[Federal Register Volume 64, Number 223 (Friday, November 19, 1999)]
[Rules and Regulations]
[Pages 63504-63515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29988]



[[Page 63503]]

_______________________________________________________________________

Part IV





Department of Health and Human Services





_______________________________________________________________________



Office of Inspector General



_______________________________________________________________________



42 CFR Part 1001



Federal Health Care Programs: Fraud and Abuse; Statutory Exception to 
the Anti-Kickback Statute for Shared Risk Arrangements; Final Rule

  Federal Register / Vol. 64, No. 223 / Friday, November 19, 1999 / 
Rules and Regulations  

[[Page 63504]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AA91


Federal Health Care Programs: Fraud and Abuse; Statutory 
Exception to the Anti-Kickback Statute for Shared Risk Arrangements

AGENCY: Office of Inspector General (OIG), HHS

ACTION: Interim final rule with request for comment.

-----------------------------------------------------------------------

SUMMARY: In accordance with section 216 of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA), and section 14 of 
the Medicare and Medicaid Patient and Program Protection Act of 1987, 
this interim final rule establishes two new safe harbors from the anti-
kickback law (section 1128B(b) of the Social Security Act) to provide 
protection for certain managed care arrangements. The first safe harbor 
protects certain financial arrangements between managed care plans and 
individuals or entities with whom they contract for the provision of 
health care items and services, where Federal health care programs pay 
such plans on a capitated basis. The second safe harbor protects 
certain financial arrangements between managed care plans (including 
employer-sponsored group health plans) and individuals or entities with 
whom they contract for health care items and services with respect to 
services reimbursed on a fee-for-service basis by a Federal health care 
program provided that such individuals and entities are placed at 
substantial financial risk for the cost or utilization of items or 
services furnished to Federal health care program beneficiaries. Each 
of these safe harbors set forth standards that will result in the 
particular arrangement being protected from criminal prosecution and 
civil or administrative sanctions under the anti-kickback provisions.

DATES: Effective date: This rule is effective on November 19, 1999. 
Comment period: To assure consideration, public comments must be 
delivered to the address provided below by no later than 5 p.m. on 
January 18, 2000.

ADDRESSES: Please mail or deliver your written comments to the 
following address: Office of Inspector General, Department of Health 
and Human Services, Attention: OIG-54-IFC, Room 5246, Cohen Building 
330 Independence Avenue, S.W., Washington, D.C. 20201.

FOR FURTHER INFORMATION CONTACT: Julie E. Kass, Senior Counsel, Office 
of Counsel to the Inspector General, (202) 205-9501; or Joel Schaer, 
Regulations Officer, Office of Counsel to the Inspector General, (202) 
619-1306.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Anti-Kickback Statute

    Section 1128B(b) of the Social Security Act (the Act) (42 U.S.C. 
1320a-7b(b)) provides criminal penalties for individuals or entities 
that knowingly and willfully offer, pay, solicit or receive 
remuneration to induce the referral of business reimbursable under a 
Federal health care program (including Medicare and Medicaid). The 
offense is a felony punishable by fines of up to $25,000 and 
imprisonment for up to 5 years. Section 2 of the Medicare and Medicaid 
Patient and Program Protection Act of 1987 (MMPPPA) authorizes the 
exclusion of an individual or entity from participation in the Medicare 
and State health care programs if it is determined that the party has 
violated the anti-kickback statute. In addition, the Balanced Budget 
Act of 1997, Public Law 105-33, amended section 1128A(a) of the Act to 
include an administrative civil money penalty provision for violating 
the anti-kickback statute. The administrative sanction is $50,000 for 
each act and an assessment of not more than 3 times the amount of 
remuneration offered, paid, solicited or received, without regard to 
whether a portion of such remuneration was offered, paid, solicited or 
received for a lawful purpose. (See section 1128A(a)(7) of the Act; 42 
U.S.C. 1320a-7a(a)(7)).
    The anti-kickback statute contains five statutory exceptions from 
the statutory prohibitions. The exceptions are for certain discounts 
obtained by a provider and disclosed to the Federal health care 
program, compensation paid to a bona fide employee by an employer, 
amounts paid to a group purchasing organization by a vendor subject to 
certain conditions, waivers of coinsurance by Federally qualified 
health centers, and remuneration paid as part of a risk-sharing 
arrangement. The last exception is the subject of this rulemaking.
    Section 14 of MMPPPA also required the OIG to promulgate 
regulations specifying those payment and business practices that, 
although potentially capable of inducing referrals of business under 
the Medicare and State health care programs, would not be subject to 
criminal prosecution under section 1128B of the Act and that will not 
provide a basis for administrative sanctions under sections 1128(b)(7) 
or 1128A(a)(7) of the Act. (See section 2 of Pub. L. 100-93.) Congress 
intended that the regulations setting forth various ``safe harbors'' 
would be periodically updated to reflect changing business practices 
and technologies in the health care industry.
    The failure of an arrangement to fit inside a safe harbor or 
statutory exception does not mean that the arrangement is illegal. It 
is incorrect to assume that arrangements outside of a safe harbor are 
suspect due to that fact alone. That an arrangement does not meet a 
safe harbor only means that the arrangement does not have guaranteed 
protection and must be evaluated on a case-by-case basis.
    The anti-kickback statute potentially applies to many managed care 
arrangements because a common strategy of these arrangements is to 
offer physicians, hospitals and other providers increased patient 
volume in return for substantial fee discounts. Because discounts to 
managed care plans can constitute ``remuneration'' within the meaning 
of the anti-kickback statute, a number of health care providers and 
managed care plans have expressed concern that many relatively 
innocuous, or even beneficial, commercial managed care arrangements 
implicate the statute and may subject them to criminal prosecution and 
administrative sanctions. In response to these concerns, we issued 
final safe harbor regulations for managed care arrangements on January 
25, 1996 (61 FR 2122) to protect certain managed care arrangements that 
we did not believe posed any significant risk of fraud or abuse. (See 
42 CFR 1001.952(m)). We are soliciting comments on whether the current 
managed care safe harbor should be removed in light of this rulemaking 
so as to avoid confusion.
    We recognize that many managed care arrangements exist in the 
marketplace today that do not fall within a safe harbor, but are not 
illegal under the anti-kickback statute. Such arrangements must be 
analyzed on a case-by-case basis. Any individual or entity with 
questions regarding whether a specific arrangement violates the anti-
kickback statute may submit an advisory opinion request to the OIG in 
accordance with regulations set forth in 42 CFR part 1008.

[[Page 63505]]

B. Section 216 of HIPAA

1. Summary of Statutory Provision
    In section 216 of HIPAA, Congress created a new statutory exception 
to the anti-kickback statute that covers remuneration in accordance 
with two categories of risk-sharing arrangements. The first category is 
``any remuneration between an organization and an individual or entity 
providing items or services, or a combination thereof, pursuant to a 
written agreement between the organization and the individual or entity 
if the organization is an eligible organization under section 1876 (of 
the Social Security Act) * * *'' The second category is ``any 
remuneration between an organization and an individual or entity 
providing items or services, or a combination thereof, pursuant to a 
written agreement between the organization and the individual or entity 
* * * if the written agreement, through a risk-sharing arrangement, 
places the individual or entity at substantial financial risk for the 
cost or utilization of the items or services, or a combination thereof, 
which the individual or entity is obligated to provide.'' Congress 
directed the Department to develop regulations implementing the 
exceptions using a negotiated rulemaking process.
2. Negotiated Rulemaking Process
    The negotiated rulemaking process began in the spring of 1997, and 
on March 7, 1997, a facilitator with the Department's Departmental 
Appeals Board issued a convening report to the Inspector General, 
setting out findings and recommendations on the use of a negotiated 
rulemaking process for these regulations and identifying industry and 
consumer representatives who, based on their interests, should serve on 
the committee. On May 23, 1997, the OIG issued a notice of intent to 
form a Negotiated Rulemaking Committee, in accordance with the 
Negotiated Rulemaking Act of 1990, Public Law 101-648, as amended by 
Public Law 102-354 (5 U.S.C. 561 et seq.), and requested public 
comments on whether those interests affected by the key issues of the 
negotiated rulemaking had been identified (62 FR 28410). After review 
of the comments, the Secretary appointed a committee consisting of 23 
parties representing all of the major groups identified as having a 
significant interest in these regulations. The negotiated rulemaking 
committee was comprised of the following groups:

 American Association of Health Plans
 American Association of Retired Persons
 American Hospital Association
 American Health Care Association
 American Medical Association
 American Medical Group Association
 Blue Cross Blue Shield Association
 Consumer Coalition for Quality Health Care
 Coordinated Care Coalition
 Department of Justice
 Federation of American Health Systems
 Health Insurance Association of America
 Health Insurance Manufacturers Association
 Independent Insurance Agents of America/National Association 
of Health
 Underwriters/National Association of Life Underwriters
 National Association of Chain Drug Stores
 National Association of Community Health Centers
 National Association of Insurance Commissioners
 National Association of Medicaid Fraud Control Units
 National Association of State Medicaid Directors
 National Rural Health Association
 Office of Inspector General, DHHS
 Pharmaceutical Research and Manufacturers of America
 The IPA Association of America

    The committee was charged with reaching consensus on the basic 
content of interim final regulations relating to section 216 of HIPAA. 
Committee consensus was defined as a unanimous concurrence of all 
committee members, provided that there was a quorum of two-thirds of 
the committee members present. Unanimous concurrence with respect to a 
committee decision meant only that the committee members ``could live 
with'' the particular decision.
    The committee held seven multi-day negotiating sessions beginning 
in June 1997. During the sessions, the committee made significant 
progress in developing new regulations. On January 22, 1998, the 
committee unanimously concurred on the committee statement that formed 
the basis of this rulemaking when considered as a whole. A copy of the 
committee statement can be found on the OIG web site at http://
www.dhhs.gov/progorg/oig.

