[Federal Register Volume 64, Number 223 (Friday, November 19, 1999)]
[Rules and Regulations]
[Pages 63518-63557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29989]



[[Page 63517]]

_______________________________________________________________________

Part V





Department of Health and Human Services





_______________________________________________________________________



Office of Inspector General



_______________________________________________________________________



42 CFR Part 1001



Medicare and State Health Care Programs: Fraud and Abuse; Clarification 
of the Initial OIG Safe Harbor Provisions and Establishment of 
Additional Safe Harbor Provisions Under the Anti-Kickback Statute; 
Final Rule

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

[[Page 63518]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AA66 (Also incorporating RIN 0991-AA74)


Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the Initial OIG Safe Harbor Provisions and 
Establishment of Additional Safe Harbor Provisions Under the Anti-
Kickback Statute

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

ACTION: Final rule.

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SUMMARY: This final rule serves both to add new safe harbor provisions 
under the Federal and State health care programs' anti-kickback 
statute, as authorized under section 14 of Public Law 100-93, the 
Medicare and Medicaid Patient and Program Protection Act of 1987, and 
to clarify various aspects of the original safe harbor provisions now 
codified in 42 CFR part 1001 (originally proposed in RIN 0991-AA74). 
Specifically, this final rule modifies the original set of final safe 
harbor provisions codified in 42 CFR 1001.952 to give greater clarity 
to that rulemaking's original intent. In addition, this final rule sets 
forth an expanded set of safe harbor provisions designed to protect 
additional payment and business practices from criminal prosecution or 
civil sanctions under the anti-kickback provisions of the statute.

EFFECTIVE DATE: This rulemaking is effective November 19, 1999.


FOR FURTHER INFORMATION CONTACT:
Vicki L. Robinson, Office of Counsel to the Inspector General (202) 
619-0335
Joel Schaer, Office of Counsel to the Inspector General (202) 619-1306

SUPPLEMENTARY INFORMATION:

I. Background

    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 in order to induce business reimbursable under the Federal 
or State health care programs. The offense is classified as a felony 
and is punishable by fines of up to $25,000 and imprisonment for up to 
5 years. Violations of the anti-kickback statute may also result in the 
imposition of a civil money penalty (CMP) under section 1128A(a)(7) of 
the Act (42 U.S.C. 1320a-7a(a)(7)) or program exclusion under section 
1128 of the Act (42 U.S.C. 1320a-7).
    The types of remuneration covered specifically include kickbacks, 
bribes, and rebates, whether made directly or indirectly, overtly or 
covertly, in cash or in kind. In addition, prohibited conduct includes 
not only remuneration intended to induce referrals of patients, but 
remuneration intended to induce the purchasing, leasing or ordering, or 
arranging of any good, facility, service, or item paid for by Federal 
or State health care programs.

Establishing the Original Safe Harbors

    Since the statute on its face is so broad, concern had been 
expressed that some relatively innocuous commercial arrangements were 
technically covered by the statute and therefore were subject to 
criminal prosecution. As a response to the above concern, the Medicare 
and Medicaid Patient and Program Protection Act (MMPPPA) of 1987, 
section 14 of Public Law 100-93, specifically required the development 
and promulgation of regulations, the so-called ``safe harbor'' 
provisions, designed to specify various payment and business practices 
which, although potentially capable of inducing referrals of business 
under the Federal and State health care programs, would not be treated 
as criminal offenses under the anti-kickback statute. The OIG safe 
harbor provisions have been developed ``to limit the reach of the 
statute somewhat by permitting certain non-abusive arrangements, while 
encouraging beneficial and innocuous arrangements.'' \1\ Health care 
providers and others may voluntarily seek to comply with these 
provisions so that they have the assurance that their business 
practices are not subject to any enforcement action under the anti-
kickback statute, the CMP provision for anti-kickback violations, or 
the program exclusion authority related to kickbacks.
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    \1\ 56 FR 35952; July 21, 1991.
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    On July 29, 1991, we published in the Federal Register the 1991 
final rule (56 FR 35952) setting forth various safe harbor provisions 
to the Medicare and Medicaid anti-kickback statute. The rulemaking was 
authorized under section 14 of Public Law 100-93, MMPPPA of 1987, and 
specified certain payment practices that will not be subject to 
criminal prosecution under section 1128B(b) of the Social Security Act 
(42 U.S.C. 1320a-7b(b)), and that will not provide a basis for 
exclusion from Medicare or the State health care programs under section 
1128(b)(7) of the Act (42 U.S.C. 1320a-7(b)(7)). The initial final 
rulemaking established ``safe harbors'' in ten broad areas: investment 
interests, space rental, equipment rental, personal services and 
management contracts, sales of practices, referral services, 
warranties, discounts, employees, and group purchasing organizations. 
However, in giving the Department the authority to protect certain 
arrangements and payment practices under the anti-kickback statute, 
Congress intended the regulations to be evolving rules that would be 
updated periodically to reflect changing business practices and 
technologies in the health care industry.

Establishing Additional Safe Harbors

    The public comments in response to the original proposed rule 
establishing the safe harbor provisions contained suggestions for the 
consideration and adoption of additional safe harbor provisions under 
42 CFR 1001.952. As a result of those comments, on September 21, 1993, 
the OIG published a proposed rule (58 FR 49008) (the ``1993 proposed 
rule'') formally requesting public comments on seven new areas of safe 
harbor protection under the anti-kickback statute, as well as proposed 
modifications to the existing safe harbor for sales of practices. The 
proposals for new safe harbors addressed investment interests in rural 
areas; ambulatory surgical centers; group practices; practitioner 
recruitment; obstetrical malpractice insurance subsidies; referral 
agreements for specialty services; and cooperative hospital service 
organizations described in section 501(e) of the Internal Revenue Code.

Clarifying the Original Safe Harbor Provisions

    After publication of the 1991 final rule, the OIG became aware of a 
limited number of issues that had created uncertainties for health care 
providers trying to comply with the original safe harbor provisions, 
and of certain instances where our intent, either to protect or 
preclude protection for particular business arrangements, was not fully 
reflected in the text of the regulation, even though it was reflected 
in the preamble. As a result, the OIG developed and published a new 
notice of proposed rulemaking on July 21, 1994 (59 FR 37202) (the 
``1994 proposed clarifications'') intended to modify the text of 1991 
final rule to conform to the rulemaking's original intent. The 
clarifications contained in the proposed rule did not represent an 
attempt to reevaluate the basic judgments that led to the original safe 
harbors, but rather were designed to protect business practices 
originally intended to be

[[Page 63519]]

protected by making the regulatory language more precise.

Annual Solicitations for Suggestions for Modified and New Safe Harbors

    In accordance with section 205 of the Health Insurance Portability 
and Accountability Act (HIPAA) of 1996 (Pub. L. 104-191), the 
Department is now required to develop and publish an annual notice in 
the Federal Register formally soliciting proposals for modifying 
existing safe harbors and promulgating new safe harbors and OIG special 
fraud alerts. The Department will review the proposals and, in 
consultation with the Department of Justice (DoJ), consider issuing new 
or modified safe harbor regulations, where appropriate. On December 31, 
1996, we published the first of these notices in the Federal Register 
(61 FR 69060), soliciting public comment regarding ``the development of 
proposed or modified safe harbor regulations,'' including the pending 
proposals for new and modified safe harbors (61 FR 69062). We published 
additional annual notices on December 10, 1997 (62 FR 65050) and 
December 10, 1998 (63 FR 68223). (These notices are referred to in this 
preamble collectively as the ``annual solicitations.'') Respondents to 
the annual solicitations suggested a number of areas for new or 
modified safe harbor protection; additionally, a number of respondents 
commented on the 1993 proposed rule and the 1994 proposed 
clarifications. This rulemaking is based on the comments received in 
response to the 1993 proposed rule, the 1994 proposed clarifications, 
and the annual solicitations insofar as the latter addressed the new 
and modified safe harbor proposals contained in the 1993 proposed rule 
and the 1994 proposed clarifications. Other suggestions for new and 
modified safe harbors are under review and will be the subject of 
annual reports to Congress made as part of the Inspector General's 
year-end semiannual report, as required by HIPAA.

Shared-Risk Exception

    Section 216 of HIPAA created an exception to the anti-kickback 
statute for certain risk-sharing arrangements and directed the 
Department to use a negotiated rulemaking process to establish 
companion regulations. Specifically, section 216 of HIPAA created an 
exception for certain managed care arrangements, involving remuneration 
(i) between eligible organizations under section 1876 of the Social 
Security Act (certain health maintenance organizations and competitive 
medical plans) and individuals or entities providing items or services 
and (ii) between any organization and an individual or entity that has 
a risk-sharing arrangement, if a written agreement places the 
individual or entity at ``substantial financial risk'' for the cost or 
utilization of the items or services provided.
    On January 22, 1998, the negotiated rulemaking committee comprised 
of 21 industry representatives, a representative from the DoJ, and an 
OIG representative representing the Department, reached consensus on a 
final proposal for two new safe harbors.\2\ Issues raised in comments 
to the 1993 proposed rule and the 1994 proposed clarifications that 
pertain to matters covered by the two shared-risk exception safe 
harbors are not considered in this final rulemaking.
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    \2\ The OIG's interim final rule addressing the safe harbors for 
shared-risk arrangements is published in today's edition of the 
Federal Register.
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II. Summary of Proposed Rules, Response to Public Comments and 
Summary of Revisions

    In response to the 1993 proposed rule and the 1994 proposed 
clarifications, we received a total of 313 timely-filed public comments 
on the additional safe harbors proposed rule and 28 timely-filed public 
comments on the safe harbor clarifications proposed rule from various 
provider groups, medical facilities, professional and business 
organizations and associations, medical societies, State and local 
government entities, private practitioners, and concerned citizens. We 
received 32 comments in response to the annual solicitations that were 
relevant to the issues addressed in this rulemaking. A summary of the 
comments and our responses to those comments follow.

A. General Comments

1. Conformity With Stark Law
    Comment: Several commenters urged the OIG to conform existing and 
proposed safe harbors to the statutory exceptions to section 1877 of 
the Act, otherwise known as the ``Stark Law.'' These commenters believe 
that payment arrangements permitted under the Stark Law should be 
protected under the anti-kickback statute. They argue that it is 
confusing for the industry to be subject to two separate bodies of 
fraud and abuse law applicable to arrangements involving physician 
self-referrals. At minimum, these commenters urge that the safe harbors 
be made consistent with the Stark exceptions with respect to physician 
compliance with the anti-kickback statute.
    Response: The Stark Law is a civil statute that generally (i) 
prohibits physicians from making referrals for clinical laboratory or 
other designated health services to entities in which the physicians 
have ownership or other financial interests and (ii) prohibits entities 
from presenting or causing to be presented claims or bills to any 
individual, third party payor, or other entity for designated health 
services furnished pursuant to a prohibited referral. (42 U.S.C. 
1395nn(a)(1)). The anti-kickback statute, on the other hand, is a 
criminal statute that prohibits the knowing and willful offer, payment, 
solicitation, or receipt of remuneration to induce Federal health care 
program business. Both laws are directed at the problem of 
inappropriate financial incentives influencing medical decision-making. 
This similarity notwithstanding, the statutes are different in scope 
and structural approach. Under the Stark Law, physicians may not refer 
patients for certain designated health services to entities from which 
the physicians receive financial benefits, except as allowed in 
enumerated exceptions. A transaction must fall entirely within an 
exception to be lawful under the Stark Law. The anti-kickback statute, 
on the other hand, establishes an intent-based criminal prohibition 
with optional statutory and regulatory ``safe harbors'' that do not 
purport to define the full range of lawful activity. Rather, safe 
harbors provide a means of assuring that payment practices are not 
illegal. Payment practices that do not fully comply with a safe harbor 
may still be lawful if no purpose of the payment practice is to induce 
referrals of Federal health care program business. Because the two 
statutory schemes are fundamentally different, the conference report 
for the Stark Law included language clarifying that ``any prohibition, 
exemption, or exception authorized under this provision in no way 
alters (or reflects on) the scope and application of the anti-kickback 
provisions in section 1128B of the Social Security Act'' (H.R. Conf. 
Rep. 239, 101st Cong., 1st sess. 856 (1989)).
    We are mindful that it may sometimes be burdensome for parties to 
review their arrangements under two separate statutory schemes. 
However, it would be inappropriate to adjust our safe harbor provisions 
in a manner that would prejudice enforcement of the anti-kickback 
statute merely to conform the safe harbors to an exception or 
prohibition under section 1877 of the Act. This is particularly the 
case in view of the clear legislative intent to keep

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enforcement under the anti-kickback statute separate from enforcement 
under section 1877 of the Act. Moreover, variation between the Stark 
Law exceptions and anti-kickback safe harbors is reasonable in light of 
the schematic differences between the two statutes. To the extent the 
anti-kickback statute and the Stark Law address the same conduct, the 
Stark Law acts as a structural bar to arrangements that contain a per 
se conflict of interest. However, even if an arrangement passes muster 
under the Stark Law, it may still constitute a violation of the anti-
kickback statute, if the requisite intent to induce referrals is 
present.
2. Integrated Delivery Systems and Managed Care
    Comment: Several commenters urged the OIG to modify existing safe 
harbors and develop new safe harbors to protect and encourage the 
development of integrated health care delivery systems and managed care 
arrangements. For example, several commenters urged the OIG to provide 
specific safe harbor protection for payments between wholly-owned 
entities, including parent entities and their wholly-owned 
subsidiaries. Some commenters questioned whether the anti-kickback 
statute is an appropriate method of regulating business arrangements in 
the health care industry, particularly in the context of managed care.
    Response: The anti-kickback statute is very broad and potentially 
covers many managed care arrangements that are common in the 
marketplace today. However, we have recognized that many of these 
arrangements do not create the potential for fraud or abuse under the 
anti-kickback statute and have created safe harbors aimed at those 
managed care arrangements. Currently, for example, a safe harbor 
protects certain price reductions offered to health plans 
(Sec. 1001.952(m)). In addition, Congress enacted in HIPAA a statutory 
shared-risk exception for certain managed care plans and arrangements 
that put individuals or entities at substantial financial risk.\3\
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    \3\ See footnote 2.
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     With respect to integrated delivery systems and payments between 
wholly-owned entities, we have stated previously that the anti-kickback 
statute is not implicated when payments are transferred within a single 
corporate entity, for example, from one division to another, and 
therefore no explicit safe harbor is needed for such payments (56 FR 
35983). We recognize that there are many lawful integrated delivery 
system arrangements and arrangements between wholly-owned entities in 
the marketplace today and that many of these arrangements may be 
beneficial to the Federal health care programs and their beneficiaries. 
We are concerned, however, that integrated delivery systems, including 
arrangements involving wholly-owned subsidiaries, may present 
opportunities for the payment of improper financial incentives that 
result in overutilization of services and increased program costs and 
that may adversely affect quality of care and patient freedom of choice 
among providers. This is primarily of concern where payment by the 
Federal health care programs is on a fee-for-service basis, as may 
occur, for example, with a hospital's referrals to a wholly-owned home 
health care agency (see, for example, Medicare Hospital Discharge 
Planning, OEI-02-94-00320 (December 1997)). Accordingly, we do not 
anticipate providing safe harbor protection for integrated delivery 
systems and arrangements between wholly-owned entities at this time. 
The advisory opinion process (42 CFR part 1008) is available for 
parties wishing to obtain OIG review of their particular integrated 
delivery or wholly-owned arrangements.
3. Additional Safe Harbors
    Comment: Several commenters urged the OIG to demonstrate renewed 
commitment to issuing clarifying interpretations of the anti-kickback 
statute in a regular and timely manner.
    Response: The OIG recognizes the need to work closely with the 
industry to combat fraud and abuse in the Federal health care programs 
through meaningful industry guidance consistent with our law 
enforcement obligations. As part of HIPAA, the OIG received substantial 
additional funding for its fraud-fighting efforts. A portion of that 
funding has been used for a number of industry guidance purposes, 
including the creation of an Industry Guidance Branch in the Office of 
Counsel to the Inspector General, which is tasked with issuing advisory 
opinions and promulgating safe harbor regulations and special fraud 
alerts. As part of our mandate under HIPAA, we have canvassed the 
industry through annual notices in the Federal Register soliciting 
public suggestions for new and modified safe harbors and special fraud 
alerts. The suggestions received in response to those notices, as well 
as other suggestions received from the industry or generated 
internally, are under review, and we anticipate further rulemaking 
periodically in connection with some of these safe harbor suggestions. 
We have reported to Congress on the status of the suggestions in the 
OIG semiannual report to be issued shortly. In addition, the ongoing 
issuance of advisory opinions, model compliance guidance, special fraud 
alerts and special advisory bulletins is providing the industry with 
meaningful guidance on the scope and application of the anti-kickback 
statute in a regular and timely manner.
4. Transition Period
    Comment: Several commenters urged the OIG to afford providers who 
entered into arrangements with a good faith belief that the 
arrangements did not violate the anti-kickback statute a reasonable 
grace period to restructure existing arrangements to conform to the 
final safe harbors contained in these regulations. In particular, 
several commenters expressed concern that the 1994 clarifications would 
be interpreted to be retroactive to the date of the original safe 
harbors, with no provision for ``grandfathering'' arrangements that 
providers believed in good faith complied with the safe harbors as set 
forth in the 1991 final rule. For example, these commenters note that 
it was not clear that only ``health care'' assets could be counted for 
purposes of qualifying for the large entity investment safe harbor 
(Sec. 1001.952(a)(i)). Specifically, one commenter proposed 
implementation of a one year grace period.
    Response: We recognize that many providers have in good faith 
attempted to structure lawful arrangements under the anti-kickback 
statute that may not fit squarely within these final safe harbor rules. 
In this regard, we repeat our response to similar comments in our 
preamble to the 1991 final rule. There we stated:

    The failure of a particular business arrangement to comply with 
these provisions does not determine whether or not the arrangement 
violates the statute because * * * this regulation does not make 
conduct illegal. Any conduct that could be construed to be illegal 
after the promulgation of this rule would have been illegal at any 
time since the current law was enacted in 1977. Thus illegal 
arrangements entered into in the past were undertaken with a risk of 
prosecution. This regulation is intended to provide a formula for 
avoiding risk in the future.
    We also recognize, however, that many health care providers have 
structured their business arrangements based on the advice of an 
attorney and in good-faith belief that the arrangement was legal. In 
the event that they now find that the arrangement does not comply 
fully with a particular safe harbor provision and are working with 
diligence and good faith to restructure it so that it does comply, 
we will use our discretion to be fair

[[Page 63521]]

to the parties to such arrangements. (56 FR 35955).

    These same principles apply with respect to arrangements structured 
in good faith in accordance with the 1991 final rule. Thus, to the 
extent that parties reasonably believed that they complied with a safe 
harbor based on the 1991 final rule and work with diligence and good 
faith to restructure their arrangements so that they comply with the 
safe harbor as clarified in this final rule, we will exercise our 
discretion to be fair to the parties. We are not setting a specific 
``grace period,'' as we believe that the reasonable time period for 
restructuring an arrangement will vary depending on the type and 
complexity of the arrangement.
5. Meaning of Safe Harbors
    Comment: Several commenters asked the OIG to clarify that the 
failure to meet the conditions of a safe harbor does not mean that an 
arrangement is suspect under the anti-kickback statute. One commenter 
expressed concern that members of the public view arrangements that do 
not comply with a safe harbor as suspect arrangements.
    Response: The issue of the scope and effect of the safe harbors is 
important and often misunderstood. We addressed this issue in our 
preamble to the 1991 final rule:

    This (safe harbor) regulation does not expand the scope of 
activities that the statute prohibits. The statute itself describes 
the scope of illegal activities. The legality of a particular 
business arrangement must be determined by comparing the particular 
facts to the proscriptions of the statute.
    The failure to comply with a safe harbor can mean one of three 
things. First * * * it may mean that the arrangement does not fall 
within the ambit of the statute. In other words, the arrangement is 
not intended to induce the referral of business reimbursable under 
(a Federal health care program); so there is no reason to comply 
with the safe harbor standards, and no risk of prosecution.
    Second, at the other end of the spectrum, the arrangement could 
be a clear statutory violation and also not qualify for safe harbor 
protection. In that case, assuming the arrangement is obviously 
abusive, prosecution would be very likely.
    Third, the arrangement may violate the statute in a less serious 
manner, although not be in compliance with a safe harbor provision. 
Here there is no way to predict the degree of risk. Rather, the 
degree of risk depends on an evaluation of the many factors which 
are part of the decision-making process regarding case selection for 
investigation and prosecution. Certainly, in many (but not 
necessarily all) instances, prosecutorial discretion would be 
exercised not to pursue cases where the participants appear to have 
acted in a genuine good-faith attempt to comply with the terms of a 
safe harbor, but for reasons beyond their control are not in 
compliance with the terms of the safe harbor. In other instances, 
there may not even be an applicable safe harbor, but the arrangement 
may appear innocuous. But in other instances, we will want to take 
appropriate action. (56 FR 35954)
    Thus, it is not true that every arrangement that does not comply 
with a safe harbor is suspect under the anti-kickback statute, though 
such arrangements may be suspect in particular circumstances. Parties 
seeking guidance about their specific arrangements may request an OIG 
advisory opinion in accordance with the regulations set forth at 42 CFR 
part 1008.

B. 1994 Clarifications to Existing Safe Harbors

    In general, the 1994 proposed clarifications were designed to 
clarify various aspects of the original safe harbor provisions. Set 
forth below are a summary of the proposed clarifications for each safe 
harbor provision, a summary of the final clarifications adopted in this 
rulemaking, summaries of the public comments received, and our 
responses to those comments.
1. Investment Interests
    Summary of Proposed Clarifications: We proposed five clarifications 
to the investment interests safe harbor, as follows
     First, we proposed that only assets or revenues related to 
the furnishing of health care items or services will be counted for 
purposes of qualifying for either the $50,000,000 asset threshold for 
``large entities'' (Sec. 1001.952(a)(1)) or the 60-40 gross revenue 
test for ``small entities'' (Sec. 1001.952(a)(2)(vi)). The purpose of 
this modification is to make clear our original intent that only assets 
and revenues derived from health care lines of business will be 
considered for purposes of qualifying for safe harbor protection.
     Second, we proposed revising the standards that prohibit 
an entity from loaning funds to an investor to be used to purchase the 
investor's investment interest in the entity. (Secs. 1001.952(a)(1)(iv) 
and 952(a)(2)(vii)). The revised standard would make clear that the 
prohibition also includes any such loan from another investor or a 
person acting on behalf of the entity or any investor.
     Third, we proposed modifying the first investment interest 
standard to the small entity investment safe harbor (the 60-40 investor 
test) to allow an alternative to the existing requirement of class-by-
class analysis. Under the current rule, ``each class of investments'' 
must meet the 60-40 investor test. Upon review, we found this class-by-
class analysis unnecessarily restrictive. Accordingly, the proposed 
alternative would allow equivalent classes of equity investment 
interests to be combined together or equivalent classes of debt 
investment interests to be combined together (separate from the equity 
investments) in order to apportion investors into ``untainted'' and 
``tainted'' pools for purposes of meeting the 60-40 investor test.
     Fourth, we proposed striking the language ``items or 
services furnished'' from the 60-40 revenue rule 
(Sec. 1001.952(a)(2)(vi)) in the small entity investment safe harbor to 
make clear that we did not intend for revenues that the joint venture 
derives from items or services furnished by an investor to the joint 
venture (such as management services) to be considered tainted for 
purposes of satisfying the 60-40 revenue test.
     Fifth, we proposed a clarification in the preamble to the 
1994 proposed clarification to the effect that an interested investor 
must obtain his or her investment interest in the same way as members 
of the public (i.e., directly off a registered national securities 
exchange through a broker) and the investment interest must be the same 
type of investment interest that is available to the public. In this 
regard, we stated that there cannot be any side agreements that require 
stock to be purchased or that restrict in any manner an investor's 
ability to dispose of the stock. We proposed no change in the language 
of the existing safe harbor, which states that the investment interest 
of an interested investor ``must be obtained on terms equally available 
to the public thorough trading on a registered national securities 
exchange * * * or on the National Association of Securities Dealers 
Automated Quotation Service'' (Sec. 1001.952(a)(1)(ii)).
    Summary of the Final Rule: We are adopting the clarifications to 
the large and small entity investment safe harbors as proposed in the 
1994 proposed clarifications and described above, with the following 
modifications in response to comments received (unless otherwise 
noted):
     We have added language to Sec. 1001.952(a)(2)(vii) 
clarifying that, for purposes of the small entity investment safe 
harbor, loans to an investor may not be made by individuals or entities 
acting on behalf of the investment entity or any of its investors. This 
language is the same as language proposed to be added to 
Sec. 1001.952(a)(1)(iv) in the large entity investment safe harbor in 
the 1994 proposed clarifications and was

[[Page 63522]]

described as applying to the small entity investment safe harbor in the 
preamble to the 1994 proposed clarifications. It was inadvertently 
omitted from the regulatory language published in the notice of 
proposed rulemaking.
     We have revisited the meaning of ``on terms equally 
available'' in the second standard of the large entity investment safe 
harbor and have concluded that an investment interest is obtained on 
equally available terms if it is obtained at the same price as is 
available to the general public trading on a registered securities 
exchange through a broker and is not subject to restrictions on 
transferability.

