the parties.
(vi) The services to be furnished under each arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any State or Federal law.
(2) Physician incentive plan exception. In the case of a physician
incentive plan between a physician and an entity, the compensation may
be determined in a manner (through a withhold, capitation, bonus, or
otherwise) that takes into account directly or indirectly the volume or
value of any referrals or other business generated between the parties,
if the plan meets the following requirements:
(i) No specific payment is made directly or indirectly under the
plan to a physician or a physician group as an inducement to reduce or
limit medically necessary services furnished with respect to a specific
individual enrolled with the entity.
(ii) Upon request by the Secretary, the entity provides the
Secretary with access to the information about the plan specified in
417.479(h) of this chapter.
(iii) In the case of a plan that places a physician or a physician
group at substantial financial risk as determined by the Secretary
under Sec. 417.479(e) and (f) of this chapter, the entity complies with
the requirements concerning physician incentive plans set forth at
Sec. 417.479(g) and (i).
(e) Physician recruitment. Remuneration provided by a hospital to
recruit a physician that is intended to induce the physician to
relocate to the geographic area served by the hospital in order to
become a member of the hospital's medical staff, if all of the
following conditions are met:
(1) The arrangement is set out in writing and signed by both
parties.
(2) The arrangement is not conditioned on the physician's referral
of patients to the hospital.
(3) The hospital does not determine (directly or indirectly) the
amount of the remuneration to the physician based on the volume or
value of any referrals by the physician or other business generated
between the parties.
(4) The physician is not precluded from establishing staff
privileges at another hospital or referring business to another entity.
(f) Isolated transactions. Isolated financial transactions, such as
a one-time sale of property or a practice, if all of the following
conditions are met:
(1) The amount of remuneration under the transaction is--
(i) Consistent with the fair market value of the transaction; and
(ii) Not determined in a manner that takes into account (directly
or indirectly) the volume or value of any referrals by the referring
physician or other business generated between the parties.
(2) The remuneration is provided under an agreement that would be
commercially reasonable even if the physician made no referrals.
(3) There are no additional transactions between the parties for 6
months after the isolated transaction, except for transactions that are
specifically excepted under the other provisions in Secs. 411.355
through 411.357.
(g) Arrangements with hospitals. Remuneration provided by a
hospital to a physician if the remuneration does not relate, directly
or indirectly, to the furnishing of designated health services. To
qualify as ``unrelated,'' remuneration must not in any way reflect the
volume or value of a physician's referrals.
(h) Group practice arrangements with a hospital. An arrangement
between a hospital and a group practice under which designated health
services are furnished by the group but are billed by the hospital if
the following conditions are met:
(1) With respect to services furnished to an inpatient of the
hospital, the arrangement is pursuant to the provision of inpatient
hospital services under section 1861(b)(3) of the Act.
(2) The arrangement began before, and has continued in effect
without interruption since, December 19, 1989.
(3) With respect to the designated health services covered under
the arrangement, at least 75 percent of these services furnished to
patients of the hospital are furnished by the group under the
arrangement.
(4) The arrangement is in accordance with a written agreement that
specifies the services to be furnished by the parties and the
compensation for services furnished under the agreement.
(5) The compensation paid over the term of the agreement is
consistent with fair market value, and the compensation per unit of
services is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
(6) The compensation is provided in accordance with an agreement
that would be commercially reasonable even if no referrals were made to
the entity.
(i) Payments by a physician. Payments made by a physician--
(1) To a laboratory in exchange for the provision of clinical
laboratory services, or
(2) To an entity as compensation for any other items or services
that are furnished at a price that is consistent with fair market
value, and that are not specifically excepted under another provision
in Secs. 411.355 through 411.357. ``Services'' in this context means
services of any kind (not just those defined as ``services'' for
purposes of the Medicare program in Sec. 400.202).
(j) Discounts. Any discount made to a physician that is passed on
in full to either the patient or the patient's insurers (including
Medicare) and that does not enure to the benefit of the referring
physician.
(k) De minimis compensation. Compensation from an entity in the
form of items or services (not including cash or cash equivalents) that
does not exceed $50 per gift and an aggregate of $300 per year if--
(1) The entity providing the compensation makes it available to all
similarly situated individuals, regardless of whether these individuals
refer patients to the entity for services; and
(2) The compensation is not determined in any way that takes into
account the volume or value of the physician's referrals to the entity.