C. Basis for Interim Final Rulemaking

    These interim final regulations will be effective upon publication. 
For a number of reasons, we find that good cause exists for an 
immediate effective date for these regulations. First, Congress 
specifically mandated that the regulations implementing section 216 of 
HIPAA should be published as interim final regulations. Second, those 
portions of the rule that are technically outside of the scope of 
section 216 of HIPAA were discussed in a public forum during the 
negotiated rulemaking sessions and are integral to the protections 
afforded under the portions of the regulation implementing section 216 
of HIPAA. In addition, safe harbors do not create any affirmative 
obligation on any individuals or entities. They only exempt certain 
conduct from potential criminal and administrative sanctions. As a 
result, we find that the benefit conferred on the public by this rule's 
immediate promulgation provides good cause for it to be effective upon 
publication.

II. Provisions of the Interim Final Rule

    In this section, we discuss the purpose and scope of the safe 
harbors, summarize the provisions of this interim final rule, and 
describe general issues that arose during the negotiated rulemaking. We 
then describe the individual provisions of the rulemaking and related 
issues discussed by the committee.

A. Purpose

    The rule is intended to implement section 216 of HIPAA by creating 
two new regulatory safe harbors that correspond to the two categories 
of managed care arrangements identified in that statutory provision. 
The first safe harbor, set forth in Sec. 1001.952(t), protects various 
financial arrangements between managed care entities that receive a 
fixed or capitated amount from the Federal health care programs and 
individuals and entities with whom the managed care entity contracts 
for the provision of health care items or services.
    The second safe harbor, set forth in Sec. 1001.952(u), protects 
contractual relationships between managed care entities and their 
contractors and subcontractors where the contractors and subcontractors 
are at substantial financial risk for the cost or utilization of items 
or services they provide or order for Federal health care program 
beneficiaries. As explained in detail below, the negotiated rulemaking 
committee recognized that there are few existing managed care 
arrangements that would qualify under newly-established 
Sec. 1001.952(u) that are not otherwise covered by the safe harbor in 
newly-established Sec. 1001.952(t). In practice, most managed care 
arrangements, such as employer-sponsored health plans, do not place 
their contractors and subcontractors at substantial financial risk for 
the cost or utilization of items or services provided to Federal health

[[Page 63506]]

care program beneficiaries. Typically, the contractors and 
subcontractors to such health plans are reimbursed directly by the 
Federal payor on a fee-for-service basis. Notwithstanding the fee-for-
service payment arrangements, Sec. 1001.952(u) identifies a category of 
arrangements that could qualify for protection.

B. Scope of the Safe Harbors

    The safe harbors established in Secs. 1001.952(t) and (u) protect 
remuneration between parties where the remuneration is a price 
reduction for the provision of health care items or services. Other 
remuneration, such as profit distributions from investment interests in 
an entity with a risk sharing arrangement, is not protected by these 
safe harbors. Individuals or entities seeking safe harbor protection 
for such arrangements may meet the requirements of another safe harbor, 
such as the safe harbor for investment interests in small entities set 
forth in Sec. 1001.952(a)(2).
    In addition, if an arrangement covers both remuneration that 
qualifies for protection under either Sec. 1001.952(t) or (u), and 
remuneration that is not qualified for protection, the former 
remuneration remains protected. For example, a managed care plan may 
``carve out'' transplant services from its capitated payment 
methodology and pay for those services on a fee-for-service basis. The 
remuneration for the transplant services would not be protected under 
these safe harbors. However, protection for the items or services 
covered by the capitation, assuming all safe harbor conditions are 
otherwise met, would not be lost. Further, an arrangement that 
potentially falls within more than one safe harbor need only meet the 
requirements of one safe harbor. The remuneration for the transplant 
services may be protected under a separate safe harbor, such as the 
personal services safe harbor (Sec. 1001.952(d)).
    Finally, compliance with a safe harbor only provides protection 
from the Federal anti-kickback criminal statute and related 
administrative sanction authorities. Safe harbors do not apply to other 
laws, such as State licensure laws, antitrust laws or other Federal and 
State health care fraud laws. Further, the terms and definitions in 
these safe harbors do not apply to other laws, including but not 
limited to the anti-trust laws.

C. General Issues Discussed By The Committee

    The literal language of section 216 of HIPAA presented several 
threshold problems. First, the two categories of managed care 
arrangements identified by section 216 of HIPAA were narrow and did not 
provide protection for other managed care arrangements that the 
committee believed presented similar low risks of fraud or abuse. For 
example, section 216 was passed prior to the enactment of the Balanced 
Budget Act of 1997, which provides both for the phasing out of section 
1876 managed care contracts, and the creation of Medicare+Choice 
programs under the new Medicare Part C. Many of the new Medicare+Choice 
organizations are similar to section 1876 organizations and deserve the 
same extensive protection. Nevertheless, while Congress in the Balanced 
Budget Act changed many of the references to section 1876 in the Act to 
the new Medicare Part C, it did not change the reference in section 216 
of HIPAA.
    A similar issue arose with respect to the second category of 
arrangements protected by section 216. The statutory language was 
limited to arrangements in which the provider or supplier is at 
substantial financial risk for items or services that it is obligated 
to provide. However, as a practical matter, many effective managed care 
systems place the physicians at substantial risk, not for the physician 
services they provide directly, but for the ancillary and hospital 
services they order. Furthermore, the financial incentives in most 
managed care plans are based not on the individual performance of a 
physician, but on the aggregate performance of a group of physicians.
    Given the shortcomings of the statutory language, the Department 
determined that it would exercise its authority under section 14 of the 
MMPPPA to expand these safe harbors beyond the legal confines of 
section 216. Again, section 14 of MMPPPA allows the Secretary to 
promulgate regulations to protect arrangements that the Department 
determines may technically violate the anti-kickback statute, but which 
pose a low risk of program fraud or abuse. Exercise of this authority 
permits protection of certain types of managed care arrangements that 
are not encompassed within the statutory language of section 216 of 
HIPAA. The committee statement includes these expanded provisions and 
specifically identifies them as areas outside of the scope of section 
216.
    A final conceptual issue was the definition of ``substantial 
financial risk.'' Some committee members wanted the rule to set forth 
clear ``bright line'' standards, so that both law enforcement officers 
and the industry would know whether a particular arrangement was 
protected or not. While bright line tests can potentially ``chill'' the 
development of some innovative managed care arrangements, any ambiguity 
in the scope of protection could be exploited by unscrupulous 
individuals or entities to engage in abusive or fraudulent activities, 
especially in light of the high burden of proof on the Government in 
criminal proceedings. Plans have the option of submitting advisory 
opinion requests for arrangements that do not fit within these safe 
harbors. Furthermore, the Department annually solicits suggestions for 
additions to the anti-kickback safe harbors (62 FR 65049; December 10, 
1997). Moreover, we have agreed to review the target payment 
percentages of the numeric substantial financial risk test as more 
research and data become available.