Comments and Responses

a. Large Entity Investments

    Comment: In response to our clarification that only assets or 
revenues ``related to the furnishing of health care items or services'' 
will be counted for purposes of qualifying for either the $50,000,000 
asset threshold for ``large entities'' or the 60-40 gross revenue test 
for ``small entities,'' several commenters sought guidance regarding 
what constitutes ``health care items or services.'' For example, some 
commenters wondered whether a managed care organization would be 
considered a health care business if it does not furnish health care 
services. Some commenters objected to the proposal, arguing that 
requiring items and services to be health care related would actually 
increase the incentives for improper referrals. They reason, for 
example, that a large entity entirely composed of health-care related 
businesses would be more susceptible to the lure of paying kickbacks 
for referrals than a diversified entity less dependent on health care 
derived profits.
    Response: By using the term ``health care items or services,'' we 
mean (i) health care items, devices, supplies, and services and (ii) 
items or services reasonably related to the furnishing 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, quality 
assurance, and practice management services. Marketing services are not 
included. In this context, we believe that a managed care company would 
count as a health care related asset for purposes of the large entity 
investment threshold test and that revenue derived from a managed care 
company would count as ``tainted'' revenue for purposes of the 60-40 
revenue test in the small entity investment safe harbor.
    While we agree that diversified assets may, in some circumstances, 
indirectly minimize financial incentives for referrals from investor 
referral sources, we continue to believe that arrangements involving 
ventures between health care businesses and non-health care business 
pose an increased risk of program abuse. As we stated in the preamble 
to the 1994 clarifications, ``[i]t would be an obvious sham, 
inconsistent with our original intent, if a joint venture could merge 
with a non-health care business and have those non-health care assets, 
and the revenues derived from that non-health care line of business 
counted for the purposes of qualifying for safe harbor protection'' (59 
FR 37203-37204).
    Comment: Several commenters expressed concern about our 
clarification of the phrase ``on terms equally available to the 
public'' in the safe harbor condition that describes how interested 
investors must obtain their investment interests in order to receive 
safe harbor protection (Sec. 1001.952(a)(1)(ii)). We indicated that the 
phrase should be interpreted to mean that the interested investor must 
obtain his or her investment interest in the same way as investors from 
the general public. Several commenters urged that this interpretation 
was too narrow and imposed unwarranted limitations on investment in 
large entities. These commenters argued, for example, that a large 
entity should be permitted to purchase a physician's practice using 
stock in addition to cash, provided that the value of the stock plus 
all other consideration paid to the physician equals the fair market 
value for the practice. For example, one commenter asked why it would 
be acceptable for an entity to purchase a practice for $1 million in 
cash (assuming fair market value to be $1 million), but not to do so 
for $500,000 in cash and $500,000 worth of stock. These commenters 
suggest that the phrase ``on terms equally available'' should mean that 
the stock is not lettered, restricted, subject to side agreements, or 
otherwise subject to limited transferability. One commenter proposed an 
alternative safe harbor condition that would deny safe harbor 
protection to an interested investor's holding of publicly-traded stock 
that is subject to transfer restrictions that are not applicable to the 
stock when held by members of the public.
    Response: We have two significant concerns regarding interested 
investors' investments in large entities that are in health care 
related businesses. First, we are concerned that limited 
transferability or other restrictions on the sale or disposition of 
stock may serve to ``lock'' interested investors into specific 
investments, thereby increasing the incentives for those investors to 
refer Federal health care program business to the investment entity. 
Second, we are concerned that interested investors who are potential 
referral sources for the investment entity not be permitted to obtain 
their investment interests at insider prices or at prices more 
favorable than those available to the general public when purchasing 
stock from a registered national securities exchange through a broker. 
Such favorable treatment could potentially be disguised remuneration 
for referrals. For example, we are aware of certain public offerings of 
health care companies that involve simultaneous acquisitions of 
physician practices in exchange for stock in the newly-public company, 
with the stock valued in a manner that results in the selling physician 
obtaining the stock at a lower price or on more advantageous terms than 
offered to the public. The economic benefit conferred on the physician 
in such an arrangement potentially violates the anti-kickback statute 
if one purpose of the benefit is to reward or induce referrals. The 
investment would not fall within the large entity investment safe 
harbor.
    Notwithstanding, upon further consideration of this issue, we are 
persuaded that requiring stock acquired by interested investors to be 
obtained in the same way as the same stock acquired by members of the 
public imposes an unduly restrictive interpretation on the existing 
safe harbor language. Accordingly, we are adding language to make clear 
that an investment interest will not qualify for safe harbor protection 
as ``obtained on terms equally available to the public'' if (i) the 
investment interest is subject to restrictions or limited 
transferability (including side agreements) not applicable to the same 
investment interest when held by members of the public and/or (ii) the 
investment interest is not obtained for the same price that is 
available to the general public when trading on a registered national 
securities exchange through a broker. Thus, in the example cited by the 
commenter above, the investment interest would be protected if $1 
million is the fair market value for the physician practice (not taking 
into account the value of any referrals) and the stock obtained by the 
physician is valued at $500,000 based on the price per share then 
available to the general public trading on a registered national

[[Page 63523]]

securities exchange through a broker. However, the public stock 
offering described in the preceding paragraph would not be protected.

b. Small Entity Investments

    Comment: Some commenters asked that we clarify which investors 
constitute referral sources for purposes of the small entity safe 
harbor. One commenter recommended that we amend the small entity safe 
harbor to make clear that only physicians (using the Medicare program 
definition of that term) are capable of making referrals or influencing 
the flow of business. In this commenter's view, the current OIG 
position that referral source investors may include hospitals and other 
entities means that safe harbor protection is unavailable for various 
integrated delivery system models that involve joint ownership and 
investment. Another commenter requested that we clarify that 
manufacturers that invest in health care entities and sell products to 
those entities are rarely in a position to refer patients, and thus 
should not fall within the pool of ``tainted'' investors for purposes 
of the investment interests safe harbors.
    Response: We continue to believe that the appropriate focus under 
this safe harbor is the status of the investors and the ability of the 
investors to make or influence the investment entity's referral stream 
or level of business activity. Investors that furnish items or services 
to the entity, as well as investors that refer patients or otherwise 
generate business for the entity, are ``tainted'' investors doing 
business with the entity for purposes of the 60-40 investor test. Thus, 
to iterate the example provided in the preamble to the 1991 final rule, 
if a durable medical equipment (DME) supplier and hospital enter into a 
joint venture to furnish DME to patients when they leave the hospital, 
both the DME supplier and the hospital fit within the category of 
investors doing business with the entity (56 FR 35968).
    We are not persuaded that hospitals, nursing homes, skilled nursing 
facilities, or other institutions are incapable of influencing 
referrals of Federal health care program business. To the contrary, we 
are aware of instances of referrals that are in fact controlled by 
these institutions' employees or agents. (See, e.g., Medicare Hospital 
Discharge Planning, OEI-02-94-00320 (December 1997); Special Fraud 
Alert: Fraud and Abuse in Nursing Home Arrangements with Hospices, 63 
FR 20415 (April 24, 1998)). Similarly, we believe that managed care 
companies and physician practice plans may control referrals in certain 
circumstances. We agree, however, that in many circumstances 
manufacturers that invest in health care entities and sell products to 
those entities may not be in a position to refer patients to, or 
generate business for, those entities for purposes of the 60-40 revenue 
test (Sec. 1001.952(a)(2)(vi)). However, in other circumstances, 
investor manufacturers may fall within the pool of ``tainted'' 
investors, and thus each arrangement must be evaluated on a case-by-
case basis. In short, manufacturers may be ``tainted'' investors for 
purposes of the 60-40 investor test (Sec. 1001.952(a)(2)(i)), where 
they are in a position to furnish items or services to the investment 
entity or to influence the flow of referrals to the entity.
    Comment: One commenter who supported our proposal to aggregate 
similar classes of investment interests sought clarification of the 
proposed condition that classes of investment interests be ``similar in 
all material respects'' for purposes of the 60-40 investor test, 
particularly as the condition applies to debt investment interests. For 
example, the commenter noted that the OIG is willing to treat general 
partners' and limited partners' interests as sufficiently similar for 
safe harbor purposes (56 FR 37204), even though general partner and 
limited partner interests are not similar in a number of arguably 
material respects, such as fiduciary obligations and assumption of 
liability. With respect to debt interests, the commenter questioned 
whether differing redemption rights would result in otherwise similar 
classes of debt being deemed too dissimilar to aggregate. Similarly, 
the commenter questioned whether debt instruments with different 
interest rates could be aggregated (especially if the different 
interest rates accurately reflect market rates at the time the 
instruments issued) and whether secured debt instruments could be 
aggregated with unsecured debt instruments.
    Response: Our use of the phrase ``similar in all material 
respects'' was not intended to suggest that for purposes of 
aggregation, classes of investment interests must be similar in all 
respects that might be material to a partner or to a lender or a 
borrower, but only that classes of investment interests must be similar 
in all respects material to the purposes of the safe harbor. The focus 
is on the potential for remuneration to investors who are existing or 
potential referral sources; material investment terms are those terms 
that create, or relate to the creation of, potential value for 
investors. For example, classes of investment interests may be 
aggregated where the classes have similar rights with respect to the 
entity's income and assets, where investors receive equivalent returns 
in proportion to amounts invested, and, most importantly, where there 
is no preferential treatment of referral source investors, including, 
but not limited to, preferences that take effect in the event of a 
disposition of entity assets.
    Comment: One commenter expressed concern about our treatment of 
general partners for purposes of the 60-40 investor rule. We have 
previously stated that general partners--who have fiduciary obligations 
to manage a partnership so as to make a profit and who are liable for 
losses incurred due to gross mismanagement--provide services to a 
partnership and are, therefore, ``tainted'' or ``interested'' investors 
for purposes of the 60-40 investor rule. The commenter observed that 
this interpretation serves to disqualify many partnerships from safe 
harbor protection and that our proposal to permit classes of investment 
interests to be aggregated for purposes of determining compliance with 
the 60-40 investor rule does not adequately address this issue. 
According to the commenter, even under our proposed aggregation test, 
safe harbor protection is only available if general partners hold a 
minority interest in the partnership, even if the partnership has no 
potential referral source investors. Thus, for example, a hospital 
owned entirely by a partnership composed of non-referral source 
investors would not qualify for safe harbor protection if the general 
partners owned more than 40 percent of any class of investment 
interest.
    Response: As we explained in our preamble to the 1991 final rule, 
it would be inappropriate to grant safe harbor protection, for example, 
to a joint venture composed of a DME supplier and physicians, because 
all of the owners would be doing business with the joint venture by 
either furnishing items or services or making referrals (56 FR 35968). 
We recognize that there may be circumstances, such as those posited by 
the commenter, where the fact that an investor is furnishing items or 
services to the investment entity may not pose an increased risk of 
improper referrals comparable to the risk posed in our DME/physician 
joint venture example. However, we find that it is not feasible to 
craft a rule that would clearly distinguish among types of investors 
furnishing items or services, while excluding potentially abusive 
arrangements from safe harbor protection.

[[Page 63524]]

    Distributions to investors in partnerships that have no existing or 
potential referral source investors may not implicate the anti-kickback 
statute at all, since the crux of the statute is a prohibition on 
remuneration to induce or reward referrals of Federal health care 
program business. To the extent the statute is implicated, partnerships 
that do not comply fully with all safe harbor conditions will have to 
be evaluated on a case-by-case basis. Our advisory opinion process is 
also available to parties contemplating such partnerships (42 CFR part 
1008).
    Comment: Several commenters supported our proposal to change the 
60-40 revenue test by striking ``items or services furnished'' 
(Sec. 1001.952(a)(2)(vi)). However, these commenters asked for 
clarification of the term ``business otherwise generated'' as used in 
the safe harbor standard. We have previously explained that revenue is 
``generated'' if it is ``induced to come to the joint venture for items 
or services by an investor'' (56 FR 37205) (emphasis in original). 
These commenters requested that we clarify that ``by an investor'' 
means by an investor who is a licensed professional with legal 
authority to order items and services, for instance, an investor with 
legal authority to refer or induce a person to obtain care from a 
participating provider.
    Response: We disagree that the definition of an investor for these 
purposes should be as narrow as the commenters suggest. Certain 
investors that are arguably not ``licensed professionals,'' such as 
hospitals, long-term care facilities, home health agencies, managed 
care companies, and physician practice management companies, may be in 
a position to generate business for an entity in which they have an 
investment interest and to receive distributions that may be 
remuneration for that business. We recognize that there may be 
occasional instances where business is generated by investors who would 
not ordinarily be considered as potential referral sources. This might 
occur, for example, if an investor is not in a health care related line 
of business, but happens to refer friends or relatives to a joint 
venture entity in which he or she has invested. However, we think that 
these situations are likely to be infrequent and, in most 
circumstances, are not likely to generate appreciable revenue.
    Comment: As described above, several commenters questioned our 
clarification that the term ``revenue'' for purposes of the 60-40 
revenue test means revenue related to the furnishing of health care 
items or services. In addition, two commenters expressed concern about 
an example involving radiologists that we used to illustrate our 
discussion of the revenue rule in the preamble to the 1994 proposed 
clarifications. Specifically, the example stated that:

    If a radiologist holds an investment interest in an imaging 
center and reads all the films at the center, his or her reading of 
the film does not taint all the revenues from the referrals by non-
investors. However, we have received a few questions from people who 
read the 60-40 revenue rule as making such referrals tainted because 
the investor furnished services at the joint venture.
    We emphasize that if a radiologist-investor is reading the film 
and making referrals or otherwise generating business, then the 
revenues the joint venture derives from that activity would become 
tainted. For example, revenues would be tainted when a radiologist-
investor takes part in a consultation with a non-investor internist, 
and during that consultation the radiologist recommends a procedure 
which is performed at the joint venture. (59 FR 37205).

    Commenters complained that in light of this example, a radiologist-
investor seeking safe harbor protection would essentially be prohibited 
from practicing medicine, because he or she would be precluded from 
recommending follow-up procedures. Moreover, the commenters argued that 
compliance with the example would not be feasible because of the record 
keeping and administrative burden associated with tracking all 
recommendations to determine if recommended follow-up studies were 
later performed at the radiologist-investor's facility. These 
commenters asked that we clarify our position regarding radiologist-
investors.
    Response: We continue to be persuaded that it is appropriate and 
consistent with our original intent that only health care related 
revenues be counted for purposes of the 60-40 revenue test. The purpose 
of the test is to limit the number of investor referrals to a safe 
harbor protected joint venture, thereby minimizing the risk that profit 
distributions might be disguised payments for investor referrals.
    Our use of the example in the preamble to the 1994 proposed 
clarifications was merely intended to illustrate the difference between 
providing items and services to an entity (which does not result in 
``tainted'' revenue) and generating business for the entity (which does 
result in ``tainted'' revenue). In retrospect, our focus on 
radiologists in the example may have led to some confusion about the 
anti-kickback implications specifically for radiologists' practice of 
medicine. In the unique circumstances of radiologists, we wish to 
clarify that the occasional recommendation of additional testing by a 
radiologist to an attending physician with whom the radiologist has no 
financial arrangements and pursuant to a bona fide medical consultation 
is not prohibited under the anti-kickback statute. Accordingly, for 
purposes of the 60-40 revenue test, such consultative recommendations 
would not ``taint'' revenue derived from tests performed at the joint 
venture entity as a result of a subsequent referral of the patient by 
his or her attending physician for the recommended tests.
    Comment: One commenter supported our proposed clarification 
regarding the prohibition on loans from entities or their investors 
that are used by investors to purchase their investment interests 
(Sec. 1001.952(a)(2)(vii)). Another commenter requested that we make 
clear that we do not intend to prohibit loans from banks or other 
unrelated parties.
    Response: The seventh investment interest standard addressing loans 
is not intended to apply to loans from banks or other unrelated third 
parties that are not equity investors in the entity seeking safe harbor 
protection and that are not acting on behalf of the entity or any of 
its investors, even if the loan is used in whole or in part by a 
prospective investor to purchase an investment interest. On the other 
hand, the safe harbor condition is intended to preclude from protection 
loan guarantees, collateral assignments or other arrangements made by 
an investment entity or any of its investors, or by individuals or 
entities acting on their behalf, to secure a loan from a bank or other 
unrelated third party, if the loan is used in whole or in part by an 
investor to obtain an investment interest in the entity.
    Comment: The remaining comments to the existing investment interest 
safe harbors addressed various aspects of the safe harbors not 
specifically covered by the proposed clarifications. Two commenters 
argued that the safe harbor's two 60-40 tests unnecessarily limit 
potential investors for, and referral sources to, legitimate, cost-
effective, high-quality health care ventures. In one commenter's view, 
the 60-40 tests prevent potential joint ventures from attracting 
necessary capital and cause investors to refrain from using the 
venture's services, even when the venture offers higher quality, lower 
prices, or better patient convenience than competing providers. This 
commenter noted that the two 60-40 tests are particularly problematic 
in rural and underserved areas, where alternative sources of capital 
and

[[Page 63525]]

alternative providers are often in short supply.
    Response: Except as otherwise noted above, we are adopting the 
proposed clarifications to the investment interests safe harbor as set 
forth in our 1994 proposed clarifications. Aside from clarifying that 
``revenue'' refers to health care related revenue and deleting the 
phrase ``items or services furnished'' in Sec. 1001.952(a)(2)(vi), we 
are not persuaded at this time that there is a need to revisit the two 
60-40 tests for small entity investments. Elsewhere in this rulemaking, 
we address a new safe harbor for investments in rural and urban 
undeserved areas (Sec. 1001.952(a)(3)) that eliminates the 60-40 
revenue test and incorporates a modified 60-40 investor test.
2. Space and Equipment Rental and Personal Services and Management 
Contracts Summary of Proposed Clarifications
    We proposed 2 clarifications to the space and equipment rental and 
personal services and management contracts safe harbors 
(Secs. 1001.952(b), (c), and (d)). First, we proposed revising these 
safe harbors expressly to preclude schemes involving the use of 
multiple overlapping contracts to circumvent the safe harbor 
requirement that space and equipment rental and personal services and 
management contracts be for terms of at least 1 year. This requirement 
was intended to prevent regular renegotiation of contracts based on the 
volume of referrals or business generated between the parties. Second, 
we proposed revising these safe harbors to preclude safe harbor 
protection for health care providers that rent more space or equipment 
or purchase more services than they actually need as a means of paying 
for referrals.
    Summary of Final Rule: We are adopting the clarifications to the 
space and equipment rental and personal services and management 
contracts safe harbors as proposed in the 1994 proposed clarifications 
and described above, with the following modifications in response to 
comments received:
     We are substituting the word ``term'' for the word 
``period'' in the second condition of each safe harbor to be more 
consistent with customary business terminology;
     We are replacing the phrase ``legitimate business 
purpose'' with the phrase ``commercially reasonable business purpose'' 
in each safe harbor to make clear that the test is not whether a 
business arrangement is lawful, but whether it serves a commercially 
reasonable business purpose, that is, whether the space and equipment 
leased or services purchased have intrinsic commercial value to the 
lessee or purchaser.
Comments and Responses
    Comment: A commenter expressed concern that the safe harbor 
condition that a lease cover all equipment leased between parties and 
specify the equipment leased would jeopardize many common commercial 
equipment leasing transactions. This commenter asserted that 
manufacturers and lessors typically lease capital equipment to health 
care providers at different times, but under leases that cover the same 
time period, in whole or in part. The commenter opined that other safe 
harbor conditions, including those prescribing aggregate compensation, 
fair market value, and arms-length negotiations, are sufficient 
safeguards against abuse.
    Response: We recognize that some lawful equipment contracts will 
not qualify for safe harbor protection and will need to be analyzed on 
a case-by-case basis. The existence of a safe harbor for a particular 
set of business arrangements does not jeopardize other types of 
arrangements under the anti-kickback statute. Many multiple contract 
arrangements are legitimate business arrangements that do not violate 
the statute; however, some multiple contract arrangements are 
essentially shams that operate to reward and encourage referrals. We 
are unable to provide safe harbor protection for such arrangements, in 
view of the potential abuse of multiple overlapping contracts described 
above. The advisory opinion process (42 CFR part 1008) is available to 
parties seeking individualized legal opinions regarding the legality of 
their leasing arrangements under the anti-kickback statute.
    Comment: One commenter suggested that for purposes of clarity and 
consistency with customary business terminology we substitute the word 
``term'' for the word ``period'' as used in Secs. 1001.952(b)(2), 
(c)(2), and (d)(2).
    Response: We agree that substituting the word ``term'' for 
``period'' in Secs. 1001.952(b)(2), (c)(2), and (d)(2) would provide 
clarity and consistency in the context of leases and service contracts.
    Comment: One commenter approved of our proposal that the aggregate 
space, equipment, or services contracted for not exceed ``that which is 
reasonably necessary to accomplish the legitimate business purpose'' of 
the party renting the space or equipment or purchasing the services. 
This commenter believed that the clarification would inhibit lessors 
with greater bargaining power from coercing lessees into contracting 
for more space than needed to conduct business. However, several 
commenters suggested that the language of our proposed clarification is 
ambiguous, duplicative, and confusing, and, in the words of one 
commenter, would open a ``Pandora's Box of potentially conflicting 
interpretations.'' For example, one commenter observed that many 
arrangements in today's health care arena, such as cost-sharing or 
risk-sharing arrangements, joint research initiatives, and data 
collection arrangements, may not reflect ``traditional'' business 
purposes, but are legitimate and reasonable in responding to insurers' 
growing demands for cost-effectiveness. One commenter recommended 
replacing the word ``legitimate'' with the word ``reasonable.''
    Response: We believe the proposed clarification further ensures 
that protected leases and personal services contracts will provide for 
fair market value compensation. However, we agree that the term 
``legitimate'' may be misconstrued. Thus, in the final rule we are 
substituting the phrase ``commercially reasonable business purpose'' 
for ``legitimate business purpose'' to make clear that the test is not 
merely whether a business purpose is legal or illegal. The 
``commercially reasonable business purpose'' test is intended to 
preclude safe harbor protection for health care providers that 
surreptitiously pay for referrals--whether because of coercion or by 
their own initiative--by renting more space or equipment or purchasing 
more services than they actually need from referral sources. By 
``commercially reasonable business purpose,'' we mean that the purpose 
must be reasonably calculated to further the business of the lessee or 
purchaser. In other words, the rental or the purchase must be of space, 
equipment, or services that the lessee or purchaser needs, intends to 
utilize, and does utilize in furtherance of its commercially reasonable 
business objectives. Thus, for example, a space rental contract between 
a physician and a DME supplier for space in the physician's office that 
includes extra office space that the DME supplier neither occupies nor 
uses for its DME business would not be protected by this safe harbor. 
Nor would the safe harbor protect the lease of more space than would 
reasonably be rented by a similarly-situated DME supplier negotiating 
in an arms-length transaction with a non-referral source lessor. Cost-
sharing or risk-sharing arrangements, joint research initiatives,

[[Page 63526]]

and data collection arrangements may qualify as commercially reasonable 
business purposes in many circumstances. However, we are aware of 
abusive arrangements involving contracts with referral sources for data 
collection services or research projects where the data to be collected 
or research to be performed have no value to the entity paying for them 
and are merely pretexts for payments for referrals. Such arrangements 
do not comply with the safe harbor and are highly suspect under the 
anti-kickback statute.
    Comment: The remaining comments we received regarding clarification 
of this safe harbor addressed matters not covered by the proposed 
clarifications. Several commenters described difficulties in meeting 
the safe harbor for part-time arrangements--including time-share office 
leases, per use equipment leases, and personal services contracts with 
hourly compensation --caused by the requirement that the ``aggregate'' 
contract price be set in advance (Secs. 1001.952(b)(5), (c)(5), and 
(d)(5)). One commenter noted that these types of arrangements typically 
contain compensation methods that are set in advance and that can be 
made consistent with fair market value and unrelated to the volume or 
value of referrals. Along these lines, one commenter suggested that the 
OIG permit ``aggregate'' payments that are not set in advance, if they 
are calculated in accordance with specific and predetermined formulas 
set forth in the written agreement. Similarly, several commenters 
expressed concern about the impracticality of the requirement that 
protected contracts specify the exact schedule of intervals for the use 
of space or equipment or the rendering of services for many part-time 
or as-needed arrangements.
    Response: We continue to believe that both the ``aggregate'' and 
the ``specific schedule of intervals'' requirements are necessary to 
ensure that safe harbor protection is not afforded to arrangements that 
include payments that are adjusted periodically on the basis of the 
volume or value of referrals or business otherwise generated from a 
referral source. We recognize that these requirements may raise 
practical problems for certain providers seeking safe harbor protection 
for part-time or as-needed arrangements. Nevertheless, we are aware of 
many instances of abuse in these types of arrangements; therefore, for 
purposes of granting protection from prosecution, we believe it is 
appropriate to protect only those arrangements that can meet the safe 
harbor's strict standards. However, as we have stated numerous times, 
safe harbors do not define the scope of legal activities under the 
anti-kickback statute. Part-time, as-needed, and other similar 
arrangements that cannot fit within the safe harbor may be lawful, if 
no payments are made, directly or indirectly, to induce referrals of 
Federal health care program business.
    Comment: One commenter sought clarification regarding the effect of 
a termination provision in a lease or contract in light of the safe 
harbor requirement that leases or contracts be for at least a 1-year 
term. This commenter specifically asked whether the 1-year term 
requirement is satisfied (i) if the lease or contract allows for ``for 
cause'' termination by either party, or (ii) if the lease or contract 
permits termination by either party with or without cause upon advance 
written notice, provided there is a concurrent contractual provision 
that restricts parties that terminate without cause from entering into 
any further relationships for the balance of the required 1-year 
period.
    Response: The 1-year term requirement ensures that protected leases 
or contracts cannot be readjusted frequently based on the number of 
referrals between the parties. Although not specifically stated in the 
safe harbor regulation, a ``for cause'' termination clause that (i) 
specifies the conditions under which the contract may be terminated 
``for cause,'' and (ii) operates in conjunction with an absolute 
prohibition on any renegotiation of the lease or contract or further 
financial arrangements between the parties for the duration of the 
original 1-year term would satisfy the 1-year term requirement. We 
remain concerned, however, that ``without cause'' termination 
provisions could be used by unscrupulous parties to create sham leases 
and contracts. This could occur, for example, where the parties enter 
into an agreement to pay a sum of money upfront for services to be 
performed over a period of time. Parties could disguise payments for 
referrals by terminating the agreement without cause after payment, but 
before performance of any services. A 1-year prohibition on 
renegotiation or further financial arrangements would be meaningless in 
such circumstances.
3. Referral Services
    Summary of Proposed Clarifications: The referral services safe 
harbor requires that any fee a referral service charges a participant 
be ``based on the cost of operating the referral service, and not on 
the volume or value of any referrals to or business otherwise generated 
by the participants for the referral service * * *'' 
(Sec. 1001.952(f)(2)) (emphasis added). This language created an 
unintended ambiguity when a referral service tries to adjust its fee 
based on the volume of referrals it makes to the participants. We 
proposed clarifying that the safe harbor precludes protection for 
payments from participants to referral services that are based on the 
volume or value of referrals to, or business otherwise generated by, 
either party for the other party.
    Summary of Final Rule: We received one comment in favor of our 
proposed clarification to the referral services safe harbor and none 
opposed. We are adopting the proposed clarification as set forth in the 
1994 proposed clarifications.
4. Discounts
    Summary of Proposed Clarifications: As a general rule, discounts 
for health care items and services are encouraged under the Federal 
health care programs so long as the Federal health care programs share 
in the discount where appropriate, and as appropriate, to the 
reimbursement methodology. Arrangements in accordance with which 
Federal programs get less than their proportional share of cost-savings 
on items or services payable by the programs are seriously abusive. 
Such arrangements result in the programs being overcharged and are not 
protected by either the statutory exception or regulatory safe harbor 
for discounts.
    Because of expressed industry uncertainty over what obligations 
individuals or entities have to meet in order to receive protection 
under this safe harbor, we proposed clarifying the discount safe harbor 
by dividing the parties to a discount arrangement into three groups--
buyers, sellers, and offerors of discounts--with descriptions of each 
party's obligations in separate paragraphs. In addition, we proposed 
clarifying the definition of ``rebate'' for purposes of this safe 
harbor. A rebate under our proposal would be defined as any discount 
not given at the time of sale. Consequently, a rebate transaction would 
not be covered by the safe harbor if it involves a buyer under 
Sec. 1001.952(h)(1)(iii) that is neither a cost-reporter nor a HMO or 
CMP, because for such buyers, all discounts must be given at the time 
of sale.
    We also proposed clarifying the scope of safe harbor protection for 
sellers in situations where buyers have not fully complied with their 
obligations under the safe harbor provisions. If a seller has done 
everything that it reasonably could under the circumstances to ensure 
that the buyer understands its obligation to