(l) Fair market value compensation. Compensation resulting from an
arrangement between an entity and a physician (or immediate family
member) or any group of physicians (regardless of whether the group
meets
[[Page 1726]]
the definition of a group practice set forth at Sec. 411.351) if the
arrangement is set forth in an agreement that meets the following
conditions:
(1) It is in writing, signed by the parties, and covers only
identifiable items or services, all of which are specified in the
agreement. The agreement covers all of the items and services to be
provided by the physician and any immediate family member to the entity
or, alternatively, cross refers to any other agreements for items or
services between these parties.
(2) It specifies the timeframe for the arrangement, which can be
for any period of time and contain a termination clause, provided the
parties enter into only one arrangement for the same items or services
during the course of a year. An arrangement made for less than 1 year
may be renewed any number of times if the terms of the arrangement and
the compensation for the same items or services do not change.
(3) It specifies the compensation that will be provided under the
arrangement. The compensation, or the method for determining the
compensation, must be set in advance, be consistent with fair market
value, and not be determined in a manner that takes into account the
volume or value of any referrals (as defined in Sec. 411.351), payment
for referrals for medical services that are not covered under Medicare
or Medicaid, or any other business generated between the parties.
(4) It involves a transaction that is commercially reasonable and
furthers the legitimate business purposes of the parties.
(5) It meets a safe harbor under the anti-kickback statute or
otherwise is in compliance with the anti-kickback provisions in section
1128B(b) of the Act.
9. In Sec. 411.360, paragraphs (a), (b), and (d) are revised to
read as set forth below, and paragraphs (c) and (e) are republished.
Sec. 411.360 Group practice attestation.
(a) Except as provided in paragraph (b) of this section, a group of
physicians that wishes to qualify as a group practice (as defined in
Sec. 411.351) must submit a written statement to its carrier annually
to attest that, during the most recent 12-month period (calendar year,
fiscal year, or immediately preceding 12-month period) 75 percent of
the total patient care services of group practice members was furnished
through the group, was billed under a billing number assigned to the
group, and the amounts so received were treated as receipts of the
group.
(b) A newly-formed group (one in which physicians have recently
begun to practice together) or any group practice that has been unable
in the past to meet the requirements of section 1877(h)(4) of the Act
or Sec. 411.351, that wishes to qualify as a group practice, must--
(1) Submit a written statement to attest that, during the next 12-
month period (calendar year, fiscal year, or next 12 months), it
expects to meet the 75 percent standard and will take measures to
ensure that the standard is met; and
(2) At the end of the 12-month period, submit a written statement
to attest that it met the 75 percent standard during that period,
billed for those services under a billing number assigned to the group,
and treated amounts received for those services as receipts of the
group. If the group did not meet the standard, any Medicare payments
made for designated health services furnished by the group during the
12-month period that were conditioned upon the standard being met are
overpayments.
(c) Once any group has chosen whether to use its fiscal year, the
calendar year, or some other 12-month period, the group practice must
adhere to this choice.
(d) The attestation must be signed by an authorized representative
of the group practice who is knowledgeable about the group, and must
contain a statement that the information furnished in the attestation
is true and accurate to the best of the representative's knowledge and
belief. Any person filing a false statement will be subject to
applicable criminal and/or civil penalties.
(e) A group that intends to meet the definition of a group practice
in order to qualify for an exception described in Secs. 411.355 through
411.357, must submit the attestation required by paragraph (a) or
(b)(1) of this section, as applicable, to its carrier no later than 60
days after receipt of the attestation instructions from its carrier.
10. In Sec. 411.361, paragraphs (a) through (e) are revised to read
as set forth below, and paragraphs (f) and (g) are republished.
Sec. 411.361 Reporting requirements.
(a) Basic rule. Except as provided in paragraph (b) of this
section, all entities furnishing services for which payment may be made
under Medicare must submit information to HCFA concerning their
financial relationships (as defined in paragraph (d) of this section),
in the form, manner, and at the times that HCFA specifies using an
HCFA-prescribed form.
(b) Exception. The requirements of paragraph (a) of this section do
not apply to entities that furnish 20 or fewer Part A and Part B
services during a calendar year, or to any Medicare covered services
furnished outside the United States.
(c) Required information. The information requested by HCFA can
include the following:
(1) The name and unique physician identification number (UPIN) of
each physician who has a financial relationship with the entity.
(2) The name and UPIN of each physician who has an immediate
relative (as defined in Sec. 411.351) who has a financial relationship
with the entity.
(3) The covered services furnished by the entity.