D. Section 1001.952(t)--Price Reductions Offered to Eligible Managed 
Care Organizations

1. Overview
    This safe harbor corresponds to the first category of arrangements 
identified in section 216 of HIPAA, which exempts certain arrangements 
involving ``eligible organizations under section 1876'' of the Act. 
Section 1876 of the Act provides for the Health Care Financing 
Administration (HCFA) to enter into managed care contracts with 
Federally-qualified health maintenance organizations (HMOs) and certain 
competitive medical plans that have characteristics similar to 
Federally-qualified HMOs. As used in section 1876 of the Act and the 
implementing regulations, an ``eligible organization'' encompasses both 
(i) Federally-qualified HMOs and competitive medical plans that have 
entered into either risk or cost-based managed care contracts with 
HCFA, and (ii) Federally-qualified HMOs that have not entered into risk 
or cost-based managed care contracts with HCFA.
    This safe harbor recognized that eligible organizations with risk 
contracts under section 1876 of the Act presented little or no risk of 
overutilization or increased costs to the Federal health care programs, 
given applicable payment arrangements and regulatory oversight. When 
plans are paid a capitated amount for all of the services they provide 
regardless of the dates, frequency or type of services, there is no 
incentive to overutilize. In any event, even if overutilization occurs, 
the Federal health care programs are not at risk for these increased 
costs.
    The safe harbor set forth in Sec. 1001.952(t) extends protection 
from the anti-kickback statute beyond the

[[Page 63507]]

managed care arrangements under section 1876 of the Act that are 
specifically protected by section 216 of HIPAA. The expansion includes 
other programs where the Federal health care programs pay on a 
capitated or fixed aggregate basis, such as certain Medicare Part C 
plans. Further, it extends safe harbor protection ``downstream'' to 
cover subcontracts with other providers and entities to provide items 
and services in accordance with a protected managed care arrangement. 
So long as the Federal health care programs' aggregate financial 
exposure is fixed in accordance with its contract with the managed care 
organization, these subcontracting arrangements are protected 
regardless of the payment methodology, subject to the limitations set 
forth below.
2. Limitations
    While Sec. 1001.952(t) broadens the statutory exception in 
important respects, there are some important limitations. First, the 
broad protection for arrangements with subcontractors is limited to 
risk-based managed care plans that do not claim any payment from a 
Federal health care program other than the capitated amount set forth 
in the managed care plan's agreement with the Federal health care 
program. Where the managed care plan, its contractors or its 
subcontractors are permitted to seek additional payments from any of 
the Federal health care programs, the regulatory safe harbor protection 
is significantly more limited. For example, protection is not extended 
to arrangements with subcontractors when the contract under section 
1876 of the Act is cost-based or where the prime contract is protected 
solely because the contracting entity is a Federally-qualified HMO. In 
the first instance, reimbursement from the Federal health care program 
is based on costs, and in the latter case, services for Medicare 
enrollees are reimbursed on a fee-for-service basis. In both instances, 
reimbursement will increase with utilization, thus providing the same 
incentive to overutilize as any fee-for-service payment methodology.
    A second limitation on the regulatory safe harbor protection is 
that it only applies to remuneration for health care items and services 
and those items or services reasonably related to the provision of 
health care items and services. Section 1001.952(t) does not cover 
marketing services or any services provided prior to a beneficiary's 
enrollment in a health plan. This limitation also applies to the other 
new safe harbor in Sec. 1001.952(u).
    Another significant limitation is that there is no protection if 
the financial arrangements under the managed care agreement are 
implicitly or explicitly part of a broader agreement to steer fee-for-
service Federal health care program business to the entity giving the 
discount to induce the referral of managed care business. Specifically, 
we understand that most managed care plans have multiple relationships 
with their contractors and subcontractors for the provision of services 
for various product lines, including non-federal HMOs, preferred 
provider organizations (PPOs) and point of service networks. 
Consequently, although neither a managed care plan receiving a 
capitated payment from a Federal health care program nor its 
contractors or subcontractors has an incentive to overutilize items or 
services or pass additional costs back to the Federal health care 
programs under the capitated arrangement, we are concerned that a 
managed care plan or contractor may offer (or be offered) a reduced 
rate for its items or services in the Federal capitated arrangement in 
order to have the opportunity to participate in other product lines 
that do not have stringent payment or utilization constraints. This 
practice is a form of a practice that has become known as ``swapping''; 
in the case of managed care arrangements low capitation rates could be 
traded for access to additional fee-for-service lines of business. We 
are concerned when these discounts are in exchange for access to fee-
for-service lines of business, where there is an incentive to 
overutilize services provided to Federal health care program 
beneficiaries.
    For example, we would have concerns where an HMO with a Medicare 
risk contract under Medicare Part C also has an employer-sponsored PPO 
that includes retirees and requires participating providers to accept a 
low capitation rate for the Medicare HMO risk patients in exchange for 
access to the Medicare fee-for-service patients in the PPO. Although in 
such circumstances the cost to the Medicare program for the risk based 
HMO beneficiaries will not be increased, there may be increased 
expenditures for Medicare beneficiaries in the PPO arrangement, since 
the providers may have an incentive to increase services to the 
Medicare enrollees in the PPO to offset the discounted rates to the 
Medicare HMO. Accordingly, such arrangements could violate the anti-
kickback statute and should not be protected.
3. Analysis of Sec. 1001.952(t)
    a. Arrangements between eligible managed care organizations and 
first tier contractors. Section 1001.952(t)(1) is divided into two 
parts and sets out the substantive standards that arrangements must 
meet in order to receive safe harbor protection. Paragraph (t)(1)(i) of 
this section sets out the standards for arrangements between the 
eligible managed care organization (EMCO) and any individual or entity 
that contracts directly with the EMCO. These direct or ``first tier'' 
contractors are the only parties that are protected by the literal 
language of section 216 of HIPAA. Accordingly, the regulation treats 
these first tier contractors differently than individuals or entities 
that provide health care items or services in accordance with 
subcontracts with these first tier entities. We refer to these 
subcontractors as ``downstream'' contractors or providers. Paragraph 
(t)(1)(ii) of this section sets out the standards which must be met in 
order for arrangements between first tier contractors and any 
downstream subcontractor or between successive tiers of downstream 
subcontractors to be protected.
    Under Sec. 1001.952(t)(1)(i)(A), the EMCO and any first tier 
contractor must have an agreement that is written and signed by the 
parties, specifies the items and services covered under the agreement, 
and has a term of at least one year. These requirements are similar to 
the requirements for written agreements in other safe harbor 
provisions. In paragraph (1)(i)(A)(IV) of this section, there is a 
requirement that neither party will receive any additional payment for 
covered services from the Federal health care programs. This 
requirement is intended to insure that there is an incentive to control 
costs by eliminating the ability on the part of the first tier 
contractor to offset losses incurred through the capitated methodology.
    There are three exceptions to this general prohibition on the 
plan's receipt of additional Federal health care payments. These 
exceptions, set out in Sec. 1001.952(t)(1)(i)(A)(IV) are:
     HMOs and CMPs that have Medicare cost-based contracts 
under section 1876 of the Act;
     Federally-qualified HMOs without a HCFA contract; and
     Federally qualified health centers that claim supplemental 
payments from a Federal health care program.
    For Federally-qualified HMOs and Medicare cost-based HMOs/CMPs, the 
billing arrangement under which they receive additional Federal health 
program payments must be set forth in

[[Page 63508]]