[[Page 63527]]

report the discount accurately, the seller is protected irrespective of 
the buyer's omissions. To receive such protection, however, the seller 
must report the discount to the buyer and inform the buyer of its 
obligation to report the discount. To emphasize that the seller's 
obligations require more than perfunctory compliance with the safe 
harbor, we proposed adding that the seller must inform the buyer ``in 
an effective manner.'' We also proposed adding a requirement that the 
seller ``refrain from doing anything that would impede the buyer from 
meeting its obligations under this paragraph.'' Thus, if the seller, in 
good faith, meets its obligations under the safe harbor and the buyer 
does not meet its obligations due to no fault of the seller, the seller 
would receive safe harbor protection. However, when a seller submits a 
claim or request for payment on behalf of the buyer, the seller must 
fully and accurately report the discount to the appropriate Federal or 
State health care program. An offeror of a discount would similarly 
receive safe harbor protection if it meets all of its safe harbor 
obligations, but its buyer or seller does not meet its obligations due 
to no fault of the offeror.
    We further proposed clarifying whether any reduction in price 
offered to a beneficiary could be safe harbored under this regulation. 
To the extent that a discount is offered to a beneficiary and all other 
applicable standards in the safe harbor are met, such a discount would 
receive safe harbor protection. However, discounts to beneficiaries in 
the form of routine reductions or waivers of any coinsurance or 
deductible amount owned by the beneficiaries do not meet the safe 
harbor conditions and are not protected.
    The preamble to the 1991 final rule stated that when reporting a 
discount, one only need report the actual purchase price and note that 
it is ``net discount.'' However, for purposes of submitting a claim or 
request for payment, we proposed clarifying that what is necessary is 
that the value of the discount be accurately reflected in the actual 
purchase price. It is not necessary to distinguish whether this price 
is the result of a discount or to state ``net discount.'' Consequently, 
parties who were uncertain about how or where to report on a particular 
form the fact that the price was due to a discount need not be 
concerned with reporting that fact, as long as the actual purchase 
price accurately reflects the discount.
    Finally, we proposed some minor editorial changes that do not 
affect the substance of the provision, but hopefully make it easier to 
understand.
    Summary of Final Rule: We are adopting the clarifications to the 
discount safe harbor as proposed in the 1994 proposed clarifications 
and described above, with the following modifications in response to 
comments received (unless otherwise noted):
     In paragraphs (h)(2) and (h)(5)(ii), we are changing the 
words ``furnishes'' to ``supplies'' and ``furnishing'' to 
``supplying,'' respectively, to clarify the role of sellers under the 
discount safe harbor and to avoid confusion with other regulatory uses 
of the word ``furnishes.''
     We are modifying our proposal that sellers and offerors 
give buyers ``effective notice'' of their obligations to report 
discounts by requiring instead that sellers and offerors provide buyers 
with notice in a manner that is reasonably calculated to give the 
buyers notice of their reporting obligations, including their 
obligation to provide information to the Secretary upon request under 
Sec. 1001.952(h)(1). The intent of this modification is to make clear 
that safe harbor protection for sellers and offerors who fully comply 
with the safe harbor conditions is conditioned on the actions of the 
sellers and offerors, and not on the buyers' compliance.
     We are modifying our proposed definition of a ``rebate'' 
to include any discount the terms of which are fixed at the time of the 
sale of the good or service and disclosed to the buyer, but which is 
not received at the time of the sale of the good or service. This 
modification will enable us to extend safe harbor protection to certain 
charge-based buyers and buyers reimbursed on the basis of fee schedules 
who obtain rebates. We are eliminating the requirement that charge-
based buyers report discounts on claims submitted to the Federal 
programs; however, we are retaining the requirement that such buyers 
provide documentation of discounts to the Secretary upon request.
     We are clarifying that credits and coupons may qualify for 
safe harbor protection if they meet all of the safe harbor criteria; 
however, credits or coupons that are, in essence, cash equivalents are 
not discounts for safe harbor purposes.
     We are clarifying that, in certain circumstances described 
in more detail below, discounts on multiple items may qualify as a 
``discount'' for safe harbor purposes where the reimbursement 
methodology for all discounted items or services is the same and where 
the discount can be fully disclosed to the Federal health care programs 
and accurately reflected where appropriate, and as appropriate, to the 
reimbursement methodology.
     We are correcting a technical error in the proposed 
clarifications by changing the word ``include'' in 
Sec. 1001.952(h)(5)(ii) to ``induce.''
Comment and Response
    Comment: Many commenters questioned the relationship between the 
regulatory safe harbor for discounts and the statutory exception for 
discounts, which provides for protection for ``a discount or other 
reduction in price obtained by a provider of services or other entity 
under a Federal health care program, if the reduction in price is 
properly disclosed and appropriately reflected in the costs claimed or 
charges made by the provider or entity under a Federal health care 
program'' (42 U.S.C. 1320a-7b(b)(3)(A)). In the preamble to the 1991 
final rule, we stated that the regulatory safe harbor includes all 
discounts Congress intended to protect under the statutory exception 
(56 FR 37206). Commenters expressed concern that this statement means 
that failure to qualify under the discount safe harbor is a statutory 
violation if items or services payable by a Federal health care program 
are involved, since intent to induce business is always present in a 
discount arrangement. Under this interpretation, according to 
commenters, numerous forms of discount pricing, such as pricing one 
product dependent on the price of another, discount package pricing, 
and certain capitation arrangements, would be prohibited without the 
case-by-case analysis generally afforded other types of arrangements 
that do not fit squarely within a safe harbor. These commenters also 
urge that limiting permissible discounts to those that comply with the 
safe harbor ``freezes'' the health care industry into a particular way 
of doing business, thereby chilling innovations in discount pricing 
that could result in reductions in health care costs, especially as the 
market moves from fee-for-service arrangements to managed care. These 
commenters argue that Congress did not give the OIG authority to 
constrict the reach of the statutory exception. One commenter observed 
that Congress unequivocally stated that practices protected under the 
safe harbors were to be in addition to existing statutory protections 
(Pub. L. 100-93, section 14(a)), and therefore the regulatory discount 
safe harbor should create a class of protected practices in addition to 
practices protected under the statutory exception.
    Response: As stated in the preamble to the 1994 proposed 
clarifications, it continues to be our position that the

[[Page 63528]]

regulatory safe harbor protects all discounts or reductions in price 
protected by Congress in the statutory exception (see 59 FR 37206). The 
Secretary is vested with the authority to make and publish rules, not 
inconsistent with the Social Security Act, necessary to the efficient 
administration of her functions under the Social Security Act (42 
U.S.C. 1302). The anti-kickback statute, including all exceptions 
thereto, are codified as part of the Social Security Act. Moreover, the 
regulatory safe harbor expands upon the statutory safe harbor by 
defining additional discounting practices not included in the statutory 
exception that are not abusive, such as certain discounts to 
beneficiaries (other than routine waivers of cost-sharing amounts) that 
meet all applicable safe harbor standards. In sum, the regulatory safe 
harbor both incorporates and enlarges upon the statutory exception.
    Comment: One commenter questioned the safe harbor exclusion of 
reductions in price that are available to one payer but not to Medicare 
or Medicaid (Sec. 1001.952(h)(3)(iii)), noting that it is unclear how 
failure to provide a discount to Medicare or Medicaid gives rise to a 
question under the anti-kickback statute, which prohibits remuneration 
to induce referrals of items or services payable by a Federal health 
care program. The commenter further argued that there is no basis in 
the statutory discount safe harbor for a requirement that Medicare and 
Medicaid patients receive the same prices as other patients.
    Response: The safe harbor excludes from the definition of a 
protected ``discount'' price reductions that apply to one payer but not 
to the Federal health care programs. This exclusion is necessary to 
protect against abusive arrangements in which remuneration in the form 
of discounts on items or services for private pay patients is offered 
to a provider to induce referrals of Federal health care program 
patients. For example, as noted in the preamble to the 1991 final rule, 
we are aware of clinical laboratories that offer price reductions to 
physicians for laboratory work for private pay patients on the 
condition that the physicians refer all of their Medicare and Medicaid 
business to the laboratory. Such ``swapping'' arrangements, which 
essentially shift costs to the Federal health care programs, continue 
to be of concern to this office. We do not believe that Congress 
intended to except such schemes from the anti-kickback statute. Nor do 
we believe that Congress intended for the Federal health care programs 
to pay premium prices and thus serve as de facto subsidy programs for 
other reimbursement systems.
    Comment: Several commenters generally supported the clarification 
of the discount safe harbor to recognize 3 groups: Buyers, sellers and 
offerors. However, a number of commenters requested further 
clarification regarding the meaning of ``offeror'' and how an 
``offeror'' differs from a ``seller''. Specifically, commenters asked 
about the application of the ``offeror'' category to wholesalers and 
other brokers, as well as to managed care plans, group purchasing 
organizations and preferred provider organizations.
    Response: An ``offeror'' may be any individual or entity that 
provides a discount on an item or service to a buyer, but that is not 
the seller of the item or service. For example, many pharmaceutical 
manufacturers sell some or all of their products through wholesalers, 
which, in turn, sell the products to hospitals, retail pharmacies, 
HMOs, and other providers. A manufacturer may offer a discount in the 
form of a rebate to the ultimate purchaser that is in addition to any 
discount from the wholesaler to the retailer. For purposes of this 
regulation, the manufacturer would be the ``offeror,'' the wholesaler 
the ``seller,'' and the retailer the ``buyer.'' While we believe that 
typically the wholesaler would be the ``seller'' and its retail 
customer the ``buyer,'' if a wholesaler offers a discount to a retail 
purchaser that has purchased the discounted product from another party, 
the wholesaler could qualify as an ``offeror.''
    Nothing in these regulations precludes a managed care organization, 
including a preferred provider organization, from being eligible as an 
``offeror'' in accordance with the safe harbor. However, in many 
situations, discounts offered by managed care organizations will not 
fit within the scope of the discount safe harbor, because the buyers 
who obtain the discounts will not be providers of services that claim 
payment for costs or charges associated with the discounted items or 
services under a Federal health care program. For example, the 
recipient of a preferred provider organization discount is typically an 
employer or other payer or patient. However, some discount arrangements 
offered by a managed care organization may be eligible for safe harbor 
protection under the discount safe harbor, provided all conditions of 
the safe harbor are satisfied. In addition, managed care ``discounts'' 
are potentially protected by the shared-risk exception (42 U.S.C. 
1320a-7b(b)(3)(F)), and the existing safe harbors for managed care 
arrangements (Secs. 1001.952(l) and (m)).
    Comment: One commenter objected to the safe harbor's portrayal of 
the role of ``sellers.'' This commenter maintained that sellers do not 
generally ``furnish'' items or services, nor do they ``permit'' buyers 
to take discounts off the purchase price. Rather, sellers sell, lease, 
transfer, or otherwise arrange for the use of products, in some cases 
involving discounts or reductions in price. This commenter noted that 
other OIG regulations define ``furnish'' as referring to items and 
services provided directly by or under the direct supervision of, or 
ordered by, a practitioner or other individual, or ordered or 
prescribed by a physician (either as an employee or in his or her own 
capacity), a provider, or other supplier of services (see Sec. 000.10). 
In addition, the preamble to the OIG final rule addressing amendments 
to the OIG's exclusion and CMP authorities resulting from Public Law 
100-93 states that manufacturers who do not receive payment directly or 
indirectly from Medicare or Medicaid do not ``furnish'' items in the 
context of that definition (57 FR 3298 and 3300). For consistency and 
to avoid confusion, the commenter suggests that the term ``furnished'' 
should be replaced by the term ``supplies.''
    Response: To avoid confusion with other regulatory definitions, we 
agree that the term ``supplies'' should be substituted for 
``furnishes'' in Secs. 1001.952(h)(2) and (h)(5)(ii).
    Comment: Several commenters commented that the proposed language 
clarifying the seller's obligation to disclose the discount properly to 
the buyer is beyond the scope of the statutory exception and confuses 
rather than clarifies the seller's obligations. A number of commenters 
suggested that the requirement that sellers provide effective notice 
would lead to mistrust between buyers and sellers and disputes about 
whether ``effective notice'' was provided. One commenter suggested that 
the requirement inappropriately saddles a seller with the 
responsibility of being the buyer's ``brother's keeper.'' Some 
commenters requested clarification of what qualifies as ``notice.'' 
Others questioned the intention of the added language requiring sellers 
to ``refrain from impeding'' the buyer's performance of its 
obligations. One commenter objected that this requirement imposed an 
undue burden on sellers, because sellers would have to know all of an 
individual buyer's specific billing activities and possible obligations 
in order to be in a position to refrain from doing anything

[[Page 63529]]

that could impede the buyer in meeting its obligations.
    Response: As we stated in the preamble to the 1991 final rule (56 
FR 35958), we believe the statute permits us to interpret statutory 
terms used in the statutory exceptions, including the phrase 
``appropriately reflect'' in the discount exception (also see 42 U.S.C. 
1302). We note that the statutory exception does not protect any seller 
if the purchaser has not appropriately reflected the discount. Thus, 
the objection based on the statute is misplaced.
    With respect to the substance of the comments, the proposed 
clarification would require that the seller inform the buyer ``in an 
effective manner'' of the buyer's obligation to report the discount and 
refrain from doing anything to impede the buyer from fulfilling its 
obligations. We agree that the phrase ``in an effective manner'' 
perhaps unintentionally focuses on the buyer's conduct and might 
inappropriately be interpreted to mean that a seller is only protected 
when the buyer, in fact, fulfills its obligation to report the 
discount. This was not our intention. Accordingly, we have decided to 
modify the language to require the seller to inform the buyer of its 
obligations ``in a manner that is reasonably calculated to give notice 
to the buyer.'' We believe this language provides the seller with an 
objective standard by which to measure the sufficiency of its notice. 
We are further clarifying that for safe harbor purposes one of the 
buyer's obligations is to provide information about discounts to the 
Secretary upon request in accordance with Sec. 1001.952(h)(1).
    We are not prescribing a specific form of notice. The form of 
notice appropriate in particular situations may vary. Our intention in 
adding the ``refrain from impeding'' standard is to make clear that a 
seller will only be protected by the safe harbor if it is not complicit 
in a buyer's noncompliance with its obligations to report discounts 
accurately to the Federal health care programs. We are not making any 
change to the requirement that the seller not impede the buyer's 
compliance because we believe the language is clear. The same standard 
applies to offerors; they will not be protected by the safe harbor if 
they are complicit in either buyer or seller noncompliance.
    Comment: A number of commenters objected to our bar on safe harbor 
protection for rebates offered to charge-based providers. Our proposed 
definition of ``rebate'' defined a rebate as a discount not given at 
the time of sale. Under our proposed clarification, safe harbor 
protection would only be extended to charge-based providers for 
discounts made at the time of sale of a good or service. The commenters 
point out, for example, that the regulation precludes retail pharmacies 
and outpatient clinics from being eligible for price reductions on the 
same basis as hospitals (cost reporters) and other large purchasers 
(e.g., HMOs). Moreover, the commenters note that there may be 
situations in which adjustments to previous billings or other errors 
could result in a rebate. The commenters also maintain that where 
payment is based on the lesser of actual charges or a fee schedule 
amount, fee schedules could be adjusted to reflect the availability of 
volume discounting. The commenters argue that excluding rebates for 
charge-based providers lacks a statutory basis, since the statutory 
exception refers to a ``reduction in price obtained by a provider,'' 
without any reference to when the reduction must be obtained. The 
commenters further argue that there is no sound basis for not 
protecting delayed discounts to physicians, since we are not requiring 
physicians to reduce their charges for the amount of a discount, even 
where there is a separately claimed item. Thus, the commenters urge 
that rebates be covered so long as the amount is fully disclosed to the 
Federal health care programs and the other safe harbor conditions are 
satisfied.
    Response: The most important aspect of the discount safe harbor is 
that the Federal health care programs share in the discount in 
proportion to the percentage the programs pay of the total cost. 
Congress intended only to protect discounts that could fairly benefit 
the Federal health care programs. It is our intention in these 
regulations to ensure that the only discounts protected are those where 
the Federal programs receive such benefit.
    Having considered the comments received about rebates, we have 
concluded that excluding safe harbor protection for all rebates to 
charge-based buyers or buyers that are reimbursed based on Federal 
program fee schedules is unnecessarily restrictive and may prevent the 
Federal health care programs from realizing indirect benefits that may 
accrue from rebates to charge-based providers.
    Accordingly, we are defining a ``rebate'' for purposes of the safe 
harbor as a discount, the terms of which are fixed at the time of the 
sale and disclosed to the buyer at the time of sale, but which is not 
given at the time of sale. ``Terms'' refers to the methodology that 
will be used to calculate the rebate (e.g., a percentage of sales or a 
fixed amount per item purchased during a given period of time). The 
terms of the rebate must be set at the time of the sale and disclosed 
to the buyer, even though the exact dollar amount of the rebate may not 
be known until the rebate is paid. In some circumstances, a rebate may 
be paid only after some number of successive purchases of particular 
goods or services; in such circumstances, the terms of the rebate must 
be fixed and disclosed to the buyer at the time of the first sale of a 
good or service to which the rebate applies. We are eliminating the 
safe harbor requirement that charge-based buyers (and sellers if 
submitting claims on behalf of charge-based buyers) disclose the amount 
of discounts on claims submitted to the Federal programs. We are 
retaining the existing requirement that buyers (and sellers submitting 
claims on their behalf) must provide information documenting the 
discount upon request of the Secretary.
    Comment: The proposed clarifications eliminated a reference to 
credits and coupons in the definition of a ``discount'' 
(Sec. 1001.952(h)(3)). Two commenters expressed concern that this 
deletion indicated an intent to prohibit safe harbor protection for 
credits and coupons.
    Response: To the contrary, our revised definition of ``discount'' 
applies to any reduction in the price a buyer who buys directly or 
through a wholesaler or group purchasing organization is charged for an 
item or service based on an arms-length transaction, except for certain 
forms of price reduction expressly not included in the definition 
(e.g., no cash or cash equivalents, no routine waivers of copayments). 
If a coupon or credit fits within the definition of a discount, it is 
included within the safe harbor (assuming all safe harbor conditions 
are satisfied). However, we did not intend to protect credits or 
coupons that are merely surrogate cash payments, such as credits or 
coupons that can be used like cash to purchase unspecified goods or 
services from the seller or offeror. Thus, a coupon good for a reduced 
price on a designated item could be included in the definition, so long 
as it meets all of the other requirements of the regulation; however, a 
coupon good for a certain dollar amount off any goods sold by the 
seller is not included in the definition. We are, therefore, adding 
clarifying language to the definition of ``discount'' to make clear 
that cash equivalents are not discounts for purposes of the safe 
harbor.
    Comment: One commenter objected to a ``discount'' for purposes of 
the safe harbor being limited to discounts offered to buyers who buy 
directly or

[[Page 63530]]

through wholesalers or group purchasing organizations. This commenter 
urged that this limitation fails to accommodate new distribution 
arrangements, many of which contribute to purchasing economies. For 
example, hospitals, physicians or ambulatory surgical centers may buy 
items and services through HMOs or other brokering-type suppliers.
    Response: In general, if a discount is negotiated with a bona fide 
seller of the item or service, including an entity that aggregates 
provider demand to obtain access to volume discounts, in accordance 
with an arms-length transaction, and if the discount otherwise meets 
all safe harbor requirements, we believe that the discount would come 
within the safe harbor definition of discount. However, there may be 
arrangements that do not fit the definition where access to a seller's 
favorable discount rates is itself an inducement or reward for 
referrals, e.g., providing certain physician practices access to a 
hospital's employee health benefits plan in order to reduce the 
physician's employee insurance costs.
    Comment: Several commenters expressed concern about the exclusion 
from the definition of ``discount'' of price reductions furnished on 
one good or service without or at a reduced charge to induce the 
purchase of a different good or service. These commenters assert that 
this restriction was intended to preclude furnishing a good at a 
reduced price in exchange for any agreement to buy a good which was 
reimbursed under a different reimbursement methodology, in such a way 
that discounts would not be passed along to the Medicare program. For 
example, the safe harbor was not intended to protect a discount on 
hospital supplies covered by a Diagnostic Related Group (DRG) payment 
in exchange for the purchase at the full price of capital equipment 
separately reimbursed by Medicare on a reasonable cost basis in 
accordance with a hospital's cost report. Nor was it intended to 
protect a discount earned on products reimbursed by Medicare but 
applied to products reimbursed by non-Medicare payers. However, these 
commenters argue that the safe harbor should not exclude discounts on 
multiple products when the net value of the discounts could be properly 
reported to, and benefit, the Medicare program. For example, commenters 
believe that safe harbor protection should be available for a discount 
to a hospital for sterile gauze pads in exchange for the purchase of 
surgical tape, both of which are included in the hospital's DRG payment 
and recorded on the hospital's cost report as routine costs not 
separately reimbursable. These commenters expressed concern that the 
discount safe harbor's limitation on discounts for bundled or multiple 
items or services fails to recognize the diversity of cost controls 
inherent in such reimbursement methodologies as DRGs; physician payment 
under the RBRVS system; national limitation amounts for clinical 
laboratory tests; fee schedules for DME, prosthetics, orthotics, and 
other supplies; and fixed rates for ASCs. Finally, commenters noted 
that by restricting discounts on multiple items, the safe harbors may 
prevent the Federal health care programs from benefitting from 
purchasing economies that result from volume purchasing and group 
discounts.
    Response: We agree that one purpose of the limitation on discounts 
for bundled items or services is to preclude protection for discounts 
that do not benefit the Federal health care programs, but which are 
used to induce purchases of other products for which the Federal health 
care programs pay the full price. These discounts are problematic, 
because they shift costs among reimbursement systems or distort the 
true costs of all items. As a result, it may be difficult for the 
Federal health care programs to determine proper reimbursement levels. 
(See 56 FR 35987, for example, citing the example of the development of 
accurate pricing data for intraocular lenses.)
    However, we are persuaded that in certain circumstances, discounts 
offered on one good or service to induce the purchase of a different 
good or service where the net value can be properly reported do not 
pose a risk of program abuse and may benefit the programs through lower 
costs or charges achieved through volume purchasing and other economies 
of scale. Such circumstances exist where the goods and services are 
reimbursed by the same Federal health care program in the same manner, 
such as under a DRG payment.
    Comment: Several commenters questioned our intent in changing 
certain language in the definition of discount from ``in exchange for 
any agreement to buy a different good or service'' to ``to include 
(induce) the purchase of a different good or service.'' (See 
Sec. 1001.952(h)(5)(ii)).
    Response: We changed this language to be consistent with the anti-
kickback statute, which prohibits inducements to refer Federal health 
care program business, even if there is no actual referral made or 
agreement to refer. We are correcting an editorial error in the 
proposed rule, which incorrectly used the word ``include'' instead of 
``induce'' in Sec. 1001.952(h)(5)(ii).
5. Sham Transactions or Devices
    Summary: We proposed a new provision to clarify that any 
arrangement entered into or employed for the purpose of appearing to 
fit within a safe harbor when the substance of the arrangement is not 
accurately reflected by its form will be disregarded, and the substance 
of the arrangement will determine whether safe harbor protection is 
warranted.
    Comment: Although one commenter supported the proposed sham 
transactions rule, many commenters objected to it. These commenters 
argued that the proposed sham transactions rule was vague, lacked clear 
objective criteria, and did not provide any examples of sham 
transactions.
    Response: Upon further consideration, we have decided to withdraw 
this proposal. We emphasize, however, that for purposes of determining 
compliance with the safe harbors, we will evaluate both the form and 
substance of arrangements. To be protected, the form must accurately 
reflect the substance. As we have explained in the context of space and 
equipment rentals:

    If a sham contract is entered into, which on paper looks like it 
complies with these provisions, but where there is no intent to have 
the space or equipment used or the services provided, then clearly 
we will look behind the contract and find that in reality payments 
are based on referrals. Thus, these contracts would not be protected 
under these provisions. (56 FR 35972)

This same general principle would apply in determining compliance with 
other safe harbors.