(4) With respect to each physician identified under paragraphs
(c)(1) and (c)(2) of this section, the nature of the financial
relationship (including the extent and/or value of the ownership or
investment interest or the compensation arrangement, if requested by
HCFA).
(d) Reportable financial relationships. For purposes of this
section, a financial relationship is any ownership or investment
interest or any compensation arrangement, as defined in Sec. 411.351,
including those relationships excepted under Secs. 411.355 through
411.357.
(e) Form and timing of reports. Entities that are subject to the
requirements of this section must submit the required information on a
HCFA-prescribed form within the time period specified by the servicing
carrier or intermediary. Entities are given at least 30 days from the
date of the carrier's or intermediary's request to provide the initial
information. Thereafter, an entity must report to HCFA once a year all
changes in the submitted information that occurred in the previous 12
months. Entities must retain documentation sufficient to verify the
information provided on the forms and, upon request, must make that
documentation available to HCFA or the OIG.
(f) Consequences of failure to report. Any person who is required,
but fails, to submit information concerning his or her financial
relationships in accordance with this section is subject to a civil
money penalty of up to $10,000 for each day of the period beginning on
the day following the applicable deadline established under paragraph
(e) of this section until the information is submitted. Assessment of
these penalties will comply with the applicable provisions of part 1003
of this title.
[[Page 1727]]
(g) Public disclosure. Information furnished to HCFA under this
section is subject to public disclosure in accordance with the
provisions of part 401 of this chapter.
PART 424--CONDITIONS FOR MEDICARE PAYMENT
B. Part 424 is amended as follows:
1. The authority citation for part 424 continues to read as
follows:
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
2. In Sec. 424.22, paragraph (d) is revised to read as set forth
below, and paragraphs (e), (f), and (g) are removed.
Sec. 424.22 Requirements for home health services.
* * * * *
(d) Limitation on the performance of certification and plan of
treatment functions. The need for home health services to be provided
by an HHA may not be certified or recertified, and a plan of treatment
may not be established and reviewed, by any physician who has a
financial relationship, as defined in Sec. 411.351 of this chapter,
with that HHA, unless the physician's relationship meets one of the
exceptions in Secs. 411.355 through 411.357 of this chapter.
PART 435--ELIGIBILITY IN THE STATES, DISTRICT OF COLUMBIA, THE
NORTHERN MARIANA ISLANDS, AND AMERICAN SAMOA
C. Part 435 is amended as follows:
1. The authority citation for part 435 continues to read as
follows:
Authority: Sec. 1102 of the Social Security Act (42 U.S.C.
1302).
2. In Sec. 435.1002, paragraph (a) is revised to read as follows:
Sec. 435.1002 FFP for services.
(a) Except for the limitations and conditions specified in
Secs. 435.1007, 435.1008, and 435.1012, FFP is available in
expenditures for Medicaid services for all recipients whose coverage is
required or allowed under this part.
* * * * *
3. Section 435.1012 is added to subpart K, under an undesignated
centered heading, to read as follows:
Limitation on FFP Related to Prohibited Referrals
Sec. 435.1012 Limitation on FFP related to prohibited referrals.
(a) Basic rule. Except as specified in paragraph (b) of this
section, no FFP in the State's expenditures for services is available
for expenditures for designated health services (as defined in
Sec. 411.351 of this chapter) furnished under the State plan to an
individual on the basis of a physician referral that would, if Medicare
provided for coverage of the services to the same extent and under the
same terms and conditions as under the State plan, result in the denial
of Medicare payment for the services under Secs. 411.351 through
411.360 of this chapter. (Section 411.353 provides that if a physician
(or an immediate family member) has a financial relationship with an
entity, the physician may not make a referral to that entity for the
furnishing of designated health services for which payment otherwise
may be made under Medicare and denies payment for any service furnished
under a prohibited referral. Section 411.351 contains definitions, and
Secs. 411.355 through 411.357 provide exceptions to the prohibition on
referrals.) The provisions of this section are based on section 1903(s)
of the Act, which applies to Medicaid aspects of the Medicare rules
limiting physician referrals.
(b) Exception for services furnished to enrollees on a
predetermined, capitated basis. The limitation on FFP in paragraph (a)
does not apply to services furnished to, or arranged for, an enrollee
by an entity with an HMO contract with a State under section 1903(m); a
prepaid health plan (PHP) contract with a State under part 434, subpart
C; or a health insuring organization (HIO) contract under part 434,
subpart D.