the written agreement. With respect to Federally-qualified HMOs and 
Medicare cost-based HMOs/CMPs, the language of section 216 of HIPAA 
expressly requires this exception, since they are ``eligible 
organizations'' in section 1876 of the Act. The exception for 
Federally-qualified health centers is beyond the language of section 
216. Nevertheless, an exception for Federally-qualified health centers 
recognizes the special role they play in health care delivery systems 
in many medically underserved areas. We wish to make clear, however, 
that the safe harbor protects only the provision of health care items 
or services by (1) individuals or entities that contract directly with 
the HMOs and CMPs with cost-based contracts under section 1876 of the 
Act, or with Federally-qualified HMOs that do not have a risk-based 
contract with the Medicare program, i.e., first tier providers, or (2) 
in the case of a Federally-qualified health center, by the health 
center itself.
    As part of this interim final rule, we are soliciting comments 
concerning coverage of arrangements where a Medicaid managed care plan 
or an individual or entity under such a plan bills another Federal 
health care program on a fee-for-service basis for a person that is 
dually eligible for Medicare and Medicaid. One possibility would be to 
extend safe harbor protection in instances where (1) the Medicaid plan 
bills the Federal health care program; (2) the individual or entity is 
paid by the Medicaid plan in the same amount and in the same way as for 
those enrollees who are not subject to the coordination of benefits; 
and (3) neither the plan nor the individual or entity otherwise shifts 
the burden of such an arrangement to the extent that increased payments 
are claimed from a Federal health care program.
    The last two standards in Sec. 1001.952(t)(1)(i) insure that the 
discounts by the providers do not increase the risk of overutilization 
or increased costs in other Federal health care programs. As explained 
in the overview section, this safe harbor does not protect situations 
where one party gives or receives a discount or other remuneration in 
return for or to induce the provision or acceptance of business (other 
than that covered by the arrangement) for which payment may be made by 
the Federal health care programs on a fee-for-service basis. In 
addition, in accordance with paragraph (1)(i)(C) of this section, the 
arrangement cannot shift the financial burden to the extent that 
increased payments are claimed from Federal health care programs.
    b. Arrangements between first tier contractors and downstream 
contractors. Except as discussed below, arrangements between a first 
tier contractor and a downstream contractor, or between successive 
tiers of downstream contractors, are protected as long as the 
arrangement is for the provision of health care items or services that 
are covered by the arrangement between the first tier contractor and 
the EMCO. In addition, arrangements between the first tier contractor 
and subcontractor, or between such subcontractors and subcontractors 
farther downstream, must meet the same requirements as apply to 
arrangements between EMCOs and first tier contractors.
    The one exception to the generally broad safe harbor protection for 
``downstream'' providers is for arrangements between providers for 
health care items or services that are downstream from (1) Federally-
qualified health centers receiving supplemental payments, (2) HMOs or 
CMPs with cost-based contracts under section 1876 of the Act; or (3) 
Federally-qualified HMOs (unless they are provided in accordance with a 
risk-based contract under section 1876 of the Act or Medicare Part C). 
Reimbursement to these entities is not strictly risk-based and presents 
some risk of overutilization and increased Federal program costs. 
However, the safe harbor does protect entities that are providing items 
or services in accordance with a contract or subcontract with 
Federally-qualified health centers if the health centers do not receive 
any supplemental payments from the State. In such situations, the 
Federally-qualified health center has a strong financial incentive to 
guard against overutilization or excessive costs.
    c. Definitions. For purposes of Sec. 1001.952(t), we have set forth 
the definition for several terms. Rather than discuss the definitions 
in alphabetical order (as they appear in the regulation), they are 
discussed below in logical order, grouping the definitions that apply 
to various contracting parties together.
    Eligible Managed Care Organization--Eligible managed care 
organizations are Medicare risk-based or cost-based contractors under 
section 1876 of the Act, Medicare Part C health plans (except for 
medical savings accounts and fee-for-service plans), certain Medicaid 
managed care organizations (as described below), most Programs For All 
Inclusive Care For The Elderly (PACE) and Federally-qualified HMOs.
    Section 1001.952(t)(2)(ii)(C)-(D) identify the Medicaid managed 
care organizations that fall within the definition of eligible managed 
care organization. Protected arrangements are those defined in section 
1903(m)(1)(A) of the Act that provide or arrange for services for 
Medicaid enrollees under a contract in accordance with section 1903(m). 
These plans are paid by the State Medicaid agency on a capitated basis. 
In addition, the safe harbor provision protects other plans with risk-
based contracts with a State agency to provide or arrange for items or 
services to Medicaid enrollees, provided that contracts are subject to 
the upper payment limit in 42 CFR 447.361 or any equivalent cap 
approved by the Secretary.
    The safe harbor also protects most PACE programs. These programs 
provide a capitated amount for medical and certain social services for 
the elderly. The BBA changed not-for-profit PACE programs from 
demonstration status to covered services under Medicare and Medicaid. 
PACE programs that still have demonstration status (i.e., certain for-
profit programs) are not protected by this safe harbor.
    We are soliciting comments on whether the Department of Defense's 
TriCare program should also be included within the definition of 
``eligible managed care organization'' and, if included, to what extent 
protection should be granted. The committee statement includes TriCare 
within the types of organizations that should receive protection 
through the Department's regulatory authority. However, TriCare is a 
relatively new health care program for the active status military and 
their dependents, and has a more complex reimbursement methodology than 
Medicare risk contracts and retains important elements of cost-based, 
retrospective methodologies. Accordingly, it is unclear whether there 
are financial safeguards to control overutilization and limit costs to 
the Federal Government that are sufficient to warrant per se protection 
from the anti-kickback statute.
    First Tier Contractors--A first tier contractor is an individual or 
entity that has a contract to provide or arrange for items or services 
directly with an eligible managed care organization.
    Downstream Contractor--A downstream contractor is an individual or 
entity that provides or arranges for items or services in accordance 
with a subcontract with either (1) a party that is contracting directly 
with an EMCO, or (2) another party for the provision or arrangement of 
items or services that are

[[Page 63509]]

covered in accordance with a contract between the parties in (1).
    Items and Services--The term ``items and services'' is defined for 
purposes of this section to mean health care items, devices, supplies 
or services or those items or services that are reasonably related to 
such services, such as non-emergency transportation, patient education, 
attendant services, disease management, case management and utilization 
review and quality assurance. ``Items and services'' does not include 
marketing services or any similar pre-enrollment activities. The 
exclusion of marketing services is not meant to apply to nurse call-in 
lines or value-added services for current enrollees.

E. Section 1001.952(u)--Price Reductions Offered to Qualified Managed 
Care Plans

1. Overview
    An overview of this new safe harbor, a summary of several major 
issues that arose during the committee's discussions, and an outline of 
the new provisions of this safe harbor are set forth below.
    While Sec. 1001.952(t) protects certain arrangements based upon the 
``status'' of the parties, e.g., designation as an eligible 
organization for purposes of section 1876 of the Act or participation 
in the PACE program, Sec. 1001.952(u) provides safe harbor protection 
for arrangements that qualify under the functional test identified in 
section 216 of HIPAA, that is, risk-sharing arrangements that place a 
health care provider under substantial financial risk for the cost or 
utilization of health care services the provider is obligated to 
provide.
2. Limitations
    Section 216 of HIPAA contains two important qualifications that 
substantially narrow the universe of arrangements that can potentially 
qualify for protection using the functional test. The most important 
constraint is that the provider has to be at substantial financial risk 
for items or services provided to Federal health care program 
beneficiaries. However, except for providers participating in the 
Medicare and Medicaid managed care plans that are already covered by 
the new safe harbor in Sec. 1001.952(t), almost all other providers are 
reimbursed by Federal health care programs on a fee-for-service basis.
    However, according to information presented to the committee, most 
managed care arrangements that cover Federal health care program 
beneficiaries and are not paid on a risk basis are employer-sponsored 
health plans that cover retirees who may also qualify for Medicare. In 
these managed care arrangements, the participating providers typically 
submit claims for services provided to enrollees who have primary 
coverage under Medicare directly to the Medicare carriers and 
intermediaries and receive reimbursement on a fee-for-service basis. In 
other words, services to Medicare beneficiaries typically are ``carved 
out'' of the risk-sharing arrangements these plans have with their 
participating providers. In accordance with section 216 of HIPAA, these 
providers are not at ``substantial financial risk'' for the cost or 
utilization of services they provide to Medicare patients. Therefore, 
such arrangements do not merit protection under the statutory criteria.
    The second major limitation in section 216 is that the providers 
must be at risk for the cost or utilization of items or services they 
are ``obligated to provide.'' Many risk sharing arrangements with 
physicians are based on the cost or utilization of items and services 
they order but that are actually provided by other entities (e.g., 
physician bonuses based on the number of hospital admissions). 
Accordingly, this requirement also substantially narrows the universe 
of arrangements that could potentially qualify for protection under 
Sec. 1001.952(u).
    Working within these two constraints, the committee determined to 
protect financial arrangements that:
     Are part of a comprehensive managed care arrangement in 
which at least fifty percent of the enrollees do not have primary 
coverage under Medicare.
     Place providers at substantial financial risk for the cost 
or utilization of health care items and services for all enrollees.
     Use the identical risk and payment methodologies to 
reimburse providers for services provided to enrollees with primary 
coverage paid by Federal health care programs as is used for all other 
enrollees. In other words, payments from the plan to its providers must 
be the same for identical items or services provided to people with 
similar health status.
     Allow payment differentials only when they are related to 
utilization patterns and/or costs of providing items or services to the 
relevant population.
3. Major Issues
    a. Definition of an ``organization''. The statutory language 
exempts ``remuneration between an organization and an individual or 
entity.'' Some committee members believed the term ``organization'' 
could refer to any entity that provides health care services. However, 
other committee members were concerned that if the term 
``organization'' meant any health care entity or individual, it would 
be easy for two parties to camouflage an illegal kickback arrangement 
as a risk sharing arrangement that could meet the requirements of the 
safe harbor. For example, the entity paying the kickback could agree to 
a capitation payment below fair market value for one service or group 
of patients, i.e., the ``remuneration,'' in exchange for referrals of 
fee-for-service patients. The scheme would be a variant of providing a 
deep discount on a good not reimbursable by Medicare to induce the 
purchase of other goods that are reimbursable by Medicare. We have 
previously stated that such arrangements potentially implicate the 
anti-kickback statute (61 FR 2130; January 25, 1996).
    The committee members opposed to a broad reading of the term 
``organization'' contended that the term in section 216 of HIPAA had to 
be read in context of the entirety of section 216. Under their reading, 
the term ``organization'' referred back to the term ``eligible 
organization,'' which preceded it in the same sentence, and should be 
construed consistent with that term. In other words, an 
``organization'' in section 216 of HIPAA should have many of the 
characteristics of an ``eligible organization'' under section 1876 of 
the Act. The committee statement, as a whole, reflects this view.
    Accordingly, in order to qualify under Sec. 1001.952(u), the risk 
sharing arrangement must be part of a comprehensive managed care plan. 
We use the term ``qualified managed care plan'' (QMCP) to describe such 
plans. These plans must be health plans, as defined in current safe 
harbor regulations (Sec. 1001.952(l)(2)), and provide a comprehensive 
range of health services. In addition, a QMCP must include certain 
elements in its arrangement with providers to assure that the health 
care services are managed, including utilization review, quality 
assurance and grievance procedure requirements. These requirements are 
derived from the current regulatory requirements for ``eligible 
organizations'' under section 1876 of the Act. Some of the 
representatives at the negotiating sessions expressed concern that 
while some of a QMCP's arrangements with providers will meet the above 
requirements, others will not. The committee concluded that those