C. 1993 Proposed Safe Harbors

    The 1993 proposed rule set forth new safe harbor regulations in the 
subject areas described below. Each description includes a summary of 
the proposed rule; a summary of the final rule, including a summary of 
significant changes between the proposed and final rules; and a summary 
of comments received and our responses.
1. Investment Interests in Underserved Areas
    Summary of Proposed Rule: It had come to our attention that it is 
difficult for entities located in many rural areas to comply with the 
two 60-40 tests set forth in the ``small entity'' investment interest 
safe harbor. The first 60-40 rule (Sec. 1001.952(a)(2)(i)) requires 
that no more than 40 percent of the investment interests of the entity 
be held by

[[Page 63531]]

investors who are in a position to make or influence referrals to, 
furnish items or services to, or otherwise generate business for the 
entity (the ``60-40 investor rule''). The second 60-40 rule 
(Sec. 1001.952(a)(2)(vi)) requires that no more than 40 percent of the 
gross revenue of the entity may come from referrals or business 
otherwise generated from investors (the ``60-40 revenue rule''). 
Entities located in rural areas may have an especially difficult time 
complying with these two standards, because in many cases physicians 
may be the primary sources of capital in the area, and those physicians 
may have no alternative facility to which they can refer.
    Consequently, we proposed an additional safe harbor for investments 
in entities located in rural areas that would have eliminated the two 
60-40 rules. We proposed defining the rural areas included in the safe 
harbor in accordance with the standards set by the Office of Management 
and Budget (OMB) and used by the Bureau of the Census. We solicited 
comments on the appropriateness of this definition of rural area. We 
stressed that the method for designating rural areas must ensure that 
this safe harbor only protects entities that truly serve a rural 
population. We suggested that one alternative would be to adopt the 
definition of ``rural'' found at 42 CFR 412.62(f)(1)(ii), which is the 
definition used by HCFA in its DRG reimbursement rules. We proposed 
leaving in place the remaining six standards for small entity 
investments for purposes of the new safe harbor. These six standards 
provide substantial assurances against abuse, and we had not been 
apprised of any particular difficulty that rural entities were 
experiencing with these standards.
    In place of the 60-40 tests, we proposed a more flexible standard 
that would still assure that referring sources, physicians in 
particular, were not inappropriately selected as investors. First, we 
proposed requiring the entity to make a bona fide offer of the 
investment interest to any individual or entity irrespective of whether 
such prospective investor is in a position to make or influence 
referrals to, furnish items or services to, or otherwise generate 
business for the entity. Thus, we proposed requiring that opportunities 
for investment be offered in a good faith, non-discriminatory manner to 
any individuals or entities that are potential sources of capital. 
Second, to exclude the possibility of sham business structures not 
intended to serve the rural areas in which they are located, we 
proposed incorporating a standard that would require that at least 85 
percent of the dollar volume of the entity's business in the previous 
fiscal year or twelve month period be derived from items and services 
provided to persons residing in the rural area. For entities that have 
not been in business for 12 months, compliance with this standard would 
be determined by examining the composition of the entity's business 
over the entire period of its existence.
    Methods of Classifying Geographic Areas: Depending on its purpose, 
the Government uses several methodologies to define whether certain 
geographic areas are ``urban'' or ``rural'' and whether certain 
geographic areas or populations have inadequate access to health care 
services. Among them, the following are relevant to this preamble 
discussion:
     OMB Methodology: The OMB defines a Metropolitan 
Statistical Area (MSA) as a group of counties (or, in New England, a 
group of townships) surrounding and related to an urban core area 
containing a large population nucleus. The core of an MSA is a city 
with a population of at least 50,000 people and/or an urbanized area 
with a total population of at least 100,000 (75,000 in New England). 
The OMB defines a county as part of the MSA if it contains the core 
city or contains part of a continuous urbanized area around the core 
city, even if outlying areas of the county are rural in character. 
Using this methodology, an area may be considered ``rural'' if it is 
not metropolitan, e.g., not part of an OMB-defined MSA (see 44 U.S.C. 
3504).
     HCFA DRG Definition: For purposes of establishing DRG 
payments, HCFA defines ``rural'' areas as all areas outside the 
metropolitan areas (MSAs) defined by OMB (Sec. 412.62(f)(1)(ii)).
     Medically Underserved Areas/Populations (MUA/MUPs): The 
MUA/MUP system was developed in the 1970s in accordance with section 
330(b)(3) of the Public Health Service (PHS) Act to identify areas and 
populations eligible to participate in the Community Health Center 
Program. MUAs and MUPs are designated by the Health Resources and 
Services Administration (HRSA). An MUA is either a rural or urban area 
designated by the Secretary as having a shortage of health care 
services; an MUP is a population group designated as having such a 
shortage, such as certain migrant farmworkers or homeless populations. 
Factors HRSA considers as part of the existing MUA/MUP designation 
process include population-to-primary care physician ratios, infant 
mortality rates, poverty rates, and the percentage of the population 
aged 65 or over. The regulations governing MUA/MUPs are currently set 
forth at 42 CFR part 51c.
     Health Professional Shortage Areas (HPSAs): HRSA developed 
HPSAs to meet the statutory requirement in section 332 of the PHS Act 
to designate areas, population groups and facilities with a shortage of 
health professionals eligible for placement of National Health Services 
Corps personnel. HPSA designations are currently based primarily on 
measurements of area population-to-provider ratios for specific 
geographic service areas (or population groups within those areas), 
together with indicators that provider resources in adjoining areas are 
overutilized, excessively distant (e.g., more than 30 minutes travel 
time away for primary care) or otherwise inaccessible (42 CFR part 5). 
A HPSA can be designated based on shortages of (1) providers in a 
geographic area; (2) providers willing to treat a specific population 
within a defined area; or (3) providers for a public or nonprofit 
facility serving a designated area or population group (which could 
include a hospital). HPSAs are identified for three types of provider 
shortages: primary care, dental care and mental health care. The 
current primary care HPSA criteria define a ``primary care physician'' 
as a physician in one of the following specialties: general practice, 
family practice, pediatrics, general internal medicine or obstetrics/
gynecology. Mental health providers covered by mental health HPSA 
designations include psychiatrists, clinical psychologists, psychiatric 
nurses, psychiatric social workers and marriage counselors.
     Notice of Proposed Rulemaking on MUA/MUPs and HPSAs. HRSA 
has proposed revising the MUA/MUP and HPSA regulations to improve the 
current designation process by combining the two designation processes; 
automating the scoring process and simplifying it by maximizing the use 
of national data; expanding States' roles in identification of rational 
service areas for designation; and incorporating better measures or 
correlates of health status and lack of access, including measures of 
minorities and isolated rural areas (63 FR 46538). In response to 
public comments, HRSA has announced its intention to issue a second 
notice of proposed rulemaking following a period of evaluation of 
comments received, analysis of alternative approaches and impact 
testing (64 FR 28831). Following an additional public comment period, 
new regulations governing MUA/MUPs and

[[Page 63532]]

HPSAs are expected to be codified at 42 CFR part 5.
    Summary of Final Rule: Paramount among OIG's concerns is that 
beneficiaries have adequate access to quality health care. We are aware 
that certain communities experience shortages of health care services 
that affect Federal program beneficiaries and others. This rule for 
investments in underserved areas is designed to balance the interests 
of those communities in facilitating the development of health care 
services with the anti-fraud interests that are the basis of the anti-
kickback statute.
    Health care joint ventures in underserved areas raise the same 
basic anti-kickback concerns as other joint ventures: First, is the 
joint venture a bona fide business enterprise? Second, are 
distributions from the joint venture really payments for referrals to 
the joint venture from investors? Third, are the distributions really 
payments for referrals from one investor to another? For this reason, 
it is important that any safe harbor contain adequate safeguards and 
conditions against fraud and abuse.
    This new safe harbor for investments in joint ventures in 
underserved areas is designed to provide additional flexibility for 
investments in underserved areas that may experience a shortage of 
available capital from non-referral source investors. The safe harbor 
includes specific criteria that substantially reduce the risk of 
inappropriate payments for referrals and exclude from protection 
entities that do not serve the health care needs of people living in 
the underserved areas in which the entities are located. Because the 
safe harbor affords protection for a broader range of investments in 
joint ventures in underserved areas, we hope it will promote the 
development of needed health care ventures.
    Based on our review of the comments received from, and concerns 
expressed by, various commenters, we have made several significant 
changes to the proposed safe harbor, all of which are described in more 
detail in the responses to comments section below.
     First, we have expanded safe harbor protection to include 
urban, as well as rural, underserved areas. We are persuaded that joint 
ventures in urban underserved areas often experience the same 
difficulties in qualifying for safe harbor protection as their rural 
counterparts. We are defining an underserved area as any defined 
geographic area that is designated as a MUA in accordance with the 
regulations at 42 CFR part 51c (or, if and when applicable, 42 CFR part 
5).
     Second, we have reduced from 85 percent to 75 percent the 
volume of the investment entity's business that must be derived from 
residents of underserved areas.
     Third, we have provided a ``grace'' period for investment 
entities that qualify for safe harbor protection at the time of the 
initial investment, but subsequently find themselves located in areas 
that have ceased to meet the safe harbor definition of an underserved 
area.
     Fourth, we have incorporated a modified investor rule that 
requires that at least half of the investment interests in the entity 
be held by non-referral source investors. Here, we were in part 
persuaded by comments from health care entities that are currently 
located in underserved areas and that have no or few referral source 
investors. These entities expressed concern about unfair competition 
from new entities entirely composed of referral source investors 
(primarily physicians) in markets with few referral sources. We were 
also concerned about limiting inappropriate financial incentives.
Comments and Responses
    Comment: We solicited comments regarding the appropriateness of our 
proposal to define ``rural'' with reference to the OMB standards for 
MSAs. In response, several commenters urged us to adopt our alternative 
proposal to use the rural definition employed by HCFA for purposes of 
reimbursing hospitals located in rural areas under DRG payment rates 
(42 CFR 412.62(f)(1)(iii)). A number of commenters urged us to extend 
the investment interest safe harbor for rural entities to equally 
qualified underserved urban areas.
    Response: One of the important issues in designing this safe harbor 
is how to define geographically the scope of investments to which it 
applies. After consideration and examination of various approaches to 
defining ``rural'' for purposes of this safe harbor, we have decided to 
limit this safe harbor to investment interests in entities located in 
areas defined by HRSA as MUAs (that otherwise meet all safe harbor 
eligibility standards). This decision responds to requests for safe 
harbor protection to facilitate investment in areas demonstrably 
experiencing difficulty in attracting needed health care services. 
Unlike OMB's MSAs, which merely measure geographic distributions of 
population, MUAs identify areas experiencing health care shortages by 
accounting for such factors as poverty levels, infant mortality, and 
population age. Thus, we are amending the rule to substitute MUAs for 
the existing definition of ``rural'' to more closely tailor the safe 
harbor to protect investment interests in entities located in 
underserved areas.
    In addition to more accurately targeting rural areas with shortages 
of health care services, protecting investments in MUAs offers a means 
of expanding safe harbor protection to urban underserved areas. We are 
persuaded that many urban underserved areas experience difficulties in 
attracting investments in health care services that are comparable to 
those experienced in rural areas. Because one of our objectives in 
creating this safe harbor is to foster the development of needed health 
care services, we believe it makes sense to protect qualified 
investments in defined shortage areas without regard to density of 
population.
    At the time of publication of this rulemaking, HRSA's final 
regulations on the new process for designating MUAs are still pending. 
Although we anticipate that those regulations will be finalized, we are 
persuaded that, even in the absence of that rule, and notwithstanding 
certain concerns we have regarding the administration of the current 
program, our selection of MUAs as a basis for this safe harbor is sound 
and more consistent with the stated purpose of the safe harbor than 
either of our original proposals for identifying the covered areas.
    We anticipate that, if finally promulgated, HRSA's new rule for 
evaluating and designating MUAs may result in some areas presently 
classified as MUAs losing their classifications. Moreover, HRSA has 
indicated its intent to review MUA classifications regularly, resulting 
in the possibility that some areas could periodically lose their 
classifications. Given this potential, it is incumbent on us to address 
the effect of the loss of a MUA designation on an entity protected by 
the safe harbor for investments in underserved areas. If an entity that 
meets all of the safe harbor standards were located in an area that 
loses its designation as a MUA after the entity has initially qualified 
for the safe harbor, the entity would technically no longer fit 
squarely within the safe harbor and would lose its protection. However, 
we are mindful of the need investors have for reasonable certainty in 
their arrangements and the significant effect a sudden loss of safe 
harbor protection resulting from circumstances outside their direct 
control may have on investors. Accordingly, we are including in this 
safe harbor a 3-year grace period during which such entities will be 
protected, provided they continue to meet all of the other safe harbor

[[Page 63533]]

conditions. This grace period will afford entities that wish to 
maintain safe harbor protection an opportunity to restructure so as to 
qualify for the small entity investment interest safe harbor at 
Sec. 1001.952(a)(2). We wish to iterate that loss of safe harbor 
protection does not mean that a joint venture arrangement becomes 
unlawful.
    Comment: Several commenters expressed concern about our proposal to 
eliminate the 60-40 tests of the small entity investment safe harbor 
for purposes of this safe harbor. One commenter advocated that the 60-
40 rules should continue to apply to facilities located in rural areas 
to prevent a proliferation of unnecessary facilities, especially 
laboratories, that are dependent on referrals from investor-physicians. 
Another commenter supported restricting the safe harbor only to rural 
areas where alternative sources of a particular service are not 
otherwise available. These commenters argued that a proliferation of 
protected entities with large numbers of referral source investors 
could adversely affect existing entities in rural communities. One 
commenter suggested that we use a ``demonstrated community need'' 
standard instead of limiting safe harbor protection to defined 
geographic areas. This commenter further recommended that entities that 
meet such a ``demonstrated community need'' test be required to 
disclose to patients a referring physician's ownership interest and to 
conduct utilization review of an entity's services.
    Response: Having considered these comments, we are persuaded that 
eliminating both 60-40 rules, and in particular the 60-40 investor 
rule, may lead to inappropriate financial incentives and unfair 
competition in some areas by allowing referral source investors, 
primarily physicians, to ``lock up'' the market for particular services 
in those areas. Ensuring fair competition in the health care 
marketplace is one of the goals of the anti-kickback statute. We are 
also concerned that an excessive proliferation of particular services 
in rural or urban underserved areas could lead to overutilization by 
entities competing for scarce revenue and could prompt protected 
entities to develop revenue streams from patients not residing in 
underserved areas, in contravention of the intent and spirit of the 
safe harbor.
    MUA designations are not made on a service-specific basis; thus, an 
area may qualify as a MUA based on an overall shortage of health care 
services even if it has a sufficient supply of a particular heath care 
service. As we stated in the preamble to the 1993 proposed rule, one of 
the purposes of this safe harbor is to ensure adequate access to 
medical care for patients in underserved areas. Our intent was to 
design a safe harbor that would accomplish this purpose, while 
excluding ventures that do not serve the underserved areas in which 
they are located. We remain persuaded that there are many rural and 
urban underserved areas with legitimate shortages of health care 
services and limited sources of potential investors. However, while we 
believe that market competition should minimize the number of 
duplicative ventures in a particular underserved area, we are persuaded 
that safe harbor protection should be limited, to the extent 
practicable, to ventures that fill a genuine health care need of area 
residents.
    In light of our intention to minimize safe harbor protection for 
redundant health care services owned by referral source investors in 
otherwise underserved areas, reduce inappropriate financial incentives, 
and maintain fair competition for providers that are not owned by 
referral source investors, we have revisited our original proposal to 
eliminate both of the 60-40 tests of the small entity investment safe 
harbor for purposes of this safe harbor. In this final rule, we are 
adopting our original proposal to eliminate the 60-40 revenue rule, but 
we are retaining a modified limitation on the number of interested 
investors. Specifically, we are requiring, as a condition for 
protection, that investors who make referrals or who are in a position 
to make referrals or furnish items or services to the entity not own 
more than 50 percent of the value of investment interests within each 
class of investments in the entity. As with the 60-40 investor rule in 
the small entity investment safe harbor, we are permitting equivalent 
classes of stock to be aggregated for purposes of determining safe 
harbor compliance.
    We believe that eliminating the 60-40 revenue rule, thereby 
permitting entities to draw 100 percent of their revenue from referrals 
by investor-owners, should make investment in such entities 
sufficiently attractive to non-referral source investors so as to 
permit the entities to meet the new 50-50 investor test. We recognize 
that this safe harbor may not fully answer all of the concerns raised 
by the commenters and that there may be particular circumstances in 
which ventures with parties to existing health care entities can not 
qualify for safe harbor protection. Some of these ventures may be 
appropriate for protection through an advisory opinion (42 CFR part 
1008). In addition, joint ventures in underserved areas may still 
qualify for protection under the small entity investment interest safe 
harbor at Sec. 1001.951(a)(2).
    We are not adopting the suggestion that we promulgate a 
``demonstrated community need'' standard for this safe harbor. Such a 
standard would not create a sufficiently clear rule and would be 
unenforceable in practice. Moreover, the additional two standards 
suggested by one commenter--public disclosure of ownership interests 
and utilization review--while good practices, are not, in our 
experience, effective deterrents to fraud and abuse.
    Comment: One commenter urged us to allow compliance with the rural 
investment safe harbor if an entity certified its inability to comply 
with the 60-40 rules in the small entity safe harbor despite its best 
efforts.
    Response: A mere ``best efforts'' exception to the small entity 
investment interests safe harbor based on a certification from the 
investment entity would be insufficient to protect against abusive 
arrangements and would be impractical in application. Like all parties 
that cannot comply with a safe harbor, parties that are unable to 
comply with the 50-50 investor rule have recourse to the advisory 
opinion process for guidance about their specific arrangements.
    Comment: One commenter requested that the OIG incorporate a ``fair 
market value'' principle more explicitly into the proposed rural 
investment safe harbor.
    Response: The principle of ``fair market value'' is included in 
this investment safe harbor at Sec. 1001.952(a)(3)(viii).
    Comment: One commenter expressed concern that a rural referral 
center (RRC) that had been reclassified as located in an urban area by 
the Medicare Geographic Classification Review Board for purposes of 
Medicare payment (42 CFR 412.230) would not be eligible to receive 
protection under the rural investment interest safe harbor. RRCs are 
Medicare participating acute care hospitals that are located in rural 
areas and that qualify under HCFA rules as referral centers (see 42 CFR 
412.96). Under certain circumstances, an individual hospital, including 
a referral center, may be redesignated from a rural area to an urban 
area for purposes of using the urban area's standardized amount for 
inpatient operating costs, wage index value, or both. (42 CFR 413.230).
    Response: A RRC located in a MUA would be eligible for protection 
under the rural investment interest safe harbor, provided it meets all 
of the conditions of the safe harbor. Reclassification as

[[Page 63534]]

``urban'' for Medicare payment purposes would not bar safe harbor 
protection.
    Comment: Several commenters asked us to further explain how 
facilities can comply with the requirement that an entity must offer 
equal and bona fide opportunities to acquire investment interests to 
individuals or entities irrespective of whether such prospective 
investors are in a position to make or influence referrals to, furnish 
item or services to, or otherwise generate business for the entity 
(Sec. 1001.952(a)(3)(i)). In the alternative, a commenter requested 
that this provision be deleted. One commenter expressed concern that 
the ``broad'' terms of the proposed safe harbor would make it difficult 
for parties to identify ``potential sources of capital'' and inquired 
whether satisfying the safe harbor required investment opportunities to 
be registered under Federal and State securities laws as public 
offerings. Another commenter expressed concern about publicizing 
investment opportunities in rural areas where investors often do not 
wish to be publicly identified.
    Response: Our intent in proposing the ``equal and bona fide 
opportunities'' standard was to ensure that investment opportunities 
are offered in a good faith, nondiscriminatory manner to any 
individuals or entities that are potential sources of capital, so that 
referral source investors are not inappropriately selected as 
investors. In light of our decision to require that at least 50 percent 
of the investment interests be held by non-referral source investors, 
we have concluded that this standard is not necessary. Accordingly, we 
are not adopting it in the final rule.
    Comment: The sixth standard of the proposed safe harbor required 
that at least 85 percent of the dollar volume of the entity's business 
in the previous fiscal year or previous 12-month period be derived from 
services provided to persons residing in the underserved area. One 
commenter asked us to lower the 85 percent dollar volume requirement to 
40 percent in order to make the threshold more attainable and allow 
more investment interests to qualify for protection.
    Response: As we explained in the preamble to the 1993 proposed 
rule, although we proposed eliminating the 60-40 revenue rule for 
investments for purposes of the proposed safe harbor, we remained 
concerned that a sham joint venture structure could be established that 
does not intend to serve the underserved area in which it is located. 
This safe harbor responds to requests for assistance in facilitating 
investment in underserved areas. It is not unreasonable to offer this 
safe harbor protection only to investments in entities that will 
primarily serve underserved populations by providing services needed in 
their communities. We are persuaded, however, that lowering the 
required percentage to 75 percent would adequately protect against 
abuses and further the purpose of this safe harbor. Accordingly, we are 
requiring that at least 75 percent of the dollar volume of the entity's 
business in the previous fiscal year or previous 12-month period be 
derived from services provided to persons residing in an underserved 
area or persons who are members of a MUP (as defined by HRSA).
2. Ambulatory Surgical Centers
    Summary of Proposed Rule: We proposed a fourth investment interest 
safe harbor to protect payments to investors in ambulatory surgical 
centers (ASCs) who are surgeons who refer patients directly to the ASC 
and perform surgery themselves on these referred patients. What we 
intended to protect is often understood conceptually as an extension of 
the physician's office space. We further explained that a safe harbor 
for investment interests in ASCs was warranted because the professional 
fee generated by a referral from a physician-investor to the ASC is 
substantially greater than the facility fee generated by the referral, 
and therefore profit distributions to physician-investors, which are 
derived from the facility fee, do not constitute a significant improper 
inducement to make referrals. The rationale underlying the proposed 
safe harbor would not extend to investment interests held by physicians 
who are not in a position to refer patients directly to the ASC and 
perform surgery. We explained that the concern with investments by such 
physicians is the potential for indirect kickbacks, because they might 
receive a return, through the ASC's profit distribution, for referrals 
of patients to other investors who perform surgical procedures at the 
ASC. We solicited comments on whether the rationale underlying this 
safe harbor is applicable to entities other than ASCs. We also 
specifically solicited comments on what degree of disparity should 
exist between the professional fee and the facility fee generated by 
referrals to a type of entity for that type of entity to receive safe 
harbor protection.
    The proposed safe harbor applied only to ASCs certified under 42 
CFR part 416. We did not propose protecting ASCs located on the 
premises of a hospital that share operating or recovery room space with 
the hospital for treatment of the hospital's inpatients or outpatients. 
The proposed safe harbor contained the following 5 standards:
     The terms on which an investment interest is offered to an 
investor must not be related to the previous or expected volume of 
referrals, services furnished or the amount of business otherwise 
generated from that investor to the entity.
     There is no requirement that a passive investor, if any, 
make referrals to the entity as a condition for remaining an investor.
     Neither the entity nor any investor may loan funds to, or 
guarantee a loan for, an investor if the investor uses any part of such 
loan to obtain the investment interest.
     The amount of payment to an investor in return for the 
investment interest must be directly proportional to the amount of the 
capital investment (including the fair market value of any pre-
operational services rendered) of that investor.
     Each investor must agree to treat patients receiving 
Medicare or Medicaid benefits.
    In contrast to the other investment interest safe harbors that 
limit investment by individuals in a position to refer, the proposed 
ASC safe harbor would have only protected entities whose investment 
interests were held entirely by such individuals. With that distinction 
in mind, four of the five standards were adapted from the standards in 
the small entity safe harbor (Sec. 1001.952(a)(2)). We solicited 
comments on the extent to which other standards were appropriate to 
safeguard against potential abuse.
    Summary of Final Rule: The OIG received nearly two hundred comments 
relating to the proposed safe harbor for investment interests in ASCs. 
As a result of these comments, we have significantly reworked this safe 
harbor to provide, in general, expanded safe harbor protection for 
investments in ASCs.
    As an initial matter, our proposed placement of the ASC safe harbor 
with the investment interests safe harbor appears to have caused 
confusion as to the safe harbor's purpose and scope. Our proposed ASC 
safe harbor contemplated a joint venture composed entirely of referral 
source investors. Placing these regulations alongside the large entity 
safe harbor, which limits safe harbor protection to investments that 
are so small as to be, at most, tangentially related to referrals, and 
the small entity investment safe harbor, which limits safe harbor 
protection to ventures composed of no more than 40 percent referral 
source investors, led