(c) Advisory opinions relating to physician referrals. Sections
411.370 through 411.389 cover the procedures for obtaining an advisory
opinion from HCFA on whether a physician's referrals relating to
designated health services (other than clinical laboratory services)
are prohibited under section 1877.
PART 455--PROGRAM INTEGRITY: MEDICAID
D. Part 455 is amended as follows:
1. The authority citation for part 455 continues to read as
follows:
Authority: Sec. 1102 of the Social Security Act (42 U.S.C.
1302).
2. Section 455.100 is revised to read as follows:
Sec. 455.100 Basis and Purpose.
(a) Basis. This subpart implements sections 1124, 1126,
1902(a)(38), 1903(i)(2), 1903(n), and 1903(s) of the Act.
(b) Purpose. This subpart does the following:
(1) Sets forth State plan requirements regarding--
(i) Disclosure by providers and fiscal agents of information
concerning ownership and control, investment arrangements, and
compensation arrangements; and
(ii) Disclosure of information on a provider's owners and other
persons convicted of criminal offenses against Medicare, Medicaid, or
the title XX services program.
(2) Specifies conditions under which the Administrator will deny
Federal financial participation for services furnished by providers or
fiscal agents that fail to comply with the disclosure requirements.
(3) Provides for a civil money penalty for failure to meet certain
reporting requirements.
3. Section 455.103 is revised to read as follows:
Sec. 455.103 State plan requirement.
A State plan must provide that the requirements of Secs. 445.104
through 455.109 are met.
4. A new subpart C, consisting of section Secs. 455.108 and
455.109, is added to read as follows:
Subpart C--Disclosure of Information by Providers for Purposes of
the Prohibition on Certain Physician Referrals
Sec. 455.108 Basis.
This subpart is based on section 1903(s) of the Act, which, in
part, applies the reporting requirements of section 1877(f) and (g) of
the Act to Medicaid providers of designated health services (as these
services are defined in Sec. 411.351).
Sec. 455.109 Disclosure of ownership, investment, and compensation
arrangements.
(a) The Medicaid agency must require that each provider of services
that furnishes designated health services covered by the State plan
submit information to the Medicaid agency concerning its financial
relationships (as defined in paragraph (d) of this section), in the
form, manner, and at the times the agency specifies. The term
``designated health services,'' for purposes of this section, refers to
the services listed in Sec. 411.351 of this chapter, as they are
defined in that section, or as those services are otherwise defined
under the State plan.
(b) Exception. The requirements of paragraph (a) of this section do
not apply to providers of services that provide 20 or fewer designated
health services covered under the State plan during a calendar year, or
to designated
[[Page 1728]]
health services furnished outside the United States.
(c) Required information. The information requested by the Medicaid
agency can include the following:
(1) The name and Medicaid State Specific Identifier (MSSI) of each
physician who has a financial relationship with the provider of
services.
(2) The name and MSSI of each physician who has an immediate
relative (as defined in Sec. 411.351 of this chapter) who has a
financial relationship with the provider of services.
(3) The covered items and services furnished by the provider of
services.
(4) With respect to each physician identified under paragraphs
(c)(1) and (c)(2) of this section, the nature of the financial
relationship (including the extent and/or value of the ownership or
investment interest or the compensation arrangement, if requested by
the Medicaid agency).
(d) Reportable financial relationships. For purposes of this
section, a financial relationship is any ownership or investment
interest or any compensation arrangement, as defined in Sec. 411.351,
including those relationships excepted under Secs. 411.355 through
411.357.
(e) Form and timing of reports. Providers of services that are
subject to the requirements of this section must submit the required
information on a prescribed form within the time period specified by
the Medicaid agency. Thereafter, a provider must report to the Medicaid
agency all changes in the submitted information within a timeframe
specified by the Medicaid agency. Providers of services must retain
documentation sufficient to verify the information provided on the
forms and, upon request, must make that documentation available to the
Medicaid State agency, HCFA, or the OIG.
(f) Consequences of failure to report. Any provider of services
that is required, but failed, to meet the reporting requirements of
paragraph (a) of this section is subject to a civil money penalty of
not more than $10,000 for each day of the period beginning on the day
following the applicable deadline until the information is submitted.
Assessment of the penalty will comply with the applicable provisions of
part 1003 of this title.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; Program No. 93.774, Medicare--
Supplementary Medical Insurance Program; and Federal Domestic
Assistance Program No. 93.778, Medical Assistance Program)
Dated: November 10, 1997.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
Dated: December 17, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 98-282 Filed 1-5-98; 8:45 am]
BILLING CODE 4120-03-P