[[Page 63510]]

arrangements that meet the requirements could receive protection under 
the safe harbor, even though the other arrangements could not.
    Further, the committee statement, which was adopted as a whole, 
reflects the view that the QMCP had to be at some financial risk for 
the cost or utilization of services provided to enrollees. This 
requirement was especially important because, for the reasons discussed 
above in section II.E.1 of this preamble, the providers generally are 
not actually at risk for the items or services being provided to 
Medicare enrollees. Accordingly, protection for such plans is premised 
on (1) the plans being at risk for services to their non-Medicare 
enrollees, and (2) the plans reimbursing providers for items or 
services to Medicare beneficiaries on the same basis as for other plan 
enrollees. Given the variety of employer arrangements, the regulations 
set out two alternative methods by which the QMCP can meet this risk 
requirement.
    The first option is that the QMCP can receive a premium payment 
that is fixed in advance. This requirement would cover all insurance 
arrangements in which, by definition, the plan assumes risk. Under this 
option, 50 percent of the enrollees cannot have primary coverage under 
Medicare. Alternatively, even where the QMCP is not paid on a premium 
basis, it can qualify if less than ten percent of the plan's enrollees 
have primary coverage under Medicare. This alternative will permit many 
self-funded ERISA plans that provide health care items or services in 
accordance with arrangements with third party administrators (TPAs) or 
contracts with insurers for administrative services only (ASOs) to 
qualify. In these arrangements, an employer pays the TPA or ASO 
separately for administering the plan and retains responsibility for 
payments to the providers. In such arrangements, the TPA or ASO may not 
have a financial incentive to control utilization or costs. Moreover, 
because the rule requires the providers to reassign any proceeds from 
Federal health care programs to the employer, the employer may actually 
profit on services to Medicare beneficiaries. By limiting Federal 
health care beneficiaries to less than 10 percent of total enrollment, 
the regulations substantially limit the ability of the employer to 
offset costs for its employees with Medicare reassignment.
    In addition to these requirements, the regulations also would not 
protect a QMCP that is receiving premiums from setting its premiums 
based on the number of Federal health care program beneficiaries in the 
health plan or the amount of services provided to such beneficiaries. 
Some committee members believed that such a requirement was necessary 
to prevent employers from receiving lower rates for non-federal health 
care program beneficiaries because the plan expects to make up the 
difference on utilization by the Federal health care program 
beneficiaries for whom they receive fee-for-service payments.
    b. Substantial financial risk. Developing a definition for 
``substantial financial risk'' was one of the most difficult and time 
consuming tasks for the committee. Several suggestions were offered, 
and two caucuses were held and developed options. One caucus discussed 
a numerical approach to the definition, while the other tried to find a 
non-numerical approach. Much of the discussion over the suggested 
definitions concerned whether a non-numerical definition could be clear 
and precise enough for individuals and entities to know definitively 
whether they met the safe harbor requirements. Suggestions that did not 
provide enough assurances were discarded, and after some joint 
discussion, the elements of each approach were combined. The committee 
statement and these regulations reflect that determination.
    For purposes of the rule, the methods to determine substantial 
financial risk were grouped into three standards:
     The payment methodology standard protects certain payment 
methodologies that are commonly used to place an individual or entity 
at substantial financial risk, including capitation, percentage of 
premium arrangements and payments based on certain diagnostic related 
groupings, so long as the reimbursement is reasonable given the 
historical utilization patterns and costs for the same or comparable 
population in similar managed care arrangements. Hybrid payment systems 
that combine a periodic fixed fee per patient with other incentives, 
such as withholds and bonuses, should be analyzed under the numeric 
standard.
     The numeric standard includes bonuses and withhold 
arrangements that meet certain criteria.
     The physician incentive plan standard protects 
arrangements that meet all of the requirements for HCFA's physician 
incentive plan rules under 42 CFR 417.479.
    These provisions are discussed in greater detail in the section-by-
section analysis that follows.
    c. Downstream arrangements. The committee also discussed whether 
the rule would protect only arrangements between the QMCP and its 
direct or ``first tier'' contractors, or whether it would also protect 
arrangements between the first tier contractors and their downstream 
subcontractors and arrangements between those subcontractors and 
providers farther downstream. The committee statement, when taken as a 
whole, reflects the view that, with some exceptions, the rule should 
protect all written agreements between downstream subcontractors, as 
well as those between the QMCP and its first tier contractors. However, 
in order to prevent fee-for-service or cost-based kickbacks disguised 
as risk-sharing arrangements by contractors that are not at substantial 
financial risk, subcontractors are only protected if both parties to 
the subcontract are at substantial financial risk for the items or 
services covered by the agreement. In other words, if either party to 
an agreement is not paid on a substantial financial risk basis, the 
contract is not protected for either party.
    Situations in which a subcontractor has an investment interest in 
its contractor raise other considerations. In such situations, the 
financial disincentive for overutilization created by a risk sharing 
arrangement might be offset by a return on the investment interest. 
Where both parties have to be at substantial financial risk in order to 
qualify for protection, the parties continue to have the necessary 
financial risk to protect against overutilization. However, where a 
first tier contractor has an investment interest in a QMCP, amounts 
received as a return on investment could offset the controls and 
safeguards of the risk-sharing arrangement. This result is possible 
because the QMCP may be receiving fee-for-service payments for services 
to Medicare enrollees on a reassignment basis. Therefore, the rule does 
not protect remuneration between a QMCP and a first tier contractor 
that has an investment interest in the QMCP, unless it qualifies under 
the large entity investment safe harbor (Sec. 1001.952(a)).
4. Analysis of Sec. 1001.952(u)
    a. Arrangements between QMCPs and first tier contractors. In order 
to qualify for protection, a contractual arrangement must be directly 
between a QMCP and a first tier contractor. The definition of a QMCP is 
set forth in Sec. 1001.952(u)(2)(vi). There are three standards that 
apply to the arrangements between the QMCP and first tier contractors. 
First, Sec. 1001.952(u)(1)(i)(A) requires that the contracts must be 
set out in writing and contain certain information, including the 
payment methodology. These requirements facilitate verification of