[[Page 63535]]

some commenters to question why an ASC with 100 percent referral source 
investors would pose less risk of fraud and abuse than another type of 
investment entity with a smaller percentage of referral source 
investors. The answer is that ASC investments do not necessarily pose 
less risk. Rather, as described in more detail below, investments in 
ASCs raise concerns that are different from those addressed by the 
small entity investment safe harbor; therefore, investments in ASCs 
warrant different safe harbor criteria, including different safeguards, 
limitations and controls.
    The new ASC safe harbor has four categories: Surgeon-Owned ASCs, 
Single-Specialty ASCs, Multi-Specialty ASCs, and Hospital/Physician 
ASCs. Safe harbor protection requires full compliance with all of the 
standards of any one category. All four categories have the following 
requirements in common: (i) The ASC must be certified under 42 CFR part 
416; (ii) loans from the entity or other investors for the purpose of 
investing are prohibited; (iii) investment interests must be offered on 
terms not related to the volume or value of referrals; (iv) all 
ancillary services must be directly and integrally related to primary 
procedures performed at the ASC and none may be separately billed to 
Medicare or other Federal health care programs; and (v) neither the ASC 
nor physicians practicing at the ASC can discriminate against Federal 
health care program beneficiaries. Additional specific standards apply 
to particular categories. Moreover, in the interest of ensuring patient 
freedom of choice and promoting informed decision-making by patients, 
we have included a requirement in each category that patients referred 
to the ASC by an investor be fully informed of the investor's 
investment interest.
    The four categories are summarized here and described in greater 
detail in the responses to comments below:
     Surgeon-Owned ASCs. The first category is designed to 
protect ASC investments where all of the physician investors are either 
general surgeons or surgeons engaged in the same surgical specialty. 
Specifically, category one protects certain investments in entities 
where all of the investors are either (i) general surgeons or surgeons 
engaged in the same surgical specialty, all of whom are in a position 
to refer patients directly to the ASC and perform procedures on such 
referred patients; (ii) group practices that are composed of such 
surgeons and that meet all of the requirements of the group practice 
safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do not 
provide items or services to the ASC or its investors, (b) are not 
employed by the ASC or any investor, and (c) are not in a position to 
refer patients directly or indirectly to, or generate business for, the 
ASC or any of its investors. A surgeon is considered to be in a 
position to refer patients directly and perform procedures if he or she 
derives at least one-third of his or her medical practice income from 
all sources for the previous fiscal year or previous 12-month period 
from his or her own performance of procedures that require an ASC or 
hospital surgical setting in accordance with Medicare reimbursement 
rules (the ``one-third practice income'' test).
     Single-Specialty ASCs. The second category is similar to 
the first category, except that it is designed to protect ASC 
investments where all of the physician investors are engaged in the 
same medical practice specialty (e.g., gastroenterologists), provided 
that they perform ASC procedures as a significant part of their medical 
practices. The physicians that qualify under this category need not be 
traditional surgeons. Specifically, category two protects certain 
investments in entities where all of the investors are either (i) 
physicians engaged in the same medical practice specialty who are in a 
position to refer patients directly to the ASC and perform procedures 
on such referred patients; (ii) group practices that are composed of 
such physicians and that meet all of the requirements of the group 
practice safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do 
not provide items or services to the ASC or its investors, (b) are not 
employed by the ASC or any investor, and (c) are not in a position to 
refer patients directly or indirectly to, or generate business for, the 
ASC or any of its investors. As with category one (Surgeon-Owned ASCs), 
physician investors must meet the ``one-third practice income'' test.
     Multi-Specialty ASCs. The third category is similar to the 
first two categories, but it allows a mix of the types of physicians 
addressed in those categories. Thus, the third category protects 
certain investments in entities where all of the investors are either 
(i) physicians (surgeons or non-surgeons) who are in a position to 
refer patients directly to the ASC and perform procedures on such 
referred patients; (ii) group practices that are composed of such 
physicians and that meet all of the requirements of the group practice 
safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do not 
provide items or services to the ASC or its investors, (b) are not 
employed by the ASC or any investor, and (c) are not in a position to 
refer patients directly or indirectly to, or generate business for, the 
ASC or any of its investors. The physicians must meet the ``one-third 
practice income'' test described in the preceding paragraphs. In 
addition, physicians in this category must meet a second standard 
related to practice income because of the increased risk of 
remuneration for referrals among physicians with different specialties. 
Specifically, the rule requires that at least one-third of the 
physician's procedures that require an ASC or hospital surgical setting 
(in accordance with Medicare reimbursement rules) be performed at the 
ASC in which he or she is investing. We believe that for physicians who 
meet the ``one-third/one-third'' test, an investment in an ASC truly 
qualifies as an extension of the physician's office. We believe such 
physician investors are unlikely to have significant incentives to 
generate referrals for other investors because of the minimal 
additional return on investment derived from such referrals.
     Hospital/Physician ASCs. The fourth category protects 
certain investments by hospitals in ASCs. To qualify for the safe 
harbor, at least one investor must be a hospital and the other 
investors must be (i) physicians or group practices that otherwise 
qualify under the safe harbor or (ii) non-referral source investors. 
The hospital must not be in a position to refer patients directly or 
indirectly to the ASC or any physician investor. The ASC space must be 
dedicated exclusively to the ASC and not used by the hospital for the 
treatment of the hospital's inpatients or outpatients. The ASC may 
lease space that is located in or owned by a hospital investor, if the 
space lease qualifies for protection under the space rental safe 
harbor. Equipment and personal services provided by the hospital must 
similarly meet safe harbor requirements.
    In this final rule, we are expressly departing from the underlying 
rationale for our original safe harbor proposal, which was the 
professional fee/facility fee differential. The existence of a 
significant disparity between the facility fee and the professional 
fee, such that the facility fee is significantly smaller than the 
professional fee, minimizes the risk of improper incentives for 
referrals; however, we are aware that professional and facility fees 
have changed and may continue to change over time and that the ratio 
between them will not always, by itself, provide a clear basis for safe 
harbor protection. So although the fee differential was meaningful at 
the time, we will in the future look more broadly for indicia that an 
ASC investment represents the extension of a physician's

[[Page 63536]]

office space and not a means to profit from referrals.
    The gravamen of an anti-kickback offense is payment of remuneration 
to induce the referral of Federal health care program business. In the 
context of an ASC, our chief concern is that a return on an investment 
in an ASC might be a disguised payment for referrals. Two examples 
illustrate the potential problem. First, primary care physicians could 
be offered an investment interest in an ASC for a nominal capital 
contribution as an incentive to refer patients to surgeon owners of the 
ASC. The primary care physicians would not perform any services at the 
ASC, but would profit from any referrals they make. Second, physicians 
in specialties that typically refer to one another could jointly invest 
in an ASC so that they are positioned to earn a profit from such 
referrals or so that one physician specialty provides the ASC services 
and the other provides the referrals. In such cases, medical decision-
making may be corrupted by financial incentives offered to potential 
referral sources who stand to profit from services provided by another 
physician.
    With the above concern in mind, we are still able to provide safe 
harbor protection for certain non-surgeon physicians, group practices 
and hospitals that meet certain requirements set forth in the safe 
harbor. These requirements are designed to preclude protection for 
investors who might have incentives to generate returns on their 
investments through referrals to other investors or to other physicians 
who perform procedures at the ASC. The safe harbor will also protect 
some investment interests held by persons who are not in a position to 
make or influence referrals either directly or indirectly to the ASC or 
to any of its investors.
    However, except as otherwise described in the regulations, we are 
not protecting investment interests held by any party that provides 
items or services to, is in a position to influence the flow of 
referrals directly or indirectly to, or generates business for, the 
entity or any investor. Notwithstanding, investments by these parties 
are not necessarily unlawful, provided that payments made in return for 
the investment are not for the purpose of inducing or rewarding 
referrals.
    Indeed, we recognize that some legitimate ASC arrangements may not 
fit precisely in the final ASC safe harbor. Those that do not fit may 
be eligible for safe harbor protection under the small entity 
investments safe harbor (Sec. 1001.952(a)(2)) or the new safe harbor 
for investments in underserved areas (Sec. 1001.952(a)(3)). 
Alternatively, current or potential investors may request an OIG 
advisory opinion in accordance with section 1128D(b) of the Act and the 
regulations at 42 CFR part 1008.
    Our responses to public comments are summarized below.

Comments and Responses

    Comment: Many commenters commended the OIG for proposing a safe 
harbor to shield ASCs from prosecution under the anti-kickback statute. 
Many commenters noted that ASCs have saved Medicare hundreds of 
millions of dollars, forcing hospitals to become more competitive, 
because ASC payment rates are typically lower than hospital payment 
rates for the same procedures. Several commenters stated that ASCs 
foster patient access to care, particularly in medically underserved 
regions. Moreover, many commenters observed that patients generally 
prefer outpatient surgical care at an ASC to hospital care.
    Response: We agree that ASCs can significantly reduce costs for 
Federal health care programs, while simultaneously benefitting 
patients. The HCFA has promoted the use of ASCs as cost-effective 
alternatives to higher cost settings, such as hospital inpatient 
surgery. Where the ASC is functionally an extension of a physician's 
office, so that the physician personally performs services at the ASC 
on his or her own patients as a substantial part of his or her medical 
practice, we believe that the ASC serves a bona fide business purpose 
and that the risk of improper payments for referrals is relatively low. 
Where the criteria set forth in the safe harbor are satisfied, we do 
not consider investments in ASCs to be a likely source of 
overutilization of services payable by the Federal health care programs 
or increased program costs. We are concerned, however, that patient 
freedom of choice be protected and informed decision-making promoted in 
situations where a physician is required to refer to an entity that he 
or she owns in order to qualify for safe harbor protection. 
Accordingly, we are adding a requirement that the existence of the 
ownership interest be disclosed to patients. We note that such 
disclosure in and of itself does not provide sufficient assurance 
against fraud and abuse of the Federal health care programs. This 
conclusion derives from our observation that a disclosure of financial 
interest is often part of a testimonial, i.e., a reason why the patient 
should patronize that facility. Thus, often patients are not put on 
guard against the potential conflict of interest, i.e., the possible 
effect of financial considerations on the physician's medical judgment.
    Comment: Many commenters questioned our proposal to limit safe 
harbor protection to physicians who are ``surgeons'', given that many 
procedures or services performed in ASCs are performed by physicians 
not commonly called surgeons (i.e., cardiologists, gastroenterologists, 
radiologists or pathologists). Many commenters argued that the 
``extension of practice?'' rationale would apply to surgeons and such 
other physicians alike.
    A number of commenters proposed that we adopt a definition of 
``surgeon'' that would include any physician who performs procedures 
classified as surgical by HCFA regulations. For example, many kinds of 
endoscopy are classified as surgical procedures in accordance with 42 
CFR 416.65 and various updates to the list of HCFA-approved ASC 
surgical procedures published in the Federal Register (see 42 CFR 
416.65(c); 63 FR 32290 (1998) (to be codified at 42 CFR parts 416 and 
488)). One commenter suggested that physicians who refer to an ASC, but 
do not perform services at the ASC, should be permitted in the safe 
harbor as long as they meet the safe harbor's five enumerated 
requirements.
    Response: As discussed above, we agree that limiting the safe 
harbor to investors who are physicians traditionally termed 
``surgeons'' is unnecessarily restrictive, especially in light of 
advancing technology and the scope of HCFA's approved list of ASC 
procedures. In light of the many comments received on this topic, we 
have revised the safe harbor to protect investments in ASCs certified 
under 42 CFR part 416 by non-surgeon physicians, group practices, 
hospitals and non-referral source investors that meet certain 
conditions. Investments by group practices and hospitals are discussed 
in responses to separate comments below.
    With respect to physicians, we are promulgating three categories of 
safe harbor criteria, each designed to protect different types of 
physician investment. All of the categories protect combinations of 
qualifying physicians, which generally are those physicians who perform 
a substantial number of procedures listed on the HCFA ASC surgical 
procedures list as part of their medical practices. Specifically, at 
least one-third of each physician investor's medical practice income 
from all sources for the previous fiscal year or previous 12-month 
period must be derived from the physician's performance of procedures 
that require an ASC or hospital surgical setting. In

[[Page 63537]]

addition, where there is a risk of referrals among physicians or 
surgeons in different specialties, we are requiring that each perform 
at least one third of his or her procedures that require an ASC or 
hospital surgical setting at the investment ASC. We believe these 
standards ensure that a physicians investment in an ASC will truly 
represent an extension of his or her office. Where physicians own an 
ASC in which they will personally perform a significant number of 
procedures, obvious and legitimate business and professional reasons 
exist for the ownership, including convenience, professional autonomy, 
accountability and quality control. Moreover, any risk of 
overutilization or unnecessary surgery is already present by reason of 
the opportunity for a surgeon to generate his professional fee; the 
additional financial return from the ASC is not likely to increase the 
risk of overutilization of procedures significantly. We believe that 
the ``one-third/one-third'' standards in the safe harbor ensure that 
physician investors will have no significant incentive beyond receipt 
of their professional fees to refer to the entity or any of its 
investors, because any return on investment will be attributable 
primarily to legitimate business and only tangentially to possible 
referrals of ASC business.
    Because of the risk of remuneration for referrals, investments by 
other physicians, such as anesthesiologists, radiologists and 
pathologists, or by non-physician providers, such as certified 
registered nurse anesthetists, are not protected by the safe harbor if 
the physician or provider is in a position to provide items or services 
to, refer patients directly or indirectly to, or generate business for, 
the ASC or any of its investors. The determination whether an investor 
should be classified as a potential referral source is a factual 
question. As is the case for investments in small entities (56 FR 
35964), we will accept a written stipulation that for the life of the 
investment the investor will not make referrals to, furnish items or 
services to, or otherwise generate business for, the entity or any of 
its investors, provided that, in fact, the investor's actions comport 
with the written stipulation. We wish to make clear that investments by 
these physicians and other providers do not necessarily implicate the 
anti-kickback statute. Finally, we note that we do not consider an 
investment by a physician's own wholly-owned professional corporation 
to be an excluded non-physician investment.
    Comment: Many commenters also objected to our proposal to protect 
only ASCs owned entirely by surgeons who practice there. These 
commenters asserted that non-surgeons, and more specifically non-
physicians, should be allowed safe harbor protection for investments in 
ASCs. Many commenters advocated a rule that would allow surgeon 
investors to transfer ownership to family members and other non-
surgeons upon retirement or death without jeopardizing the ASC's safe 
harbor protection. Commenters also expressed concern that the safe 
harbor did not protect investments held by administrative staff at the 
ASC. Many commenters asserted that co-ownership with administrative 
staff would enable these individuals to make long-term commitments to 
providing better services in a cost-effective manner. Many commenters 
further expressed the view that anyone who is not in a position to 
refer patients to the ASC, including corporate entities such as for-
profit management companies, should be eligible to invest in the ASC. 
Some commenters urged that investments held by a physician's retirement 
plan be protected.
    Response: We are extending safe harbor protection to investors who 
are not in a position to provide items or services to the ASC or any of 
its investors and who are not in a position directly or indirectly to 
generate referrals for the entity or any of its investors. There is 
minimal risk that a payment made to such a non-referral source investor 
would implicate the anti-kickback statute, and accordingly investments 
by such investors do not taint the ASC investment. However, we believe 
that hospitals, skilled nursing facilities, home health agencies, 
managed care companies, physician practice management companies, and 
similar entities may be referral sources in some circumstances. By way 
of example only, a hospital may be in a position to influence referrals 
when it employs physicians who make referrals, when it owns surgical 
practices, or when it is affiliated with a ``friendly'' or ``captive'' 
professional corporation owned or controlled by its employees. We 
further believe that some employees, such as certain marketing and 
administrative staff, may be referral sources.
    Comment: Many commenters argued that the scope of the safe harbor 
should be expanded to include facilities that are not traditionally 
considered ``surgical'' centers, such as lithotripsy facilities, end-
stage renal disease (ESRD) facilities, comprehensive outpatient 
rehabilitation facilities (CORFs), radiation oncology facilities, 
cardiac catheterization centers and optical dispensing facilities. Many 
commenters argued that such facilities, like ASCs, are part of the 
physician's practice and are not simply vehicles for passive investment 
and self-referral. A number of commenters stated that such facilities 
would not encourage overutilization, would increase access to care, 
would reduce costs, and would maintain or improve quality of care. 
Several commenters averred that investments in such facilities offer 
little inducement because each investor makes very little profit from 
investments in such facilities, in part because in some facilities, 
each physician's investment is a small percentage of the whole. Other 
commenters stated that the cost of operating these facilities is so 
high that each investor's net revenues from the facility investment is 
marginal. Many commenters argued that existing regulation by Federal 
and State agencies and by physician associations creates sufficient 
checks on fraud and abuse.
    Response: Our regulatory treatment of ASCs recognizes the 
Department's historical policy of promoting greater utilization of ASCs 
because of the substantial cost savings to Federal health care programs 
when procedures are performed in ASCs rather than in more costly 
hospital inpatient or outpatient facilities. Physician investment in 
ASCs was an important corollary to the Department's efforts to promote 
ASCs because physicians were natural sources of capital, since many 
hospitals were reluctant to open or invest in ASCs that competed with 
their own outpatient and inpatient surgery departments. Accordingly, 
many of the early ASCs were financed and owned by surgeons and other 
physicians who worked in them. Currently, HCFA's goal is to set payment 
rates that are consistent across different sites of service.\4\ 
However, currently surgeries in ASCs generally continue to be 
reimbursed at lower rates.
---------------------------------------------------------------------------

    \4\ See e.g., Update of Ratesetting Methodology, Payment Rates, 
Payment Policies, and the List of Covered Surgical Procedures for 
Ambulatory Surgical Centers Effective October 1, 1998, 63 FR 32290, 
32307 (to be codified at 42 CFR parts 416 and 488) (proposed June 
12, 1998).
---------------------------------------------------------------------------

    Safe harbor protection for ASCs derives in large measure from this 
longstanding policy encouraging freestanding ASCs as a less costly 
alternative to hospitals for appropriate surgeries. In addition, 
Medicare's uniform, prospectively-established ASC payment methodology 
and the safe harbor's restriction on billing Medicare separately for 
ancillary services provide further assurance against abuse.

[[Page 63538]]

    Investments by referring physicians or combinations of referring 
physicians and hospitals in non-ASC clinical joint ventures, including, 
but not limited to, cardiac catheterization laboratories, radiation 
oncology centers or ESRD facilities, do not share the same policy 
background and are not subject to the same reimbursement structure as 
investments by physicians in ASCs. Such clinical joint ventures may 
raise concerns not present with ASCs. In short, to qualify under this 
safe harbor, a facility must be a certified ASC under 42 CFR part 416. 
The existing small entity investment safe harbor (Sec. 1001.952(a)(2)) 
may be applicable for other joint ventures (assuming all safe harbor 
conditions are satisfied). In addition, we are not prepared at this 
time to extend safe harbor protection to non-HCFA-certified ASCs. 
Industry-promulgated standards, while welcome and often helpful in 
combating fraud and abuse, may not be sufficient to safeguard the 
Federal health care programs.
    Comment: Several commenters asserted that hospitals with investment 
interests in ASCs should also be protected under the proposed ASC safe 
harbor. One commenter expressed the view that hospitals have no 
financial incentive to refer outpatient surgeries to ASCs because ASC 
net collections would be significantly lower than hospital net 
collections for the same procedures. By contrast, several other 
commenters suggested that hospitals would refer outpatient procedures 
to ASCs to enable the hospitals to focus resources on inpatient 
operations and treatments and the development of integrated delivery 
systems. Several commenters asserted that a hospital referral of a 
patient to an ASC would be an extension of the hospital's practice 
analogous to a surgeon's referral of a patient to an ASC. A number of 
commenters asserted that patients would benefit from using an ASC in 
close proximity to a hospital, and that creating an ASC would make 
efficient use of surplus hospital space.
    Response: After reviewing the comments, we are persuaded that safe 
harbor protection should be extended to ASCs jointly owned by hospitals 
and physicians who qualify under the terms of this safe harbor. 
Although joint ventures between hospitals and physicians are often 
susceptible to fraud and abuse, precluding all safe harbor protection 
for hospital investors in ASCs may unnecessarily place hospitals at a 
competitive disadvantage if they are forced to compete with ASCs owned 
by physicians, who principally control referrals.
    To be protected by the safe harbor, a hospital investment must meet 
all of the conditions set forth in the safe harbor. The hospital must 
not be in a position to make or influence referrals directly or 
indirectly to the ASC or to any of its physician investors. Whether 
this condition is met will depend on the facts and circumstances of 
particular arrangements. Any space used by the ASC that is located in, 
or owned by, the hospital must be leased in accordance with a lease 
arrangement that satisfies all of the criteria of the space rental safe 
harbor (Sec. 1001.952(b)). Similarly, any hospital equipment used by 
the ASC must be leased under an arrangement that satisfies the 
equipment rental safe harbor (Sec. 1001.952(c)), and any personal 
services provided by the hospital must be provided in accordance with a 
contract that complies with the personal services and management 
contracts safe harbor (Sec. 1001.952(d)). To further mitigate the risk 
of improper cost-shifting, in no event may operating or recovery room 
space be shared with the hospital for the treatment of the hospital's 
inpatients or outpatients, nor may the hospital reflect or include any 
costs associated with developing or operating the ASC on any Federal 
health care program claim or cost report (except such non-reimbursable 
costs as may be required by the programs).
    Comment: Many commenters expressed the view that a safe harbor that 
protects an investment where 100 percent of the investors are 
physicians would be inconsistent with the 60-40 investor rule in the 
existing investment interest in small entities safe harbor. Several 
commenters argued that imposing a new 100 percent rule would be 
burdensome on those investors who diligently tried to comply with the 
40 percent rule.
    Response: We are not changing the rules for those ASCs that meet 
the criteria for the ``small entity'' safe harbor. However, many 
existing ASCs that are owned entirely or predominantly by the 
physicians who practice there cannot fit within the ``small entity'' 
safe harbor and thus are not currently afforded safe harbor protection. 
Depending on the circumstances, either this new safe harbor, the 
``small entity'' safe harbor (Sec. 1001.952(a)(2)), or the new 
``underserved areas'' safe harbor (Sec. 1001.952(a)(3)) may offer 
protection to investors in an ASC.
    Comment: Several commenters requested clarification of the 
requirement that a participating practitioner ``must agree to treat'' 
Medicare and Medicaid patients. Some commenters noted that it was 
unclear what level of participation in these Federal health care 
programs would satisfy the requirement. One commenter questioned 
whether the safe harbor would require treating Medicare and Medicaid 
patients to the exclusion of other patients if capacity were limited. 
Two commenters questioned whether it was sufficient to ``agree to 
treat'' instead of actually treating Medicare and Medicaid patients. 
Another commenter wondered whether all investors in the facility must 
treat Medicare and Medicaid patients. One commenter suggested that the 
requirement be deleted from the safe harbor. Another suggested that 
each ASC maintain records, on an annual basis, to show that it actually 
provided services to Medicare and Medicaid patients in proportion to 
those patients in the community. Several commenters noted that the 
requirement to treat Medicare and Medicaid patients is unnecessary 
because the anti-kickback statute is implicated only when Federal 
health care program reimbursement is requested.
    Response: The requirement that all protected investors agree to 
treat Medicare and Medicaid patients is intended to ensure Medicare and 
Medicaid patients access to care at ASCs on a non-discriminatory basis. 
Thus, decisions whether to accept and treat Federal health care program 
beneficiaries must be made on a nondiscriminatory basis. This 
requirement is further intended to promote cost savings for the 
programs by encouraging investors to provide services for Federal 
program beneficiaries in ASCs rather than hospitals in medically 
appropriate circumstances. We do not intend to exclude from protection 
physicians who are not accepting any new patients. We are not adopting 
the suggestion that ASCs demonstrate that they provide services to 
Medicare and Medicaid patients in proportion to the numbers of those 
patients in the community. We find that requirement to be too limiting. 
We are clarifying the language of the safe harbor to make clear its 
anti-discrimination purpose, and we are expanding it to require non-
discriminatory treatment of all Federal health care program 
beneficiaries.
    The commenter is correct that the anti-kickback statute would not 
be implicated, and no safe harbor protection required, if the investor 
physicians were not in a position to make referrals of or otherwise 
generate business payable in whole or in part under a Federal health 
care program. However, given the number of Federal health care 
programs, which include

[[Page 63539]]