[[Page 63511]]

compliance with the substantive requirements of the regulation.
    Second, Sec. 1001.965(u)(2)(i)(B) makes clear that where a first 
tier contractor has an investment interest in the QMCP, the investment 
interest must meet the safe harbor requirements of Sec. 1001.952(a)(1). 
This condition addresses the concern that the contractor's substantial 
financial risk may be offset by returns on its ownership interest in 
the organization and therefore undermine protections against 
overutilization. We want to emphasize that, while arrangements in which 
providers have investment interests in a QMCP may not qualify for safe 
harbor protection, such arrangements do not necessarily violate the 
anti-kickback statute.
    Third, Sec. 1001.952(u)(1)(i)(C) defines ``substantial financial 
risk'' by four alternative methodologies. The first three methods 
(paragraphs (u)(1)(i)(C)(I) -(III)) provides protection for several 
payment methodologies that historically have been used by plans and 
HMOs to transfer risk to providers: Capitation, percentage of premiums 
and inpatient reimbursement based on Federal health care program 
diagnostic related groupings (DRGs). Under any of these methods, the 
payment amounts must be reasonable given the historical utilization 
patterns and costs for the same or comparable populations in similar 
managed care arrangements. We are requesting comments on the extent to 
which the risk of full capitation is diminished by the purchase of 
commercial stop loss insurance or contractual provisions regarding the 
limitation of financial liability.
    The exception for DRGs is limited to Federal health care program 
DRGs, since these are the only DRG methodologies with which we have 
significant experience and data for Federal health care program 
beneficiaries. Inpatient psychiatric DRGs are not covered because, 
based on the experience of the Medicare and Medicaid programs, these 
groupings are not sufficient to deter unnecessary admissions or to 
protect patients seeking those services. We emphasize that, although 
the plan must reimburse providers for items and services to other 
enrollees using the same DRG system, the amount of payment may vary so 
long as it is based on adequate utilization and cost data for the 
covered population that justifies the difference.
    The definition of substantial financial risk also includes a 
numeric standard for certain bonus and withhold arrangements (paragraph 
(u)(1)(i)(C)(IV)). In the case of a physician provider, the requirement 
for substantial financial risk will also be satisfied if the 
arrangement places the physician at risk for an amount that exceeds the 
substantial financial risk threshold of the physician incentive payment 
rule (42 CFR 417.479(f)), and the arrangement is in compliance with the 
stop-loss and beneficiary survey requirements of 42 CFR 417.479(g). 
Although the committee statement requires the patient panel size to be 
less than 25,000 covered lives to meet the substantial financial risk 
element, we determined that this requirement does not provide 
significant additional protection and, therefore, it is not included in 
this rule. A bonus or withhold arrangement can also qualify if the 
target payment is at least 20 percent greater than the minimum payment 
for individuals or non-institutional entities, or is at least ten 
percent greater than the minimum payment in the case of institutional 
entities, specifically, hospitals and nursing homes. We are requesting 
data on the appropriateness of different target payment percentages for 
institutional and non-institutional entities. In addition, we also seek 
comments on whether additional individuals and entities, such as 
pharmacy providers, manufacturers and federally qualified health 
centers, should be considered institutional entities for purposes of 
this paragraph.
    The ``minimum payment'' is defined in Sec. 1001.952(u)(2)(v). 
Generally, it represents the minimum amount a contractor will receive 
under a contract, regardless of utilization. In addition, the bonus or 
withhold must be earned in direct proportion to the ratio of the actual 
to the target utilization. For example, if the provider's utilization 
is only 80 percent of the target, the provider receives 80 percent of 
the difference between the target payment and the minimum payment. This 
requirement should protect against sham arrangements that provide a 
penalty or bonus conditioned entirely upon achieving a utilization 
level that is unreasonable. Finally, in calculating the substantial 
financial risk percentage, the target payment and the minimum payment 
must both include any bonus for performance (e.g., timely submission of 
paperwork, continuing medical education, meeting attendance) that is 
given to at least 75 percent of the participating individuals or 
entities who are paid a performance bonus based on the same bonus 
structure under the arrangement. This requirement is necessary to 
prevent plans from reallocating their compensation to performance 
bonuses, thereby increasing the apparent percentage of risk on the 
remaining compensation. In year one of an arrangement, it is not 
necessary to include the performance bonus in the substantial financial 
risk calculation.
    Section 1001.952(u)(1)(i)(D) provides that the QMCP (or, in the 
case of a self-funded ERISA plan, the employer) must bill the Federal 
health care programs directly for covered services and compensate the 
provider for such services on the same basis as services to similar 
enrollees without primary coverage from a Federal health care program. 
Two examples of such arrangements are (1) staff model HMOs where the 
physicians are salaried, and (2) a plan that, in accordance with a 
reassignment agreement, bills Medicare for Part B services and pays the 
provider under the same bonus arrangement applicable to other 
enrollees. Because Medicare requires hospitals to claim payment 
directly, the rule is applicable where a hospital submits claims 
directly to a Federal health care program on a DRG basis and the plan 
pays the hospital for the plan's other enrollees using the same 
methodology.
    Section 1001.952(u)(1)(i)(E) does not protect parties to a contract 
from trading discounted business for more remunerative fee-for-service 
business.
    b. Arrangements with downstream contractors. Section 
1001.952(u)(1)(ii) provides that subcontracting arrangements between 
first tier contractors and downstream contractors (and any arrangements 
with providers farther downstream) are protected if both parties are 
paid in accordance with one of the substantial financial risk 
methodologies identified in this section. This provides assurances that 
both parties have a financial incentive to control utilization. In 
addition, the individual or entity providing items or services in 
accordance with the contract must be paid for items and services to 
Federal health care program beneficiaries in the same manner as for 
other enrollees. Finally, as discussed above, the arrangement cannot 
involve remuneration in return for, or to include the provision or 
acceptance of other Federal health care program business and cannot 
shift the financial burden of the arrangement to the Federal health 
care programs.
    c. Definitions. Most of the defined terms in Sec. 1001.952(u) have 
the same meaning as those set forth in Sec. 1001.952(t). The additional 
defined terms are discussed below.
    Minimum Payment--The minimum payment is the guaranteed amount that 
an individual or entity is entitled to receive under a risk-sharing 
contract for purposes of calculating substantial

[[Page 63512]]

financial risk under the numeric standard. The minimum payment is the 
lowest amount a provider can reasonably be expected to receive based on 
past or expected performance.
    Obligated To Provide--The statute requires individuals or entities 
to be placed at substantial financial risk for the cost or utilization 
of services they are ``obligated to provide.'' A strict reading of the 
statutory language would not include many risk arrangements that are 
currently used to give incentives to physicians. Accordingly, for 
purposes of this regulation, the term is defined broadly and includes 
any items or services (as defined in this regulation) for which the 
individual or entity is financially responsible, makes referrals, or 
receives incentives based on the provider, group or health plan's 
performance.
    Qualified Managed Care Plan--As discussed above, the committee 
statement, which was adopted as a whole, reflects the view that 
protection should apply to only those risk-sharing arrangements for the 
provision of health care items or services that were part of an 
comprehensive managed health care plan. For purposes of these 
regulations, we have defined such plans as ``qualified managed care 
plans.'' Section 1001.952(u)(2)(vi) requires that the items and 
services be provided under agreement by an entity that qualifies as a 
health plan under Sec. 1001.952(1)(2), and Sec. 1001.952(u)(2)(vi)(A) 
requires that the QMCP provide a comprehensive range of health 
services. Section 1001.952(u)(2)(vi)(B) requires that the organization 
provide or arrange for (1) reasonable utilization goals and a 
utilization review program; (2) a quality assurance program that 
promotes the coordination of care, protects against underutilization 
and specifies patient goals, including measurable outcomes where 
appropriate; (3) grievance and hearing procedures; (4) protection for 
its members from incurring financial liability other than copayments 
and deductibles; and (5) assurances that treatment for Federal health 
care program beneficiaries is no different than for other enrollees due 
to their status as Federal health care program beneficiaries. These 
requirements are derived from current regulations under section 1876 of 
the Act and assure that basic indicia of a managed care plan exist. 
Finally, the requirement that there be at least 50 percent non-federal 
health care program enrollees reduces the likelihood that Federal 
health care program beneficiaries will receive disparate treatment 
either in insured or ERISA plans as compared to other enrollees.
    Target Payment--The target payment is defined as the fair market 
value payment consistent with arms-length negotiations that will be 
earned by an individual or entity depending on the individual or 
entity's meeting a utilization target or range of utilization targets 
that are consistent with historical utilization rates for the same or 
comparable populations in similar managed care arrangements. The 
utilization target may not be a precise number, but rather a range. In 
order to protect against undue incentives to underutilize, the rule 
provides that if a provider's utilization falls below or surpasses the 
utilization target (whether a fixed number or range), any payment 
amounts attributable to performance beyond (or below) the utilization 
target will not be included in the calculation of substantial financial 
risk. Arrangements where the target payment is set at a level that is 
unrealistic would always produce the appearance of substantial 
financial risk and, accordingly, will not be protected.

III. Regulatory Impact Statement

Executive Order 12866, the Unfunded Mandates Reform Act and the 
Regulatory Flexibility Act

    The Office of Management and Budget (OMB) has reviewed this interim 
final rule in accordance with the provisions of Executive Order 12866 
and the Regulatory Flexibility Act (5 U.S.C. 601-612), and has 
determined that it does not meet the criteria for a significant 
regulatory action. Executive Order 12866 directs agencies to assess all 
costs and benefits of available regulatory alternatives and, when 
rulemaking is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health, safety distributive and equity effects). The Unfunded Mandates 
Reform Act, Public Law 104-4, requires that agencies prepare an 
assessment of anticipated costs and benefits on any rulemaking that may 
result in an annual expenditure by State, local or tribal government, 
or by the private sector of $100 million or more. In addition, under 
the Regulatory Flexibility Act, if a rule has a significant economic 
effect on a substantial number of small businesses, the Secretary must 
specifically consider the economic effect of rule on small business 
entities and analyze regulatory options that could lessen the impact of 
the rule.
    Executive Order 12866 requires that all regulations reflect 
consideration of alternatives, costs, benefits, incentives, equity and 
available information. Regulations must meet certain standards, such as 
avoiding unnecessary burden. The safe harbor provisions set forth in 
this rulemaking are designed to permit individuals and entities to 
freely engage in business practices and arrangements that encourage 
competition, innovation and economy. In doing so, these regulations 
impose no requirements on any party. Health care providers and others 
may voluntarily seek to comply with these provisions so that they have 
the assurance that their business practices are not subject to any 
enforcement actions under the anti-kickback statute. We believe that 
any aggregate economic effect of these safe harbor regulations will be 
minimal and will impact only those limited few who engage in prohibited 
behavior in violation of the statute. As such, we believe that the 
aggregate economic impact of these regulations is minimal and will have 
no effect on the economy or on Federal or State expenditures.
    Additionally, in accordance with the Unfunded Mandates Reform Act 
of 1995, we have determined that there are no significant costs 
associated with these safe harbor guidelines that would impose any 
mandates on States, local or tribal governments, or the private sector, 
that will result in an annual expenditure of $100 million or more, and 
that a full analysis under the Act is not necessary.
    Further, in accordance with the Regulatory Flexibility Act (RFA) of 
1980, and the Small Business Regulatory Enforcement Act of 1996, which 
amended the RFA, we are required to determine if this rule will have a 
significant economic effect on a substantial number of small entities 
and, if so, to identify regulatory options that could lessen the 
impact. While these safe harbor provisions may have an impact on small 
entities, we believe that the aggregate economic impact of this 
rulemaking should be minimal, since it is the nature of the violation 
and not the size of the entity that will result in a violation of the 
anti-kickback statute. Since the vast majority of individuals and 
entities potentially affected by these regulations do not engage in 
prohibited arrangements, schemes or practices in violation of the law, 
we have concluded that these interim final regulations should not have 
a significant economic impact on a number of small business entities, 
and that a regulatory flexibility analysis is not required for this 
rulemaking.

Paperwork Reduction Act

    As indicated above, the provisions of these interim final 
regulations are voluntary and impose no new reporting or recordkeeping 
requirements on health care providers necessitating clearance by OMB.

[[Page 63513]]

IV. Public Inspection of Comments

    Comments will be available for public inspection beginning December 
10, 1999, in Room 5518 of the Office of Inspector General at 330 
Independence Avenue, SW, Washington, DC, on Monday through Friday of 
each week from 8:00 a.m. 4:30 p.m., (202) 619-0089.

List of Subjects in 42 CFR Part 1001

    Administrative practice and procedure, Fraud, Grant programs--
health, Health facilities, Health professions, Maternal and child 
health, Medicaid, Medicare.
    Accordingly, 42 CFR part 1001 is amended as follows:

PART 1001--[AMENDED]

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

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7b, 1395u(j), 
1395u(k), 1395y(d), 1395y(e), 1395cc(b)(2)(D),(E) and (F), and 
1395hh; and sec.2455, Pub.L. 103-355, 108 Stat. 3327 (31 U.S.C. 6101 
note).

    2. Section 1001.952 is amended by republishing the introductory 
text; by reserving paragraphs (n) through (s); and by adding new 
paragraphs (t) and (u) to read as follows:


Sec. 1001.952  Exceptions.

    The following payment practices shall not be treated as a criminal 
offense under section 1128B of the Act and shall not serve as the basis 
for an exclusion:
* * * * *
    (n)-(s) [Reserved]
    (t) Price reductions offered to eligible managed care 
organizations. (1) As used in section 1128(B) of the Act, 
``remuneration'' does not include any payment between:
    (i) An eligible managed care organization and any first tier 
contractor for providing or arranging for items or services, as long as 
the following three standards are met--
    (A) The eligible managed care organization and the first tier 
contractor have an agreement that:
    (1) Is set out in writing and signed by both parties;
    (2) Specifies the items and services covered by the agreement;
    (3) Is for a period of at least one year; and
    (4) Specifies that the first tier contractor cannot claim payment 
in any form directly or indirectly from a Federal health care program 
for items or services covered under the agreement, except for:
    (i) HMOs and competitive medical plans with cost-based contracts 
under section 1876 of the Act where the agreement with the eligible 
managed care organization sets out the arrangements in accordance with 
which the first tier contractor is billing the Federal health care 
program;
    (ii) Federally qualified HMOs without a contract under sections 
1854 or 1876 of the Act, where the agreement with the eligible managed 
care organization sets out the arrangements in accordance with which 
the first tier contractor is billing the Federal health care program; 
or
    (iii) First tier contractors that are Federally qualified health 
centers that claim supplemental payments from a Federal health care 
program.
    (B) In establishing the terms of the agreement, neither party gives 
or receives remuneration in return for or to induce the provision or 
acceptance of business (other than business covered by the agreement) 
for which payment may be made in whole or in part by a Federal health 
care program on a fee-for-service basis.
    (C) Neither party to the agreement shifts the financial burden of 
the agreement to the extent that increased payments are claimed from a 
Federal health care program.
    (ii) A first tier contractor and a downstream contractor or between 
two downstream contractors to provide or arrange for items or services, 
as long as the following four standards are met--
    (A) The parties have an agreement that:
    (1) Is set out in writing and signed by both parties;
    (2) Specifies the items and services covered by the agreement;
    (3) Is for a period of at least one year; and
    (4) Specifies that the party providing the items or services cannot 
claim payment in any form from a Federal health care program for items 
or services covered under the agreement.
    (B) In establishing the terms of the agreement, neither party gives 
or receives remuneration in return to induce the provision or 
acceptance of business (other than business covered by the agreement) 
for which payment may be made in whole or in part by a Federal health 
care program on a fee-for-service basis.
    (C) Neither party shifts the financial burden of the agreement to 
the extent that increased payments are claimed from a Federal health 
care program.
    (D) The agreement between the eligible managed care organization 
and first tier contractor covering the items or services that are 
covered by the agreement between the parties does not involve:
    (1) A Federally qualified health center receiving supplemental 
payments;
    (2) A HMO or CMP with a cost-based contract under section 1876 of 
the Act; or
    (3) A Federally qualified HMO, unless the items or services are 
covered by a risk based contract under sections 1854 or 1876 of the 
Act.
    (2) For purposes of this paragraph, the following terms are defined 
as follows:
    (i) Downstream contractor means an individual or entity that has a 
subcontract directly or indirectly with a first tier contractor for the 
provision or arrangement of items or services that are covered by an 
agreement between an eligible managed care organization and the first 
tier contractor.
    (ii) Eligible managed care organization \1\ means--
---------------------------------------------------------------------------

    \1\ The eligible managed care organizations in paragraphs 
(u)(2)(ii)(A)-(F) of this section are only eligible with respect to 
items or services covered by the contracts specified in those 
paragraphs.
---------------------------------------------------------------------------

    (A) A HMO or CMP with a risk or cost based contract in accordance 
with section 1876 of the Act;
    (B) Any Medicare Part C health plan that receives a capitated 
payment from Medicare and which must have its total Medicare 
beneficiary cost sharing approved by HCFA under section 1854 of the 
Act;
    (C) Medicaid managed care organizations as defined in section 
1903(m)(1)(A) that provide or arrange for items or services for 
Medicaid enrollees under a contract in accordance with section 1903(m) 
of the Act (except for fee-for-service plans or medical savings 
accounts);
    (D) Any other health plans that provide or arrange for items and 
services for Medicaid enrollees in accordance with a risk-based 
contract with a State agency subject to the upper payment limits in 
Sec. 447.361 of this title or an equivalent payment cap approved by the 
Secretary;
    (E) Programs For All Inclusive Care For The Elderly (PACE) under 
sections 1894 and 1934 of the Act, except for for-profit demonstrations 
under sections 4801(h) and 4802(h) of Pub. L. 105-33; or
    (F) A Federally qualified HMO.
    (iii) First tier contractor means an individual or entity that has 
a contract directly with an eligible managed care organization to 
provide or arrange for items or services.
    (iv) Items and services means health care items, devices, supplies 
or services or those services reasonably related to the provision of 
health care items, devices, supplies or services including, but not 
limited to, non-emergency