Medicare, Medicaid, TRICARE, Veterans' Administration, Public Health 
Service, Indian Health Service, and children's health insurance under 
Title XXI of the Act, we think it likely that most investor physicians 
will potentially be in a position to refer Federal program business.
    Comment: One commenter was concerned that States might interpret 
State self-referral prohibitions as also prohibiting surgeons in ASCs 
from referring patients to the ASC for related laboratory, radiology 
and other ancillary services, and asked that we clarify that, under 
this safe harbor, such ``self-referrals'' would be permissible.
    Response: We are not in a position to comment on State self-
referral prohibitions. The ASC safe harbor is not intended to protect 
payments derived from ancillary services performed at or by the ASC, 
unless such services are directly and integrally related to the primary 
procedure performed at the ASC. Thus, for example, payments in 
connection with invasive radiology (a procedure in which an imaging 
modality is used to guide a needle, probe, or catheter accurately) 
would be protected, while payments for diagnostic or therapeutic 
radiology would not be protected. To clarify the safe harbor on this 
point, we have added a requirement that all ancillary services for 
Federal health care program beneficiaries performed at or by the ASC be 
directly and integrally related to primary procedures performed at the 
ASC and that no ancillary services be separately billed to the 
programs. Simply stated, because of the risk of overutilization of 
ancillary services, this safe harbor does not protect ancillary 
services joint ventures married to ASCs. Payments to providers of 
ancillary services may be protected under the employee compensation or 
personal services contract safe harbors, if the arrangements meet all 
applicable criteria.
    Comment: A number of commenters expressed the opinion that 
integrated multispecialty or single-specialty group practices, as well 
as HMOs, should be able to develop ASCs as part of the practice network 
or HMO. With respect to HMO ownership and operation of ASCs, one 
commenter requested that the safe harbor permit such ownership even if 
physicians own the HMO and would be referral sources for the ASC.
    Response: We have revised the safe harbor to protect explicitly 
group practice investments in qualifying ASCs. To be protected, a group 
practice investor must meet the requirements for the group practices 
safe harbor at Sec. 1001.952(p) and be composed entirely of physicians 
who meet all of the criteria for protection as individual investors 
under the ASC safe harbor. Nothing in these regulations is intended to 
preclude the development of ASCs by HMOs, provided such arrangements do 
not include impermissible payments of remuneration to induce or reward 
referrals of Federal program business. These rules merely describe a 
certain subset of lawful practices that are deemed protected from 
prosecution under the anti-kickback statute.
    Comment: At least one commenter suggested that the safe harbor be 
expanded for ASCs in rural areas, so that any individual or entity who 
is financially able to invest may do so, on the ground that there is a 
great need for ASCs and limited ability to capitalize them in rural 
areas.
    Response: We believe that the provisions of this safe harbor will 
permit most investors who are in a position to capitalize ASCs in rural 
areas to do so. No special exception is necessary. Investors in an ASC 
located in a rural area may qualify for safe harbor protection under 
the investment interests in ASCs safe harbor, the investment interests 
in small entities safe harbor, or the new investment interests in 
underserved areas safe harbor. Investors in ASCs need only satisfy one 
safe harbor to qualify returns on their investments for protection from 
prosecution under the anti-kickback statute.
3. Investment Interests In Group Practices
    Summary of Proposed Rule: We proposed a new safe harbor to protect 
payments to investors in entities composed only of active investors in 
a group practice. This safe harbor would have protected the investment 
interests of members of group practices that met certain prerequisites 
and standards. We proposed adopting the definition of group practice 
contained in the Stark Law at section 1877(h)(4) of the Act. The Stark 
Law prohibits Medicare payment where physicians make referrals for 
designated health services to entities in which they have an ownership 
interest or with which they have a compensation arrangement, unless 
that interest or arrangement meets the strict terms of a statutory 
exception. In the proposed safe harbor, we intended principally to 
protect investors who are individuals who qualify as ``physicians'' 
under the Stark Law definition; however, our definition of group 
practice permitted a physician to invest as a professional corporation, 
if the corporation were exclusively owned by the physician. The 
proposed safe harbor was intended to protect any payment that is a 
return on an investment interest (such as a dividend or interest 
income) made to a physician member of a group practice who is an 
``active investor'' in the investment entity, as long as all of the 
standards in the safe harbor were satisfied. For example, the safe 
harbor would have protected any payments resulting from the ownership 
of an interest in the group practice itself. It also could have been 
read--although it was not intended--to protect dividends from an 
investment in an MRI facility to which the physician-investors referred 
patients, if the investment met the terms of the safe harbor. The 
proposed safe harbor was not intended to protect other payments made by 
group practices, such as salary payments to employees of a group 
practice or payments to independent contractors.
    We solicited comments on the appropriateness of our definition of 
group practice. We further solicited comments on the appropriateness of 
incorporating standards from the second investment interest safe harbor 
(Sec. 1001.952(a)(2)), including the prohibition on preferential terms 
of an investment interest being offered to certain physicians based on 
expected referrals; the prohibition on loans or loan guarantees from 
the entity or another investor used to obtain the investment interest; 
and the requirement that the amount of the return on an investor's 
investment must be directly proportional to the capital invested. In 
particular, we solicited information regarding the types of 
compensation arrangements that exist within group practices and the 
extent to which such compensation arrangements create inappropriate 
incentives that might distort the professional judgement of the members 
of the group. Lastly, we solicited comments on how we might expand the 
proposed safe harbor to other types of joint ventures composed 
exclusively of active investors.
    We received over a dozen comments on this proposal. While some 
commenters supported the safe harbor and some opposed it, most 
questioned the need for the safe harbor and indicated that it would 
cause confusion among existing group practices. Moreover, it became 
apparent from reviewing the comments that the intended scope of the 
safe harbor was not clear. Some commenters understood the safe harbor 
to protect investments in group practices; others believed it protected 
investments by group practice members in other entities. A few 
commenters believed it covered both types of investments.

[[Page 63540]]

    Summary of Final Rule: Because of the evident confusion caused by 
the proposed safe harbor, and for reasons more fully explained below, 
we have decided not to promulgate the safe harbor in the form it was 
originally proposed. Instead, we are adopting a simpler, although 
perhaps narrower, safe harbor that protects returns on investments in 
the group practice itself (i.e., not in separately owned health care 
services), if the group practice meets the Stark Law definition of a 
group practice (section 1877(h)(4) of the Act) and if the group 
practice investors are all licensed professionals who practice in the 
group. The safe harbor also protects investments in solo practices 
where the practice is conducted through the solo practitioner's 
professional corporation or other separate legal entity. The anti-
kickback statute is not otherwise implicated for investments by solo 
practitioners in their practices. The safe harbor protects returns 
derived from in-office ancillary services that qualify for the 
exception for ``in-office ancillary services'' under the Stark Law 
(section 1877(b)(2) of the Act). This safe harbor does not protect 
investments made jointly by group members in separate entities. The 
general parameters of this new safe harbor were suggested in comments 
submitted by a group practice trade association as a less complicated 
alternative to our proposed safe harbor language.
    Specifically, the new safe harbor imposes four criteria. First, the 
equity interests in the practice or group must be held by licensed 
professionals who practice in the practice or group. The equity 
interests may be held by an individual professional corporation if the 
corporation is exclusively owned by a single individual. Second, the 
equity interests must be in the practice or group itself, and not some 
subdivision of the practice or group. Third, the practice (unless a 
solo practice) must meet the definition of ``group practice'' in 
section 1877(h)(4) of the Act and implementing regulations. Fourth, 
profit distributions derived from in-office ancillary services are only 
protected if the services meet the definition of ``in-office ancillary 
services'' in section 1877(b)(2) of the Act and implementing 
regulations. We believe these conditions will offer reasonably broad 
safe harbor coverage for integrated medical practices, while at the 
same time minimizing financial incentives that could lead to 
inappropriate utilization and increased program costs.
    Conceptually, this new safe harbor is consistent with the 
accommodation for referrals between group practice members contained in 
the safe harbor for specialty referral arrangements (Sec. 1001.952(s)). 
In our preamble to the 1993 proposed rule, we explained that revenues 
shared between members of a group practice as a result of a referral 
from one member of the group to another are an inherent part of 
belonging to a group practice. This safe harbor protects such payments, 
provided all safe harbor conditions are satisfied.
    We want to emphasize our view that under section 1877(h)(4) of the 
Act, a group practice must consist of one legal entity and must be a 
unified business with centralized decision-making, pooling of expenses 
and revenues, and a distribution system that is not based on satellite 
offices operating as if they were separate enterprises or profit 
centers. This safe harbor is not intended to protect group practices 
that are not legally organized, but instead only hold themselves out as 
groups. Nor is this safe harbor intended to protect multiple groups of 
physicians that remain in many ways separate, but join together for 
selective purposes, such as taking advantage of the exceptions in 
section 1877 of the Act that apply to group practices. For purposes of 
these regulations, a group practice may be one legal entity if it is 
composed of owners who are individual professional corporations or is 
owned by physicians who are individually incorporated.

Comments and Responses

    Comment: One commenter supported a safe harbor based on the 
definition of ``group practice'' contained in section 1877(h)(4) of the 
Act, but objected to the application of any other standards or 
conditions. This commenter argued that a bona fide group practice can 
be equated, for fraud and abuse purposes, with sole-practitioner 
medical practices in that any remuneration shared or exchanged among 
the members of the group and any investment made jointly by the group 
in an entity to which the members of the group practice may make 
referrals and which can be considered as ``extension'' of the group 
practice should be regarded as a self-referral. On the other hand, some 
commenters expressed concern regarding the anti-competitive effects of 
protecting group practice investments in ancillary services and the 
attendant increased risk of abusive practices, including 
overutilization. Commenters suggested that the safe harbor include a 
requirement for public notice of group practice investment in ancillary 
services entities and notices to patients identifying alternative 
service providers.
    Response: We agree that, generally speaking, safe harbor protection 
is warranted for remuneration shared or exchanged among the members of 
a group practice that meets the definition of a group practice under 
the Stark Law (section 1877(h)(4) of the Act). However, we are 
persuaded that investments by group practice members in entities that 
provide ancillary services may have anti-competitive effects and may 
result in abusive arrangements and incentives to overutilize those 
ancillary services. Accordingly, we do not believe that safe harbor 
protection is warranted for group practice investments in ancillary 
services at this time. Of course, investments in ancillary services may 
be covered by the small entity investment safe harbor. This new safe 
harbor for investments in group practices protects remuneration derived 
from in-office ancillary services, as defined in section 1877(b)(2) of 
the Act and implementing regulations.
    Comment: Some commenters questioned the need to protect physicians' 
investments in their own group practice, and suggested that the anti-
kickback statute is not implicated by a physician's ownership of his or 
her own professional practice.
    Response: The plain language of the anti-kickback statute is 
sufficiently broad so as potentially to include payments from a group 
practice to an investor in the practice, even if the investor is a 
physician member of the group practice. However, our promulgation of 
this safe harbor is not an indication that we view investments in group 
practices as suspect per se under the anti-kickback statute. Similarly, 
we do not view investments in solo practices as suspect per se.
    Comment: Some commenters urged that the proposed safe harbor would 
have excluded from protection most existing group practices. First, the 
proposed safe harbor required all investment interests in the group to 
be held by physicians. ``Investment interests'' was broadly defined to 
include bonds, notes and other debt instruments. Thus, if a group 
practice borrowed from a bank or other entity, the bank or other entity 
would have had an investment interest that precluded safe harbor 
protection. Second, the proposed safe harbor required all investors to 
be ``active investors.'' One commenter noted that in most groups, the 
responsibility for the day-to-day management of the entity is given to 
one physician or to a practice manager operating under the supervision 
of a managing physician. This commenter stated that it is not possible 
or desirable for every physician partner to be responsible for the day-
to-day operation of the practice. Another commenter

[[Page 63541]]

observed that many group practices are corporations in which the 
members are shareholders and thus not ``active investors'' in the 
corporation.
    Response: We agree that inclusion of debt interests and the 
requirement that all investors be ``active investors'' as defined in 
our investment interests safe harbor unnecessarily limited the proposed 
group practice safe harbor. The new safe harbor, which applies only to 
investors who practice in a group practice that meets the group 
practice definition in the Stark Law, looks only to equity interests 
owned by physicians for purposes of measuring safe harbor compliance. 
Moreover, the new safe harbor does not require all group members be 
``active investors'' as defined in the small entity investment 
interests safe harbor. Thus, the fact that all group members do not 
participate in the day-to-day management of the group practice will not 
disqualify a group practice from safe harbor protection.
    Comment: One commenter expressed concern about the proposed 
restriction on investment terms being related to the previous or 
expected volume of referrals, noting that many physicians who 
previously practiced in solo or small groups have joined group 
practices or merged into large groups precisely because of the 
professional relationships between and among the physicians involved.
    Response: We agree that a restriction on the terms of an investment 
interest being related to previous or expected volume of referrals is 
not necessary in the context of investments in group practices that 
meet the definition of a group practice under the Stark Law. Our 
revised safe harbor language does not contain such a requirement. 
However, the return on the investment interest must comply with the 
Stark Law, which limits compensation to physician investors that is 
based on the volume or value of referrals by the physician (section 
1877(h)(4)(A)(iv) of the Act and implementing regulations).
    Comment: One commenter expressed concern about the prohibition on 
group practices making loans to, or guaranteeing loans for, investors, 
if the loans are used to acquire an interest in the group. This 
commenter believed that this provision could create a problem for 
physicians who are given the opportunity to buy into an existing 
practice over time, if a deferred capital contribution were viewed as a 
loan.
    Response: Our new safe harbor does not contain a prohibition on 
loans from group practices or group practice members used to acquire 
interests in the group practice.
    Comment: One commenter suggested that the safe harbor should be 
expanded by adding protection for in-office ancillary services (such as 
a laboratory) shared by physicians who are not part of the same group 
practice, where the physicians sharing the in-office laboratory bill 
independently of one another and do not benefit from the volume or 
value of referrals made by their partners. According to the commenter, 
these arrangements are common, practical, and cost-effective.
    Response: We agree that these arrangements are often practical and 
cost-effective for physicians. However, as indicated above, we are not 
prepared to provide safe harbor protection for investments in 
separately-owned ancillary services at this time, whether the ownership 
is by group practice members or others. We remain concerned that 
investments in ancillary services may create incentives for 
overutilization and lead to increased program costs. This is not to say 
that all such arrangements are unlawful under the anti-kickback 
statute. However, we do not believe that it would be possible to craft 
a sufficiently circumscribed safe harbor that would protect legitimate 
investments, while at the same time excluding from protection sham 
investments that are in reality vehicles for the payment of kickbacks.
    Comment: One commenter recommended that the safe harbor apply to 
all practitioners within the reach of the anti-kickback statute, 
including nurse practitioners, certified nurse-midwives, clinical nurse 
specialists and certified registered nurse anesthesiologists.
    Response: For now, we are limiting the safe harbor to group 
practices as defined in the Stark Law. The Stark Law definition of 
group practices applies only to physicians. We may consider an 
expansion to non-physician practitioners in future rulemaking.
4. Practitioner Recruitment
    Summary of Proposed Rule: We proposed a safe harbor for certain 
payments or benefits offered by rural hospitals and entities in their 
efforts to recruit physicians and other practitioners. It had come to 
our attention that some hospitals located in rural areas encounter 
difficulties in attracting physicians to their communities. Our 
proposed safe harbor was designed to address this problem without 
protecting recruitment arrangements intended to channel Federal health 
care program beneficiaries to recruiting hospitals and entities.
    We proposed limiting the practitioner recruitment safe harbor to 
entities located in rural areas as defined in our proposed safe harbor 
for investments in rural areas. However, we solicited comments on 
alternative geographic criteria. One alternative we suggested was 
limiting safe harbor protection to recruitment of practitioners located 
in areas that are health professional shortage areas (HPSAs) for the 
practitioner's specialty category.
    To ensure that we did not protect arrangements designed to channel 
Federal program business to recruiting hospitals or entities, we 
proposed protecting recruitment of 2 types of practitioners: (1) 
Practitioners relocating at least 100 miles to a new geographic area 
and starting a new practice, and (2) new practitioners starting 
practices or specialties after completing an internship or residency 
program. We proposed seven standards that would have to be met to 
qualify for safe harbor protection. We also solicited comments about 
protecting payments designed to retain physicians already practicing in 
an area that has been designated as a HPSA for the physician's 
specialty category.
    Summary of Final Rule: The intent of the practitioner recruitment 
safe harbor is to promote beneficiary access to quality health care by 
permitting communities that have difficulty attracting needed medical 
professionals to offer inducements to those professionals without 
running afoul of the anti-kickback statute. This safe harbor is 
intended to apply only to areas with a demonstrated need for 
practitioners and only to practitioners who actually serve the 
residents of such areas. We are adopting the proposed safe harbor with 
the following modifications:
     We are expanding the safe harbor to cover practitioner 
recruitment in urban, as well as rural, underserved areas. 
Specifically, the safe harbor applies to recruitment activities where 
the recruited practitioner's primary place of practice will be located 
in a HPSA for the practitioner's specialty area in accordance with 42 
CFR part 5.
     We have eliminated the ``100 mile'' rule.
     We have reduced the required new patient revenues from 85 
percent to 75 percent.
     At least 75 percent of the revenues of the new practice 
must be generated from patients residing in a HPSA or a MUA or who are 
members of a MUP (as defined by HRSA).
     The benefits may be provided for a term of up to 3 years, 
provided there is a written agreement, and the benefits do

[[Page 63542]]

not directly or indirectly benefit other referral sources. If the HPSA 
ceases to be a HPSA during the term of the written agreement, the 
recruitment arrangement will not lose its safe harbor protection.
     The recruited practitioner must agree to treat Federal 
health care program patients in a non-discriminatory manner.
     We are not requiring the entity doing the recruiting to be 
located in the underserved area.
     We are not requiring new practitioners to establish staff 
privileges at the recruiting entity.
Comments and Responses
    Comment: Commenters expressed a range of views regarding our 
proposed definition of ``rural'' for purposes of this safe harbor. Some 
urged us to adopt the definition of rural used by HCFA to reimburse 
hospitals located in rural areas under DRG payment rates (42 CFR 
412.62(f)(1)(iii)). Others urged that an entity be protected under the 
safe harbor if it qualifies as a disproportionate share hospital (DSH) 
under Medicare payment policy. Some commenters suggested that we use 
HRSA's designations of HPSAs as a means of limiting protection afforded 
by the safe harbor. Several commenters recommended use of HRSA's 
designation of MUAs (42 CFR part 51c). One commenter suggested that we 
substitute a ``demonstrated community need'' standard for the 
geographic criteria. In addition, many commenters suggested that we 
extend the practitioner recruitment safe harbor to underserved urban 
areas. Several commenters proposed that we conform the safe harbor to 
the Stark Law exception for physician recruitment by eliminating 
geographic criteria.
    Response: We are not prepared to expand this safe harbor by 
protecting practitioner recruitment wherever it occurs. In many areas, 
hospitals and other recruiting entities can attract sufficient numbers 
of qualified practitioners. In such areas, we see no need to protect 
additional payments or benefits that may in reality be disguised 
bonuses for high referrers. We recognize, however, that many hospitals 
in rural and urban underserved areas have legitimate problems 
attracting physicians and other practitioners and may need to offer 
additional financial incentives to acquire adequate staff. After 
carefully reviewing the suggested options, we have concluded that the 
most sensible approach--one that fairly balances the need to address 
practitioner shortages with the need to guard against abusive 
practices--is to extend safe harbor protection to recruitment payments 
and benefits provided to new and relocating practitioners who establish 
their primary place of practice in a HPSA in the practitioner's 
specialty area (see discussion of HPSAs above). The choice of HPSAs has 
the advantage of (i) including urban underserved areas, which we are 
persuaded often experience comparable difficulties attracting health 
care practitioners as rural areas, and (ii) targeting areas that have 
demonstrated a shortage of practitioners in particular specialties, 
and, consequently a need for additional recruitment.
    We are not adopting the definition of ``rural'' used by HCFA for 
purposes of reimbursing rural hospitals under DRG payment rates. As 
discussed above, that definition is derived from the OMB definition of 
``rural'' that is used by the Bureau of Census. The OMB methodology is 
not as closely tailored to the purpose of this safe harbor as is HRSA's 
HPSA methodology. Moreover, the OMB methodology would not identify 
underserved urban areas. We also concluded that the use of MUAs would 
create a broader safe harbor than is needed to facilitate the type of 
practitioner recruitment we intend to protect. Unlike HPSAs, which 
target practitioner shortages, MUAs measure shortages of health care 
services generally.
    Similarly, we are not adopting the proposal to use DSH payments as 
a criterion for safe harbor protection. Although they are an indicator 
of the number of low-income patients a hospital treats, DSH payments do 
not necessarily indicate practitioner shortages. A ``demonstrated 
community need'' standard, while appealing in theory, presents too many 
difficulties in application to produce consistent and predictable safe 
harbor protection.
    Comment: One commenter asked us to clarify whether the safe harbor 
protected payments made by recruiting entities that are not located in 
an rural area to practitioners who are practicing in a rural area. This 
commenter observed that some hospitals in ``non-rural'' areas serve 
patients who live in ``rural'' areas.
    Response: The safe harbor provides that an entity will be protected 
if the practitioner's primary place of practice is located in a HPSA 
for the practitioner's specialty area. Consistent with our intent to 
facilitate recruitment of health care practitioners to serve the needs 
of underserved populations, we are not requiring that the recruiting 
entity also be located in a HPSA.
    Comment: One commenter wondered whether a rural referral center 
(RRC) that had been reclassified by HCFA as urban for purposes of 
Medicare payment would be eligible for protection under the 
practitioner recruitment safe harbor.
    Response: A RRC recruiting a practitioner whose primary place of 
practice will be located in a HPSA for the practitioner's specialty 
area would be eligible for protection under the rural investment 
interest safe harbor provided it met all of the conditions of the safe 
harbor.
    Comment: The proposed safe harbor applies to new and relocating 
practitioners who derive 85 percent of their patient revenue from new 
patients not previously seen by the practitioner at his or her former 
place of practice. One commenter urged that the threshold be lowered to 
50 percent to expand safe harbor protection. One commenter questioned 
the ability to measure compliance with the 85 percent revenue standard 
prospectively. Another commenter inquired whether a hospital would be 
required to audit a recruited physician's practice to ensure compliance 
with the 85 percent revenue test. One commenter suggested that the 85 
percent revenue test be eliminated for urban providers.
    Response: A dollar volume standard is necessary to ensure that safe 
harbor protection is granted only to new practitioners and those 
genuinely relocating and starting new practices. This safe harbor is 
intended to protect recruitment activities, not payments to retain 
physicians in existing practices. The safe harbor does not cover 
arrangements between hospitals and physicians that may be, in reality, 
payments to obtain the referrals of established practitioners. However, 
upon further consideration, we agree that the 85 percent standard we 
proposed is too high. We are, therefore, lowering the required 
percentage to 75 percent, which we believe will be sufficient to deter 
abuses. We recognize that determining compliance with the safe harbor 
may be problematic in some circumstances, such as during the first year 
of practice. However, we think that new and relocating practitioners 
should be able to achieve a reasonable degree of certainty that they 
have complied with the regulations. Parties to recruitment arrangements 
may use any reasonable method for establishing compliance, provided 
they use the same principles consistently over time, so as to avoid 
manipulating data to obscure noncompliance.
    Comment: Several commenters suggested that we use a patient 
population test instead of a revenue test as a basis for ensuring that 
the practice is truly new or relocated.

[[Page 63543]]

    Response: A revenue-based test more accurately measures whether 
services are, in fact, being provided to new patients than does a test 
based on the numbers of patients in a practitioner's practice. We do 
not intend to protect relocating practitioners who establish practices 
in HPSAs, but who continue primarily to treat patients from the 
practitioner's former practice.
    Comment: The proposed safe harbor contained a requirement that a 
relocating practitioner's physical primary place of practice be at 
least 100 miles from his or her previous primary place of practice. 
Several commenters urged us to eliminate the 100 mile rule altogether 
or reduce the distance required. These commenters pointed out that the 
100 mile requirement would produce arbitrary results in some 
circumstances and that some rural areas with practitioner shortages 
were located less than 100 miles from urban areas with pools of 
potential practitioners from which to recruit. Moreover, the 100 mile 
rule made it more difficult for urban undeserved areas to qualify for 
safe harbor protection. One commenter suggested using a travel distance 
of one and a half hours as a means of ensuring a majority of the 
practitioner's patients will be new. In the alternative, a commenter 
suggested making the 100 mile rule an alternative test to the 85 
percent new patient revenue rule.
    Response: The 100 mile rule was intended to ensure that the safe 
harbor protected recruitment of new or relocating practitioners only. 
However, we are persuaded that the proposed 100 mile rule would be 
impractical and lead to arbitrary results in some circumstances and 
would unnecessarily limit the protection afforded by this safe harbor. 
We also recognize that the 100 mile rule would make it difficult for 
entities in urban underserved areas to enter into recruitment 
arrangements that qualify for the safe harbor. Accordingly, we are 
eliminating the 100 mile rule, thereby enabling some recruitment 
arrangements to qualify for the safe harbor even if the practitioner 
relocates his or her primary place of practice only a short distance to 
a HPSA.
    We are concerned, however, about the possibility of abuse by 
experienced practitioners, particularly in urban settings, who may 
``relocate'' their offices short distances to underserved areas in 
order to qualify for the safe harbor and therefore receive recruitment 
payments that may, in fact, be rewards for referrals. The 75 percent 
new patient revenue test does not adequately guard against such abuse, 
because it measures whether patients are new to the practice and not 
whether patients are part of an underserved population. To ensure that 
safe harbor protection is not available for practitioners who relocate 
but do not serve the populations intended to benefit from this safe 
harbor, we are adding a requirement that 75 percent of the revenues of 
the new practice must be generated from patients residing in a HPSA or 
a MUA or who are members of a MUP. The patients do not necessarily have 
to reside in the specific HPSA in which the practitioner's new practice 
is located, but may reside instead in a nearby MUA or HPSA. In sum, to 
qualify for the safe harbor, a new or relocating physician must 
substantially treat patients who are new to the physician's practice 
and who reside in underserved areas, or are members of medically-
underserved populations designated by HRSA.
    Comment: A number of commenters discussed the third proposed safe 
harbor standard, which would have imposed certain time limits on 
payments and benefits protected by the safe harbor. One commenter 
recommended extending the time limit for protected recruitment payments 
in non-HPSA rural areas from 3 years to 5 years. Several commenters 
urged us to allow protected recruitment payments for practitioners in 
HPSAs for as long as an area is designated as a HPSA. Some commenters 
questioned what would happen if a HPSA designation was revoked during 
the term of the recruitment contact. These commenters recommended that 
the contract continue to be protected for its term.
    Response: Our original proposed safe harbor contemplated a 3 year 
limit on benefits, unless the practitioner was located in a HPSA, in 
which case recruitment benefits would be protected for the entire 
duration of the relationship between the practitioner and the 
recruiting entity. Given that we have limited the scope of this safe 
harbor to HPSAs, the 3 year limit for non-HPSA rural areas originally 
proposed no longer pertains.
    However, our experience over the past few years has shown that 
practitioner recruitment is an area frequently subject to abusive 
practices. The risk of kickbacks is mitigated when payments are made to 
new or relocating physicians who do not have established referrals 
streams that can be locked up through inappropriate incentives and 
loyalties. Thus, we have concluded that protected payments under this 
safe harbor should not be of unlimited duration or subject to 
renegotiation that may be based on the volume or value of referrals. We 
believe that 3 years is a reasonable time period for recruitment 
benefits. Accordingly, we are amending the third standard to read as 
follows: ``the benefits are provided by the entity for a period not to 
exceed 3 years, and the terms of the agreement are not renegotiated 
during this 3 year period in any substantial aspect.'' By ``any 
substantial aspect,'' we mean in any manner that materially affects the 
payments and benefits to be made to the recruited practitioners under 
the written agreement. We have also revised the safe harbor to make 
clear that if the HPSA designation is revoked during the term of the 
contract, the payments will remain protected for the term of the 
contract (which term may not exceed 3 years), provided all other safe 
harbor conditions are satisfied.
    We understand that limiting recruitment payments and benefits 
raises the question of incentives to retain physicians in HPSAs beyond 
an initial 3 year period. Because of the increased risk of kickbacks, 
payments for retention purposes require closer scrutiny than initial 
recruitment payments. We solicited comments regarding development of a 
physician retention safe harbor. We received several comments in 
support of such a safe harbor. A physician retention safe harbor may be 
the subject of future rulemaking.
    Comment: Several commenters had concerns about the fourth proposed 
standard of the physician recruitment safe harbor, which would require 
that ``the entity providing the benefits cannot condition the agreement 
on the practitioner's referral of business to the entity.'' 
Specifically, one commenter inquired if this meant that the hospital 
could not condition the recruitment payments on the practitioner having 
and maintaining staff privileges at the recruiting entity.
    Response: This requirement is derived from the small entity 
investment interests safe harbor at Sec. 1001.952(a)(2)(iv) and is 
intended to ensure that the agreement is not conditioned on the 
referral of business from the practitioner to the entity. Consistent 
with this provision, hospitals may require a practitioner to have and 
maintain staff privileges; however, a hospital may not prohibit the 
practitioner from obtaining or maintaining staff privileges at other 
facilities. A hospital may not condition recruitment payments on 
aggregate admissions by the practitioner, nor may it require a 
recruited practitioner to admit a proportionate share of his or her 
patients to the hospital. A hospital may impose conditions intended to 
ensure quality of patient care, such as requiring that a physician have 
performed a minimum number of a particular type of

[[Page 63544]]

procedure before performing the procedure at the hospital.
    Comment: Some commenters questioned the need for the requirement 
that practitioners agree to treat Medicare and Medicaid patients. One 
commenter suggested that the regulations require a recruited physician 
to treat all patients referred by the hospital, regardless of a 
patient's insurance status or ability to pay. A similar comment 
suggested that the regulations for physician recruitment require the 
physician to become a participating provider in the Medicare and 
Medicaid programs.
    Response: We have generally addressed this issue in our discussion 
above. To impose a standard requiring a practitioner to treat all 
patients referred by a hospital would exceed our regulatory authority. 
Likewise, we are not requiring recruited practitioners to become 
participating providers in the Medicare and Medicaid programs. However, 
if they participate in any Federal health care program, they must treat 
all program beneficiaries in a nondiscriminatory manner.
    Comment: A number of commenters requested that we further define 
the terms ``payment'' and ``benefit'' as used in Secs. 1001.952(n)(1), 
(3), and (6) of the proposed physician recruitment safe harbor. Some 
commenters sought guidance regarding which specific payment practices 
are protected by the safe harbor.
    Response: We decline to specify in these regulations any particular 
set of payment practices covered by this safe harbor. Recruitment 
practices necessarily vary depending on specific circumstances. 
Accordingly, whether payment practices are protected by this safe 
harbor must be evaluated on a case-by-case basis. In particular, the 
amount or value of the benefits provided by the entity may not vary (or 
be adjusted or renegotiated) in any manner based on the volume or value 
of any expected referrals to, or business otherwise generated for, the 
recruiting entity by the practitioner for which payment may be made in 
whole or in part under a Federal health care program.
    Comment: A commenter urged that the final regulations make clear 
that compliance with the recruitment safe harbor exempts parties from 
having to comply with other safe harbor regulations, including the 
personal services, space and equipment rental and obstetrical 
malpractice insurance safe harbors.
    Response: This comment addresses a situation where a recruitment 
agreement may involve more than one safe harbor (e.g., the space rental 
and obstetrical malpractice safe harbors). If the recruitment agreement 
as a whole meets the criteria of the recruitment safe harbor, then the 
agreement as a whole is exempt from criminal prosecution. If, however, 
the agreement does not fit within the recruitment safe harbor, certain 
payments made in accordance with it may still be protected under the 
other safe harbors, if the other individual safe harbor criteria are 
met.
    Comment: Several commenters requested that we clarify whether the 
safe harbor protects joint recruitment efforts between hospitals and 
group practices or between hospitals and individual physicians who may 
employ new physicians in their practices. Along these same lines, one 
commenter asked us to protect the indirect recruitment activities of 
managed care organizations, which frequently conduct physician 
recruitment in conjunction with participating hospitals.
    Response: We are aware that an increasing amount of physician 
recruitment is being conducted through joint arrangements between 
hospitals and group practices or solo practitioners. Typically, these 
arrangements involve payments from hospitals to group practices or solo 
practitioners to assist the group practice or solo practitioner in 
recruiting a new physician. Managed care organizations are also 
involved in joint practitioner recruitment activities with hospitals 
and physician practices. On the one hand, these arrangements can be 
efficient and cost effective means of recruiting needed practitioners 
to an underserved community. Moreover, many new practitioners prefer 
joining an existing group practice to starting a solo practice. On the 
other hand, these arrangements can be used to disguise payments for 
referrals from the group practice or solo practice to the hospital.
    We are not persuaded that a safe harbor can be crafted that would 
protect legitimate joint recruiting arrangements of the type described 
above without sweeping in sham arrangements that are actually disguised 
payments for referrals. However, we want to make clear that joint 
recruitment arrangements are not necessarily illegal and must be 
evaluated on a case-by-case basis. Parties seeking further guidance 
about their joint recruitment activities may apply for an advisory 
opinion.
    Comment: One commenter stated that the sixth standard of the 
proposed safe harbor for physician recruitment, which prohibits 
benefits that vary based on the volume or value of expected referrals, 
would eliminate income guarantees from safe harbor protection, since 
the amount of the funds advanced against the guarantee are generally 
not determined until the new physician has commenced his or her 
practice and the initial income from the practice has been determined. 
According to the commenter, income guarantees are among the most common 
recruitment incentives.
    Response: The anti-kickback statute prohibits payment of any 
remuneration to induce referrals for which payment may be made in whole 
or in part by a Federal health care program. To this end, this safe 
harbor, like others, prohibits payments that are based on the volume or 
value of expected referrals. Recruitment incentives tied to volume or 
value of referrals generated are not immunized by this safe harbor. 
However, where the maximum amount of the income guarantee and the 
formula for determining payment under the guarantee are set in advance 
and not subject to renegotiation, the formula is not tied to volume or 
value of referrals, and the income guarantee otherwise meets the safe 
harbor requirements, the fact that the actual amount that will be paid 
to the practitioner under the guarantee is not known in advance will 
not disqualify the income guarantee from safe harbor protection.
    Comment: One commenter requested clarification as to how the 
recruitment safe harbor would apply to physicians recruited to fill 
medical director positions where, in most cases, the physician is not 
an employee of the facility and is not generally perceived as a source 
of referrals.
    Response: In many circumstances, medical directors are potential 
referral sources and medical director contracts serve as a means to 
reward referrals. There is no special protection for medical directors 
under the practitioner recruitment safe harbor. To be protected, a 
recruitment arrangement must meet all of the standards of the safe 
harbor, including the new patient and underserved patient revenue tests 
(Secs. 1001.952(n)(2) and (8)). In the alternative, a contract for 
medical director services may qualify for protection under the employee 
compensation or personal services contract safe harbors 
(Secs. 1001.952(i) and (d)).
    Comment: Several commenters urged us to make the safe harbor 
consistent with IRS Revenue Ruling 97-21 on physician recruitment.
    Response: The IRS Revenue Ruling 97-21 on physician recruitment by 
a tax-exempt hospital is intended to provide guidance on recruitment 
activities that are consistent with a hospital's operations as a tax-
exempt entity. The revenue ruling sets forth standards for determining 
whether a

[[Page 63545]]

tax-exempt hospital's practitioner recruitment activities jeopardize 
its tax-exempt status. Under the revenue ruling, a hospital does not 
jeopardize its tax-exempt status if its recruitment payments are 
reasonably related to its tax-exempt purpose. However, this standard is 
an insufficient safeguard against improper payments for referrals. A 
payment that is reasonably related to a hospital's tax-exempt purpose, 
but is tied to the volume or value of expected referrals, will likely 
run afoul of the anti-kickback statute and is not appropriate for safe 
harbor protection.
    Comment: One commenter asked us to reaffirm that not all physician 
recruitment activities necessarily violate the anti-kickback statute, 
and that recruitment programs not meeting the safe harbor criteria will 
be analyzed on a case-by-case basis.
    Response: The failure of a particular arrangement to comply with 
the safe harbor does not determine whether or not the arrangement 
violates the anti-kickback statute. Neither does such failure determine 
whether an enforcement action is warranted. As a general rule, 
remuneration to physicians, including recruitment, should be consistent 
with fair market value for necessary services rendered by the 
physician. The practitioner recruitment safe harbor protects certain 
payment practices that may depart from this general rule if particular 
criteria established by the safe harbor are met. Arrangements that do 
not qualify for the safe harbor must be evaluated on a case-by-case 
basis to determine whether there has been a violation and whether an 
enforcement proceeding is warranted.
5. Obstetrical Malpractice Insurance Subsidies
    Summary of Proposed Rule: We proposed a new safe harbor to permit a 
hospital or other entity to pay all or part of the malpractice 
insurance premiums for practitioners engaging in obstetrical practice 
in primary health care professional shortage areas. For purposes of 
this safe harbor, we included certified nurse midwives as defined in 
section 1861(gg) of the Act in the definition of ``practitioner.'' We 
limited this safe harbor to the provision of malpractice insurance 
regulated by State law. We explained that nothing in the safe harbor 
would authorize payment by the Federal health care programs to 
hospitals or other institutional providers for costs they may incur in 
providing malpractice insurance. Any allowable costs for such insurance 
are governed strictly by Federal health care program rules.
    We solicited comments on specific, narrowly-drawn circumstances 
where this safe harbor provision could be expanded to help assure 
beneficiary access to services that may be significantly affected by 
the cost of malpractice insurance premiums. In addition, we solicited 
views regarding the feasibility of expanding this safe harbor to 
protect malpractice insurance programs that are not regulated under 
State law, but which are operated directly by providers.
    Summary of Final Rule: This safe harbor is intended to facilitate 
access to obstetrical services for Federal health care program 
beneficiaries in primary care health professional shortage areas by 
protecting from the reach of the anti-kickback statute subsidized 
malpractice insurance for practitioners who are primarily engaged in 
obstetrical practices in those areas. We have adopted the proposed safe 
harbor with the following modifications:
     We are expanding the safe harbor to cover self-funded 
insurance plans.
     We are reducing from 85 percent to 75 percent the 
proportion of the practitioner's obstetrical patients who must be 
treated under the subsidized insurance coverage.
     We are eliminating the phrase ``be in a position to make 
or influence referrals'' from Sec. 1001.952(o)(3), since most, if not 
all, insurers require practitioners to be in a position to perform 
obstetrical services as a condition of coverage.
     We are requiring that protected practitioners be engaged 
in obstetrics as a routine part of their practices. Full subsidies for 
obstetrical malpractice insurance may be paid for full-time 
obstetricians or nurse midwives; for part-time practitioners in 
obstetrics, the safe harbor protects only costs attributable to the 
obstetrical portion of their practices.
Comments and Responses
    Comment: One commenter recommended expanding the phrase 
``practitioners engaging in obstetrical practice'' to include 
explicitly family practitioners and other physicians who may deliver 
babies, in order to make clear that the safe harbor covers insurance 
subsidies for such individuals.
    Response: We agree that limited safe harbor protection is 
appropriate for family practitioners and other physicians and certified 
nurse midwives who deliver babies as a routine part of their medical 
practices. Accordingly, we are amending the proposed regulation to 
provide for limited coverage for ``a practitioner who engages in 
obstetrical practice as a routine part of his or her medical 
practice.'' For purposes of this safe harbor, by ``routine'' we mean 
that the practitioner must provide substantial and regular obstetrical 
services; we do not intend to protect obstetrical insurance subsidies 
for practitioners who practice obstetrical medicine on only an 
occasional basis.
    For practitioners who are not full-time obstetricians or certified 
nurse midwives, we will protect payments for obstetrical malpractice 
insurance only. We will not protect subsidies for other types of 
medical malpractice liability insurance. Thus, for these practitioners 
the protected subsidy will be the difference between the cost of 
malpractice insurance that includes obstetrical coverage and the cost 
of malpractice insurance that does not include such coverage. 
Similarly, the safe harbor will protect certain insurance subsidies 
paid on behalf of practitioners engaged in obstetrical practices part-
time in a HPSA and part-time elsewhere. We have in mind, in particular, 
urban obstetricians who may practice several days in an inner-city 
clinic (in a HPSA) and several days in areas that are not underserved. 
For these practitioners, the safe harbor protects insurance subsidies 
for obstetrical malpractice insurance coverage related exclusively to 
services provided in the HPSA. If the practitioner is covered by a 
single insurance policy or program, the safe harbor covers subsidies 
for that portion of the insurance premium that is reasonably allocable 
to obstetrical services provided in a HPSA.
    Comment: We solicited comments on specific, narrowly-drawn 
circumstances where this safe harbor provision could be expanded to 
help assure beneficiary access to services that may be significantly 
affected by the cost of malpractice insurance premiums. In response, 
one commenter recommended expanding this safe harbor to include neuro, 
cardiovascular and orthopedic surgeons. Two commenters recommended 
enlarging the safe harbor to cover malpractice insurance coverage for 
pediatricians. A commenter also recommended expanding the safe harbor 
to cover emergency room coverage by high risk medical specialists in 
situations where a hospital is able to certify that a viable panel of 
specialists is only possible if the hospital can provide this benefit. 
One hospital association expressed concern that a safe harbor only for 
insurance subsidies for obstetrical practitioners may create 
unnecessary concern in the industry that all other types of 
practitioner malpractice insurance subsidies may be suspect. The

[[Page 63546]]

association recommended greatly expanding the proposed safe harbor or 
deleting it as written.
    Response: This safe harbor is intended to promote access to 
obstetrical services for Federal health care program beneficiaries and 
others in underserved areas. Although we solicited comments on 
expanding this safe harbor, we are not persuaded at this time that 
there are compelling reasons to expand it beyond malpractice insurance 
subsidies for practitioners engaging in obstetrical practices. This 
safe harbor does not call into question the legality of all other types 
of practitioner malpractice insurance subsidies. Such subsidies may 
qualify for protection under other safe harbors, such as practitioner 
recruitment, personal services contracts or employee compensation 
(Secs. 1001.952(n), (d), and (i)). Moreover, as we have previously 
stated, the fact that a payment practice does not fall within the ambit 
of a safe harbor does not necessarily mean that the practice violates 
the anti-kickback statute. At the same time, we note that malpractice 
insurance subsidies paid to or on behalf of potential referral sources 
may be suspect under the anti-kickback statute. These arrangements are 
subject to a case-by-case evaluation. The advisory opinion process is 
available for parties seeking OIG guidance on the anti-kickback 
implications of particular insurance subsidy arrangements (See 42 CFR 
part 1008).
    Comment: Several commenters offered views on the geographic scope 
of the safe harbor. One commenter recommended that we expand the scope 
of the safe harbor to protect subsidies in primary care HPSAs and in 
rural areas as defined in 42 CFR 412.62(f)(1)(iii). Another urged 
application of the safe harbor in urban areas. Some commenters noted 
that the HPSA designation process is a volatile, on-going process, and 
that the list of shortage areas is rarely an accurate reflection of 
actual need for health care professionals at a particular point in 
time. Moreover, these commenters believed that dependence on Federal 
designations fails to recognize the role of states in identifying and 
remedying health professional shortage areas. One commenter suggested 
focusing on emergency room admissions of obstetrics patients who have 
no designated primary care practitioner rather than on HPSA data to 
measure community need.
    One commenter raised the question of what happens when the offer of 
subsidized malpractice insurance induces a physician to relocate to a 
HPSA, but the physician's relocation itself serves to remove the 
community's HPSA designation. This commenter proposed substituting a 
``need'' standard, with the appropriate documentation of need for the 
subsidized practitioner left up to the entity providing the subsidy. 
This commenter observed that many current safe harbors use the concept 
of ``fair market value'' without requiring any particular fair market 
value standard to be met, and the health care community for the most 
part understands that documentation is critical to prove fair market 
value in the event a particular transaction is later scrutinized. 
Examples of documentation of ``need'' could include determinations by 
State legislatures, as well as any other appropriate indications of 
need for a particular type of health care professional.
    Response: As described in greater detail above in our responses to 
comments on the practitioner recruitment safe harbor, primary care 
HPSAs may be located in rural or urban areas. We are limiting this safe 
harbor to primary care HPSAs so as to ensure as much as possible that 
the benefits protected by this safe harbor are extended to 
practitioners in areas where there is a well-founded, documented 
shortage of obstetrical practitioners. We are aware that there are and 
have been problems with the HPSA process. We expect that the 
Department's anticipated revision of the process should address many of 
those problems, including providing States with greater input in 
designating shortage areas. We believe that a general ``need'' standard 
could be manipulated in ways that would permit abusive payments in the 
guise of insurance subsidies. We note that nothing in this safe harbor 
prevents protection of malpractice insurance subsidies for 
practitioners engaged in practice outside primary care HPSAs as part of 
an arms-length, fair market value compensation package that meets the 
requirements of the personal services safe harbor or the employee 
compensation exception to the anti-kickback statute (Secs. 1001.952(d) 
and (c); 42 U.S.C. 1320a-7b(b)(3)(B)).
    Comment: One commenter questioned the feasibility of the 
requirement that 85 percent of the practitioner's obstetrical patients 
treated under the insurance coverage must come from certain defined 
underserved populations, noting that compliance with the standard can 
only be determined after the payment of the insurance premium subsidy. 
The commenter observed that obtaining liability coverage necessarily 
precedes treatment of any patients under that coverage. Documenting 
compliance with the standard is particularly problematic where 
insurance subsidies are used as recruiting devices for new or 
relocating practitioners who do not have established patient pools that 
can be measured. One commenter suggested that this problem could be 
solved by deeming the 85 percent test satisfied if the practitioner 
provides a written stipulation that the 85 percent test will be met.
    Response: Upon further review, we believe that an 85 percent test 
is unnecessarily restrictive. Accordingly, we have amended the safe 
harbor to provide that 75 percent of the patients treated must come 
from underserved populations, that is, they must reside in a HPSA or a 
MUA or be part of a MUP, all as defined by HRSA and described above. 
Moreover, we agree that under the test as drafted in the proposed rule, 
it would not be possible for parties seeking safe harbor protection to 
determine whether a payment for an insurance subsidy satisfies the safe 
harbor prior to making the payment. However, we believe that a 
practitioner stipulation is insufficient by itself to ensure that 
appropriate populations are benefitting from the increased access to 
obstetrical care contemplated by this safe harbor. Accordingly, we have 
amended the safe harbor to provide that for the initial coverage 
period, which will be limited to one year, the practitioner must 
certify that he or she has a reasonable basis for believing that he or 
she will meet the 75 percent test for the duration of the coverage 
period. Thereafter, for payments of insurance premiums to be protected, 
the 75 percent standard must have been met for the period covered by 
the preceding insurance premium payment, which coverage period may not 
exceed one year.
    Comment: One commenter recommended eliminating the requirement that 
the insurance subsidy be paid to the insurance provider, rather than 
the subsidized practitioner.
    Response: The requirement that the subsidy be paid to the insurance 
provider is a reasonable means of ensuring that the payment is used for 
the purposes intended by this safe harbor. Permitting a direct cash 
payment to the subsidized practitioner increases the risk that the 
``subsidy'' payment may in fact be a disguised payment for referrals. 
We are not persuaded that payment directly to insurance providers is 
impractical or unduly burdensome on subsidizing entities or subsidized 
practitioners.
    Comment: One commenter believed that the requirement that 
practitioners

[[Page 63547]]

treat Medicaid patients is superfluous, because the anti-kickback 
statute is only implicated where Medicaid and Medicare referrals are in 
fact made. Another commenter recommended amending the requirement to 
provide that a physician may not discriminate against Medicaid patients 
to the extent the physician is able to see new patients in his or her 
practice. Otherwise, the safe harbor would preclude protection for 
physicians whose current practices may be full.
    Response: These issues are addressed above with respect to the safe 
harbor regarding physician recruitment.
    Comment: A commenter observed that some professional liability 
underwriters, especially in states with harsh liability climates, do 
not have the surpluses required to provide coverage beyond certain 
minimum limits, and suggested that the safe harbor should protect 
hospital underwriting of all physician liability above certain limits 
in order to protect physicians against large awards against them. The 
commenter suggested limits of $100,000 to $300,000.
    Response: This proposal, which essentially would cover the entire 
range of practitioner services, does not meet our requirements for 
proposals of specific, narrowly-drawn circumstances where the safe 
harbor could be expanded to help assure beneficiary access to services 
significantly affected by the cost of malpractice insurance premiums.
    Comment: Several commenters suggested the safe harbor be extended 
to protect payment of premiums or establishment of reserves in self-
funded programs underwritten and operated by hospitals and other 
providers, including risk-retention groups. These commenters point out 
that many hospitals and other entities elect self-insurance programs 
for physicians on the medical staff, instead of purchasing commercial 
insurance from independent third parties. The commenters noted that 
self-insurance programs, including risk-retention groups, were 
established in response to the unavailability or unaffordability of 
malpractice insurance for certain areas or specialities. Commenters 
believed that these programs keep health care costs to a more 
reasonable level and ought to be encouraged and protected. They argued 
that the benefit to the physician is the same whether insurance is 
provided through a self-funded program or commercial third party 
insurance, and thus hospitals or other health care providers with self-
funded programs should not be deprived of protection. Self-insured 
hospitals are not in a position to make payments to another entity that 
provides insurance. To assure that only bona fide programs are 
shielded, one commenter recommended that only programs that have been 
certified by a qualified actuary as adequate relative to the risk 
assumed should be afforded safe harbor protection. Finally, several 
commenters suggested expanding the safe harbor to include offshore 
insurance products.
    Response: We solicited comments regarding the feasibility of 
expanding the safe harbor to protect subsidies for insurance under 
programs operated directly by providers. As indicated in the preamble 
to the 1993 proposed rule, our concern was that the subsidized 
insurance policies be bona fide to ensure that this safe harbor is not 
used as a mechanism to disguise improper inducements to practitioners. 
The requirement that the insurance be bona fide also protects 
practitioners and patients. We agree that from the practitioner's 
perspective, the benefit derived from an insurance subsidy is the same 
whether the insurance is provided by commercial third party insurance 
or a self-funded program. Accordingly, we have amended the safe harbor 
to extend protection to bona fide self-funded obstetrical malpractice 
insurance programs, including risk-retention groups that qualify under 
the Liability Risk Retention Act, 15 U.S.C. 3901, and to bona fide 
offshore insurance products. Although we are not defining the full 
scope of bona fide insurance products, we believe that certification by 
a qualified actuary that the program is adequate relative to the risk 
insured would be an indicator of a bona fide insurance program.
    Comment: One commenter suggested that the prohibition on requiring 
a physician to ``be in a position to make or influence referrals'' 
limits the ability of facilities to require that physicians maintain 
medical licenses and be in a position to practice medicine and 
recommended that the prohibition be eliminated.
    Response: Nothing in these safe harbor regulations is intended to 
prevent hospitals and other health care facilities from requiring that 
physicians and other practitioners who perform services at or for such 
facilities be fully licensed and able to practice medicine. In 
particular, we recognize that proper licensure and qualifications to 
practice medicine are prerequisites for obtaining malpractice 
insurance. We are persuaded that the language ``be in a position to 
make or influence referrals to'' is unnecessary in the context of a 
safe harbor for obstetrical malpractice insurance subsidies. Therefore, 
we have amended the third condition of the safe harbor to prohibit any 
requirement that practitioners ``make referrals to, or otherwise 
generate business for, the entity as a condition for receiving the 
benefits.''
    Comment: One commenter expressed concern that the safe harbor does 
not adequately protect group practices.
    Response: A group practice that provides obstetrical malpractice 
insurance subsidies may qualify as an ``entity'' for purposes of this 
safe harbor. Moreover, as indicated above, we have amended the safe 
harbor to permit entities to subsidize insurance through self-funded 
insurance programs. This safe harbor is not intended to protect group 
practices for any payment practice that does not satisfy all of the 
safe harbor criteria, including the requirements that the subsidized 
practitioner practice in a primary care HPSA and that 75 percent of the 
obstetrical patients treated reside in underserved areas.
6. Referral Agreements for Specialty Services
    Summary of Proposed Rule: We proposed a new safe harbor for 
referral agreements for specialty services. This safe harbor would 
protect arrangements under which an individual or entity agrees to 
refer a patient to another individual or entity for specialty services 
in return for an agreement on the part of the party receiving the 
referral to refer the patient back at a certain time or under certain 
circumstances. For example, a primary care physician and a specialist 
(to whom the primary care physician has made a referral) may agree 
that, when their patient reaches a particular stage of recovery, the 
primary care physician should resume treatment of the patient.
    We proposed three standards that such a referral arrangement would 
have to meet to fit within the safe harbor. First, the service for 
which the initial referral is made must not be within the medical 
expertise of the referring party and must be within the special 
expertise of the party receiving the referral. Second, the parties 
could receive no payment from each other for the referral. Third, the 
only exchange of value permitted between the parties would be the 
monetary remuneration each party would receive directly from third-
party payers or the patient as compensation for professional services 
furnished by each party to the patient.
    We proposed an accommodation in this safe harbor for members of the 
same group practice who refer to one another. Where the referring and 
receiving physicians belong to the same group practice, revenues are 
shared among

[[Page 63548]]

members of the group practice, and thus it appears that the referring 
physician receives remuneration for the referral. However, such 
financial benefits are an inherent part of belonging to a group 
practice, and therefore we proposed protecting such remuneration if the 
group practice met the definition of ``group practice'' in section 
1877(h)(4) of the Act.
    Summary of Final Rule: Because of the potential for abuse when the 
referring physician and the specialty physician receiving the referral 
split a global payment from a Federal health care program, we are 
revising the regulation specifically to exclude remuneration received 
in such circumstances from the safe harbor. We are also adding a 
requirement that the condition for the referral back to the originating 
referral source must be clinically appropriate. We are otherwise 
promulgating the safe harbor as proposed.