[[Page 63514]]

transportation, patient education, attendant services, social services 
(e.g., case management), utilization review and quality assurance. 
Marketing and other pre-enrollment activities are not ``items or 
services'' for purposes of this section.
    (u) Price reductions offered by contractors with substantial 
financial risk to managed care organizations. (1) As used in section 
1128(B) of the Act, ``remuneration'' does not include any payment 
between:
    (i) A qualified managed care plan and a first tier contractor for 
providing or arranging for items or services, where the following five 
standards are met--
    (A) The agreement between the qualified managed care plan and first 
tier contractor must:
    (1) Be in writing and signed by the parties;
    (2) Specify the items and services covered by the agreement;
    (3) Be for a period of a least one year;
    (4) Require participation in a quality assurance program that 
promotes the coordination of care, protects against underutilization 
and specifies patient goals, including measurable outcomes where 
appropriate; and
    (5) Specify a methodology for determining payment that is 
commercially reasonable and consistent with fair market value 
established in an arms-length transaction and includes the intervals at 
which payments will be made and the formula for calculating incentives 
and penalties, if any.
    (B) If a first tier contractor has an investment interest in a 
qualified managed care plan, the investment interest must meet the 
criteria of paragraph (a)(1) of this section.
    (C) The first tier contractor must have substantial financial risk 
for the cost or utilization of services it is obligated to provide 
through one of the following four payment methodologies:
    (1) A periodic fixed payment per patient that does not take into 
account the dates services are provided, the frequency of services, or 
the extent or kind of services provided;
    (2) Percentage of premium;
    (3) Inpatient Federal health care program diagnosis-related groups 
(DRGs) (other than those for psychiatric services);
    (4) Bonus and withhold arrangements, provided--
    (i) The target payment for first tier contractors that are 
individuals or non-institutional providers is at least 20 percent 
greater than the minimum payment, and for first tier contractors that 
are institutional providers, i.e., hospitals and nursing homes, is at 
least 10 percent greater than the minimum payment;
    (ii) The amount at risk, i.e., the bonus or withhold, is earned by 
a first tier contractor in direct proportion to the ratio of the 
contractor's actual utilization to its target utilization;
    (iii) In calculating the percentage in accordance with paragraph 
(u)(1)(i)(C)(4)(i) of this section, both the target payment amount and 
the minimum payment amount include any performance bonus, e.g., 
payments for timely submission of paperwork, continuing medical 
education, meeting attendance, etc., at a level achieved by 75 percent 
of the first tier contractors who are eligible for such payments;
    (iv) Payment amounts, including any bonus or withhold amounts, are 
reasonable given the historical utilization patterns and costs for the 
same or comparable populations in similar managed care arrangements; 
and
    (v) Alternatively, for a first tier contractor that is a physician, 
the qualified managed care plan has placed the physician at risk for 
referral services in an amount that exceeds the substantial financial 
risk threshold set forth in 42 CFR 417.479(f) and the arrangement is in 
compliance with the stop-loss and beneficiary survey requirements of 42 
CFR 417.479(g).
    (D) Payments for items and services reimbursable by Federal health 
care program must comply with the following two standards--
    (1) The qualified managed care plan (or in the case of a self-
funded employer plan that contracts with a qualified managed care plan 
to provide administrative services, the self-funded employer plan) must 
submit the claims directly to the Federal health care program, in 
accordance with a valid reassignment agreement, for items or services 
reimbursed by the Federal health care program. (Notwithstanding the 
foregoing, inpatient hospital services, other than psychiatric 
services, will be deemed to comply if the hospital is reimbursed by a 
Federal health care program under a DRG methodology.)
    (2) Payments to first tier contractors and any downstream 
contractors for providing or arranging for items or services reimbursed 
by a Federal health care program must be identical to payment 
arrangements to or between such parties for the same items or services 
provided to other beneficiaries with similar health status, provided 
that such payments may be adjusted where the adjustments are related to 
utilization patterns or costs of providing items or services to the 
relevant population.
    (E) In establishing the terms of an arrangement--
    (1) Neither party gives or receives remuneration in return for or 
to induce the provision or acceptance of business (other than business 
covered by the arrangement) for which payment may be made in whole or 
in part by a Federal health care program on a fee-for-service or cost 
basis; and
    (2) Neither party to the arrangement shifts the financial burden of 
such arrangement to the extent that increased payments are claimed from 
a Federal health care program.
    (ii) A first tier contractor and a downstream contractor, or 
between downstream contractors, to provide or arrange for items or 
services, as long as the following three standards are met--
    (A) Both parties are being paid for the provision or arrangement of 
items or services in accordance with one of the payment methodologies 
set out in paragraph (u)(1)(i)(C) of this section;
    (B) Payment arrangements for items and services reimbursable by a 
Federal health care program comply with paragraph (u)(1)(i)(D) of this 
section; and
    (C) In establishing the terms of an arrangement--
    (1) Neither party gives or receives remuneration in return for or 
to induce the provision or acceptance of business (other than business 
covered by the arrangement) for which payment may be made in whole or 
in part by a Federal health care program on a fee-for-service or cost 
basis; and
    (2) Neither party to the arrangement shifts the financial burden of 
the arrangement to the extent that increased payments are claimed from 
a Federal health care program.
    (2) For purposes of this paragraph, the following terms are defined 
as follows:
    (i) Downstream contractor means an individual or entity that has a 
subcontract directly or indirectly with a first tier contractor for the 
provision or arrangement of items or services that are covered by an 
agreement between a qualified managed care plan and the first tier 
contractor.
    (ii) First tier contractor means an individual or entity that has a 
contract directly with a qualified managed care plan to provide or 
arrange for items or services.
    (iii) Is obligated to provide for a contractor refers to items or 
services:
    (A) Provided directly by an individual or entity and its employees;
    (B) For which an individual or entity is financially responsible, 
but which are provided by downstream contractors;
    (C) For which an individual or entity makes referrals or 
arrangements; or
    (D) For which an individual or entity receives financial incentives 
based on

[[Page 63515]]

its own, its provider group's, or its qualified managed care plan's 
performance (or combination thereof).
    (iv) Items and services means health care items, devices, supplies 
or services or those services reasonably related to the provision of 
health care items, devices, supplies or services including, but not 
limited to, non-emergency transportation, patient education, attendant 
services, social services (e.g., case management), utilization review 
and quality assurance. Marketing or other pre-enrollment activities are 
not ``items or services'' for purposes of this definition in this 
paragraph.
    (v) Minimum payment is the guaranteed amount that a provider is 
entitled to receive under an agreement with a first tier or downstream 
contractor or a qualified managed care plan.
    (vi) Qualified managed care plan means a health plan as defined in 
paragraph (l)(2) of this section that:
    (A) Provides a comprehensive range of health services;
    (B) Provides or arranges for--
    (1) Reasonable utilization goals to avoid inappropriate 
utilization;
    (2) An operational utilization review program;
    (3) A quality assurance program that promotes the coordination of 
care, protects against underutilization, and specifies patient goals, 
including measurable outcomes where appropriate;
    (4) Grievance and hearing procedures;
    (5) Protection of enrollees from incurring financial liability 
other than copayments and deductibles; and
    (6) Treatment for Federal health care program beneficiaries that is 
not different than treatment for other enrollees because of their 
status as Federal health care program beneficiaries; and
    (C) Covers a beneficiary population of which either--
    (1) No more than 10 percent are Medicare beneficiaries, not 
including persons for whom a Federal health care program is the 
secondary payer; or
    (2) No more than 50 percent are Medicare beneficiaries (not 
including persons for whom a Federal health care program is the 
secondary payer), provided that payment of premiums is on a periodic 
basis that does not take into account the dates services are rendered, 
the frequency of services, or the extent or kind of services rendered, 
and provided further that such periodic payments for the non-Federal 
health care program beneficiaries do not take into account the number 
of Federal health care program fee-for-service beneficiaries covered by 
the agreement or the amount of services generated by such 
beneficiaries.
    (vii) Target payment means the fair market value payment 
established through arms length negotiations that will be earned by an 
individual or entity that:
    (A) Is dependent on the individual or entity's meeting a 
utilization target or range of utilization targets that are set 
consistent with historical utilization rates for the same or comparable 
populations in similar managed care arrangements, whether based on its 
own, its provider group's or the qualified managed care plan's 
utilization (or a combination thereof); and
    (B) Does not include any bonus or fees that the individual or 
entity may earn from exceeding the utilization target.

    Dated: February 11, 1999.
June Gibbs Brown,
Inspector General.
    Approved: June 8, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-29988 Filed 11-18-99; 8:45 am]
BILLING CODE 4150-04-P