Comments and Responses

    Comment: A number of commenters generally supported the approach of 
the proposed safe harbor, stating that it would adequately protect 
legitimate referral arrangements while sufficiently discouraging 
illegitimate ones. They suggested that the safe harbor would be useful 
because it would assure convenient access to follow-up care in 
communities where there are no specialists. However, several commenters 
suggested that insulating referrals for specialty services from the 
kickback statute would encourage arrangements that might compromise the 
quality of patient care, because arrangements between the primary 
physician and the referral specialist might require a patient to be 
referred back to the primary physician, regardless of whether it would 
be clinically appropriate. Further, specialty referral arrangements 
could deny patients the right to choose their providers.
    Response: We share the commenters' concerns that patient referrals 
be made only under clinically appropriate circumstances. Indeed, 
clinical appropriateness should be the touchstone of all referrals, 
specialty or otherwise. To emphasize the importance of clinical 
appropriateness as a consideration, we are revising the safe harbor to 
reflect that the ``mutually agreed upon time or circumstance'' for the 
receiving specialist to return the patient must be clinically 
appropriate. We are not further defining ``clinically appropriate,'' 
however, because whether a referral is clinically appropriate will 
depend on the particular facts and circumstances. Depending on 
circumstances, an agreement to refer a patient back on a date certain, 
without regard to medical condition, would be questionable.
    We also share the commenters' concerns regarding the preservation 
of patient freedom of choice. Patient freedom of choice may be 
compromised, however, if patients are not given access to needed 
specialty care. There is a legitimate concern if physicians are 
disinclined to refer patients to specialists because of fear of losing 
patients to those specialists permanently. Thus, for example, the safe 
harbor would protect an agreement between a general cardiologist and a 
cardiologist with special expertise on a particular medical condition 
whereby (i) the general cardiologist would refer a patient to the 
specialist for treatment of the particular medical condition about 
which the specialist has expertise, and (ii) the specialist--who also 
has a general cardiology practice--would refer the patient back to the 
originating cardiologist upon completion of the specialty treatment.
    We want to make clear that protection under this safe harbor is 
limited to referral arrangements for patients of the physician making 
referrals to the specialist. The safe harbor does not protect 
generalized cross-referral arrangements of the ``you send me your 
patients and I'll send you mine'' variety. Rather, the safe harbor 
protects an agreement to refer patients to a specialist in return for 
an agreement or understanding that the specialist will refer those same 
patients back at the agreed upon time or circumstance (e.g., completion 
of the specialist services for which the patient was referred). In 
other words, assuming all safe harbor conditions are satisfied (and 
there is no split of a global fee, as discussed below), the safe harbor 
will protect agreements along the lines of ``I'll send you my patients 
who need your specialist services if you agree to send them back to me 
upon completion of your services.''
    On balance, we believe that a safe harbor under the anti-kickback 
statute for referrals for specialty services is appropriate and will 
protect many legitimate referral arrangements that benefit patients, 
including those living in remote areas. Where no payment is made 
between the referring and receiving parties (and there is no splitting 
of a Federal health care program global fee, as discussed below), we 
believe the specialty referral arrangements protected by the safe 
harbor pose no more than a minimal risk of illegal remuneration for 
referrals in violation of the anti-kickback statute.
    Comment: Ophthalmology providers were especially concerned that the 
proposed safe harbor may encourage the development of potentially 
abusive referral arrangements with optometrists, who wish to receive 
the post-operative portion of the Medicare global fee for eye surgery. 
The ophthalmologists allege that many optometrists refer patients to 
ophthalmologists on the condition that patients be referred back to the 
optometrists for post-surgical care, often without regard to clinical 
appropriateness. Some ophthalmologists claimed that optometrists 
generally control referrals and therefore ophthalmologists, for whom 
surgical procedures are the mainstay of their practices, must acquiesce 
to these return referral arrangements in order to get patients. One 
commenter described a situation where an optometrist/ophthalmologist 
network referred patients for cataract surgery only to ophthalmologists 
who would agree to split the global surgical fee by referring the 
patient back to the optometrist for post-operative care. The 
optometrists referred their patients to an ophthalmologic surgery 
center 200 miles away when there were at least 50 available 
ophthalmologists from 7 to 35 miles away. In such circumstances, the 
ophthalmologists do not do any of the follow-up care for the patients 
and the post-operative portion of the global fee is paid to the 
optometrists. The commenter, an ophthalmologist, had provided some of 
the patients referred by the optometrist network with a second opinion 
and found that none required surgery.
    Response: The serious issues raised by the ophthalmologists about 
apparently routine or blanket agreements to split global Medicare fees 
with referring optometrists (as well as other information that has come 
to our attention from industry and Government sources) has caused us to 
modify the scope of this safe harbor. We have revised the safe harbor 
regulation to preclude protection for arrangements between parties that 
share or split a global or bundled payment from a Federal health care 
program for the referred patient. Thus, for example, the safe harbor 
does not protect referral arrangements where the parties bill Medicare 
using the 54/55 modifiers to indicate an 80 percent-20 percent split of 
the surgical fee for cataract surgery.
    By limiting the safe harbor, we do not mean to suggest that all 
specialty referral arrangements involving splitting of global fees are 
illegal under the anti-kickback statute. Whether a particular

[[Page 63549]]

referral arrangement for specialty services violates the anti-kickback 
statute depends on a case-by-case analysis of all of the facts and 
circumstances, including, but not limited to, whether the specialty 
services are medically necessary, whether the timing of the referrals 
is clinically appropriate, and whether the services performed are 
commensurate with the portion of the global fee received.
    Comment: One commenter questioned whether the anti-kickback statute 
applies to specialty referral arrangements where no kickback, rebate or 
other consideration is made for the referral.
    Response: As the United States Court of Appeals for the First 
Circuit has recognized, the opportunity to generate a fee may 
constitute the requisite remuneration under the statute, even if no 
payment or rebate is paid for a referral. For instance, the opportunity 
to split a global surgical fee, as in the hypothetical described in the 
previous comment, is an example of a circumstance in which an 
opportunity to generate a fee is something of value to a referring 
party apart from any payment for the referral. Giving a person an 
opportunity to earn money may well be an inducement to that person to 
channel potential Medicare patients toward a particular recipient. (See 
United States v. Bay State Ambulance and Hospital Rental Service, Inc., 
874 F.2d 20, 29 (1st Cir. 1989)).
    Comment: A managed care organization trade association commented 
that managed care organization arrangements often require the referral 
of patients to other contracting providers as a condition of the 
provider's compensation and that the anti-kickback statute should not 
be construed so broadly as to encompass these types of managed care 
arrangements. In addition, a managed care plan commented that the safe 
harbor should be expanded to exempt expressly referrals made within an 
HMO, or that the OIG should establish a new safe harbor for referrals 
made by HMO-participating physicians.
    Response: The anti-kickback statute is broad and technically may 
cover many managed care arrangements that are common in the marketplace 
today. However, we have recognized that most of these arrangements 
involving HMOs do not create the potential for fraud or abuse and have 
created safe harbors aimed at those arrangements. Currently, 
Sec. 1001.952(m) protects certain price reductions offered to health 
plans. In addition, as part of HIPAA, Congress enacted a statutory 
exception for managed care arrangements that put individuals or 
entities at substantial financial risk (42 U.S.C. 1320a-
7b(b)(3)(F)).\5\ These safe harbors offer broad protection under the 
anti-kickback statute to HMOs.
---------------------------------------------------------------------------

    \5\ See footnote 2.
---------------------------------------------------------------------------

    Comment: One commenter urged that we clarify the safe harbor to 
make clear that it covers primary care practitioners in rural areas who 
do not belong to group practices.
    Response: The safe harbor applies to solo practitioners, as well as 
members of group practices. To be protected by the safe harbor, solo 
practitioners may not give anything of value to a specialist in 
exchange for the referral back of his or her original patient, except 
for the opportunity to receive compensation for services directly from 
third parties or patients. Members of bona fide group practices who 
refer among themselves are not similarly restricted; they may share 
revenues from specialty services performed as a result of the intra-
group referrals.
7. Cooperative Hospital Service Organizations
    Summary of Proposed Rule: We proposed a new safe harbor to protect 
cooperative hospital service organizations (CHSOs) that qualify under 
section 501(e) of the Internal Revenue Code. These organizations are 
formed by two or more tax exempt hospitals (known as ``patron 
hospitals'') to provide specifically enumerated services, such as 
purchasing, billing, and clinical services solely for the benefit of 
patron hospitals. These entities are required by law to distribute all 
of their net earnings to patrons on the basis of services performed (26 
U.S.C. 501(e)(2)).
    The safe harbor would protect payments from a patron hospital to a 
CHSO to support the CHSO's operational costs and those payments from a 
CHSO to a patron hospital that are required by IRS rules. As a 
condition of protection, the CHSO must be wholly owned by its patron 
hospitals, in order to avoid potentially abusive joint venture 
arrangements formed under the guise of CHSOs. To the extent a CHSO acts 
as a group purchasing agent or a patron hospital obtains discounts as a 
result of the CHSO's activities, CHSOs and patron hospitals must comply 
with the respective safe harbor provisions applicable to group 
purchasing organization and discounts (Secs. 1001.952(j) and (h)) to be 
fully protected. We solicited comments regarding the various types of 
payment formula (which comply with the IRS rules) that are used by 
CHSOs, but did not receive any comments on this issue.
    Summary of Final Rule: We are adopting the rule as proposed, with 
some minor technical changes.
Comments and Responses
    Comment: We requested comments on the extent to which we should 
expand this provision to protect other similar entities specifically 
organized under Federal or State laws. Four comments were submitted 
suggesting that the safe harbor be expanded to include other types of 
cooperative organizations that qualify under subchapter T of the 
Internal Revenue Code (sections 1381 to 1388). One commenter also 
requested that the safe harbor be expanded to include other types of 
hospital cooperative organizations.
    Response: We decline to extend safe harbor protection to 
cooperative organizations that do not qualify under section 501(e). 
Unlike CHSOs complying with that section, there are few limitations 
applicable to cooperative organizations qualifying under subchapter T. 
There are no limits on the types of services that may be shared, nor 
are there restrictions on the identity of shareholders. The conditions 
and limitations imposed on tax-exempt entities, including the limits on 
private inurement, do not apply to subchapter T organizations. We 
believe the limitations imposed under section 501(e) are necessary to 
protect against potentially abusive joint ventures or referral 
arrangements. Additionally, in view of the small number of comments we 
received concerning non-hospital cooperatives and the fact that we 
received only a single comment requesting broader hospital coverage, we 
are not persuaded of the need to broaden the safe harbor to other types 
of hospital or non-hospital cooperatives. Accordingly, we are adopting 
the proposed safe harbor for CHSOs without modification.
8. Modification of Sale of Practice Safe Harbor
    Summary of Proposed Rule: We solicited comments on the desirability 
of modifying the existing sale of practice safe harbor set forth in 
Sec. 1001.952(e) to accommodate transactions involving the rural 
hospital purchase of a physician practice as part of a practitioner 
recruitment program that complies with the safe harbor we are 
establishing to protect practitioner recruitment. The existing sale of 
practice safe harbor did not protect such purchases. We had been 
informed that many rural hospitals buy and ``hold'' the practice of a 
retiring physician, often using locum tenens

[[Page 63550]]

physicians until a new physician can be recruited to replace the 
retiring one.
    Summary of Final Rule: We are modifying the existing sale of 
practice safe harbor to protect payments made to a practitioner by a 
hospital or other entity to purchase the practitioner's practice where 
the following conditions are satisfied:
     The sale is completed within 3 years.
     After completion of the sale, the practitioner who is 
selling his or her practice will not be in a professional position to 
make referrals to, or otherwise generate business for, the purchasing 
entity for which payment may be made by a Federal health care program.
     The practice being acquired must be located in a HPSA for 
the practitioner's specialty area.
     Commencing at the time of the sale, the purchasing entity 
must diligently and in good faith engage in recruitment activities that 
(i) may reasonably be expected to result in the recruitment of a new 
practitioner to take over the acquired practice within 1 year of 
completion of the sale, and (ii) satisfy the conditions of the new 
practitioner recruitment safe harbor (Sec. 1001.952(n)).
Comments and Responses
    Comment: Commenters generally supported our proposed modification 
to the sale of practice safe harbor. Some commenters urged that the 
safe harbor be extended to sales of practices in urban underserved 
areas. One commenter stated that the problem of preserving and 
maintaining a retiring physician's practice until a new physician can 
be recruited and established exists in both urban and rural HPSAs. 
Because of these difficulties, a hospital may find itself in the 
position of ``holding'' a practice for some time. One commenter 
suggested that in the case of small, rural hospitals with tight cash 
flow, the payment period under the safe harbor should be 3 to 5 years, 
rather than 1 year as set forth in the existing safe harbor.
    Several commenters stated that the existing sale of practice safe 
harbor is too narrow. Some commenters suggested that the safe harbor be 
expanded to include entities other than hospitals, such as hospital 
systems and other health care organizations. These commenters urged the 
OIG to modify the safe harbor to protect, among other arrangements, 
sales of practices in accordance with fair market value transactions 
and sales of practices to entities in connection with the process of 
creating integrated health care delivery systems. One commenter urged 
the OIG to modify the safe harbor to provide that reasonable valuation 
of all assets, tangible and intangible, may be used to determine the 
market value of the practice.
    Response: Based on the comments we received to our solicitation and 
after further consideration, we are persuaded that a need exists to 
protect certain practice acquisitions by hospitals and other entities 
located in rural and urban underserved areas that are engaged in 
practitioner recruitment programs, and that these arrangements can be 
protected without concurrently immunizing potentially fraudulent or 
abusive practices. Specifically, we are modifying the sale of practice 
safe harbor to protect acquisitions of the practices of physicians in 
underserved areas who are retiring or relocating a distance that would 
preclude them from being in a position to make referrals to the 
purchasing entity, if the acquisitions occur as part of a practitioner 
recruitment program that qualifies for protection under the safe harbor 
for practitioner recruitment contained in these regulations. We are 
requiring that the physician be retired from the practice of medicine 
or otherwise no longer in a position to generate referrals for the 
hospital. A purchase of a practice from a physician potentially still 
in a position to make referrals to the purchasing entity might result 
in abusive payments to induce referrals of business from the 
physician's new practice. Relocation a significant distance from the 
practice being sold is an indicator that a physician is no longer in a 
position to refer patients. We agree that a longer payment period is 
appropriate in the context of this safe harbor; accordingly, we are 
establishing a 3 year period for completion of the sale from the date 
of the first agreement pertaining to the sale.
    As a result, to be protected, a sale of practice by a practitioner 
must meet all of the following conditions: (1) The period from the date 
of the first agreement pertaining to the sale to the completion of the 
sale is not more than 3 years; (2) following the sale, the practitioner 
may not be in a position to make or influence referrals to, or 
otherwise generate business for, the purchasing entity for which 
payment may be made in whole or in part under a Federal health care 
program; (3) the practice being acquired must be located in a HPSA for 
the practitioner's specialty area; (4) commencing at the time of the 
first agreement pertaining to the sale, the purchasing entity must 
diligently and in good faith engage in commercially reasonable 
recruitment activities that (i) may reasonably be expected to result in 
the recruitment of a new practitioner to take over the acquired 
practice within a 1 year period, and (ii) will satisfy the conditions 
of the practitioner recruitment safe harbor at Sec. 1001.952(n).
    We are not inclined at this time to modify the sale of practice 
safe harbor further. While we do not intend to stand in the way of 
integrated delivery system acquisitions of practices, we are concerned 
that many such arrangements may provide incentives for overutilization, 
increased billings to the Federal programs, and inappropriate steering 
of patients in circumstances where the Federal health care programs pay 
on a fee-for-service basis. Moreover, we remain of the opinion that 
payments for ``intangibles'' can easily be used to disguise payments 
for referrals of Federal health care program business, and therefore we 
are unwilling to provide safe harbor protection for any particular 
valuation methodology.

III. Regulatory Impact Statement

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

    The Office of Management and Budget has reviewed this 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 an economically significant 
regulatory action. Executive Order 12866 direct 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 a 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

[[Page 63551]]

burden. We believe that this final rule should have no significant 
economic impact. 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 State, 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 some of 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 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 final regulations are 
voluntary and impose no new reporting or recordkeeping requirements on 
health care providers necessitating clearance by OMB.

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 set forth below:

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 as follows:
    a. By republishing the introductory text;
    b. Revising paragraph (a), introductory text;
    c. Republishing paragraph (a)(1), introductory text;
    d. Revising paragraphs (a)(1)(ii) and (iv), (a)(2)(i), (vi) and 
(vii);
    e. Adding a new paragraph (a)(3)
    f. Redesignating the closing definitional paragraph in paragraph 
(a); as paragraph (a)(4) and revising it;
    g. Revising paragraph (b), and introductory text, and paragraph 
(b)(2) and adding a new paragraph (b)(6);
    h. Revising paragraph (c), and introductory text, and paragraph 
(c)(2) and adding a new paragraph (c)(6);
    i. Revising paragraph (d), introductory text, and paragraph (d)(2) 
and adding a new paragraph (d)(7);
    j. Revising paragraph (e);
    k. Republishing paragraph (f), introductory text, and revising 
paragraph (f)(2);
    l. Revising paragraph (h); and
    m. Adding new paragraphs (n) through (s).
    The additions and revisions to Sec. 1001.952 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:
    (a) Investment interests. As used in section 1128B of the Act, 
``remuneration'' does not include any payment that is a return on an 
investment interest, such as a dividend or interest income, made to an 
investor as long as all of the applicable standards are met within one 
of the following three categories of entities:
    (1) If, within the previous fiscal year or previous 12 month 
period, the entity possesses more than $50,000,000 in undepreciated net 
tangible assets (based on the net acquisition cost of purchasing such 
assets from an unrelated entity) related to the furnishing of health 
care items and services, all of the following five standards must be 
met--
* * * * *
    (ii) The investment interest of an investor in a position to make 
or influence referrals to, furnish items or services to, or otherwise 
generate business for the entity must be obtained on terms (including 
any direct or indirect transferability restrictions) and at a price 
equally available to the public when trading on a registered securities 
exchange, such as the New York Stock Exchange or the American Stock 
Exchange, or in accordance with the National Association of Securities 
Dealers Automated Quotation System.
* * * * *
    (iv) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor in the entity) must not 
loan funds to or guarantee a loan for an investor who is in a position 
to make or influence referrals to, furnish items or services to, or 
otherwise generate business for the entity if the investor uses any 
part of such loan to obtain the investment interest.
* * * * *
    (2) * * *
    (i) No more than 40 percent of the value of the investment 
interests of each class of investment interests may be held in the 
previous fiscal year or previous 12 month period by investors who are 
in a position to make or influence referrals to, furnish items or 
services to, or otherwise generate business for the entity. (For 
purposes of paragraph (a)(2)(i) of this section, equivalent classes of 
equity investments may be combined, and equivalent classes of debt 
instruments may be combined.)
* * * * *
    (vi) No more than 40 percent of the entity's gross revenue related 
to the furnishing of health care items and services in the previous 
fiscal year or previous 12-month period may come from referrals or 
business otherwise generated from investors.
    (vii) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor in the entity) must not 
loan funds to or guarantee a loan for an investor who is in a position 
to make or influence referrals to, furnish items or services to, or 
otherwise generate business for the

[[Page 63552]]

entity if the investor uses any part of such loan to obtain the 
investment interest.
* * * * *
    (3)(i) If the entity possesses investment interests that are held 
by either active or passive investors and is located in an underserved 
area, all of the following eight standards must be met--
    (A) No more than 50 percent of the value of the investment 
interests of each class of investments may be held in the previous 
fiscal year or previous 12-month period by investors who are in a 
position to make or influence referrals to, furnish items or services 
to, or otherwise generate business for, the entity. (For purposes of 
paragraph (a)(3)(i)(A) of this section, equivalent classes of equity 
investments may be combined, and equivalent classes of debt instruments 
may be combined.)
    (B) The terms on which an investment interest is offered to a 
passive investor, if any, who is in a position to make or influence 
referrals to, furnish items or services to, or otherwise generate 
business for the entity must be no different from the terms offered to 
other passive investors.
    (C) The terms on which an investment interest is offered to an 
investor who is in a position to make or influence referrals to, 
furnish items or services to, or otherwise generate business for the 
entity must not be related to the previous or expected volume of 
referrals, items or services furnished, or the amount of business 
otherwise generated from that investor to the entity.
    (D) There is no requirement that a passive investor, if any, make 
referrals to, be in a position to make or influence referrals to, 
furnish items or services to, or otherwise generate business for the 
entity as a condition for remaining as an investor.
    (E) The entity or any investor must not market or furnish the 
entity's items or services (or those of another entity as part of a 
cross-referral agreement) to passive investors differently than to non-
investors.
    (F) At least 75 percent of the dollar volume of the entity's 
business in the previous fiscal year or previous 12-month period must 
be derived from the service of persons who reside in an underserved 
area or are members of medically underserved populations.
    (G) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor in the entity) must not 
loan funds to or guarantee a loan for an investor who is in a position 
to make or influence referrals to, furnish items or services to, or 
otherwise generate business for the entity if the investor uses any 
part of such loan to obtain the investment interest.
    (H) The amount of payment to an investor in return for the 
investment interest must be directly proportional to the amount of the 
capital investment (including the fair market value of any pre-
operational services rendered) of that investor.
    (ii) If an entity that otherwise meets all of the above standards 
is located in an area that was an underserved area at the time of the 
initial investment, but subsequently ceases to be an underserved area, 
the entity will be deemed to comply with paragraph (a)(3)(i) of this 
section for a period equal to the lesser of:
    (A) The current term of the investment remaining after the date 
upon which the area ceased to be an underserved area or
    (B) Three years from the date the area ceased to be an underserved 
area.
    (4) For purposes of paragraph (a) of this section, the following 
terms apply. Active investor means an investor either who is 
responsible for the day-to-day management of the entity and is a bona 
fide general partner in a partnership under the Uniform Partnership Act 
or who agrees in writing to undertake liability for the actions of the 
entity's agents acting within the scope of their agency. Investment 
interest means a security issued by an entity, and may include the 
following classes of investments: shares in a corporation, interests or 
units in a partnership or limited liability company, bonds, debentures, 
notes, or other debt instruments. Investor means an individual or 
entity either who directly holds an investment interest in an entity, 
or who holds such investment interest indirectly by, including but not 
limited to, such means as having a family member hold such investment 
interest or holding a legal or beneficial interest in another entity 
(such as a trust or holding company) that holds such investment 
interest. Passive investor means an investor who is not an active 
investor, such as a limited partner in a partnership under the Uniform 
Partnership Act, a shareholder in a corporation, or a holder of a debt 
security. Underserved area means any defined geographic area that is 
designated as a Medically Underserved Area (MUA) in accordance with 
regulations issued by the Department. Medically underserved population 
means a Medically Underserved Population (MUP) in accordance with 
regulations issued by the Department.
    (b) Space rental. As used in section 1128B of the Act, 
``remuneration'' does not include any payment made by a lessee to a 
lessor for the use of premises, as long as all of the following six 
standards are met--
* * * * *
    (2) The lease covers all of the premises leased between the parties 
for the term of the lease and specifies the premises covered by the 
lease.
* * * * *
    (6) The aggregate space rented does not exceed that which is 
reasonably necessary to accomplish the commercially reasonable business 
purpose of the rental.
* * * * *
    (c) Equipment rental. As used in section 1128B of the Act, 
``remuneration'' does not include any payment made by a lessee of 
equipment to the lessor of the equipment for the use of the equipment, 
as long as all of the following six standards are met--
* * * * *
    (2) The lease covers all of the equipment leased between the 
parties for the term of the lease and specifies the equipment covered 
by the lease.
* * * * *
    (6) The aggregate equipment rental does not exceed that which is 
reasonably necessary to accomplish the commercially reasonable business 
purpose of the rental.
* * * * *
    (d) Personal services and management contracts. As used in section 
1128B of the Act, ``remuneration'' does not include any payment made by 
a principal to an agent as compensation for the services of the agent, 
as long as all of the following seven standards are met--
* * * * *
    (2) The agency agreement covers all of the services the agent 
provides to the principal for the term of the agreement and specifies 
the services to be provided by the agent.
* * * * *
    (7) The aggregate services contracted for do not exceed those which 
are reasonably necessary to accomplish the commercially reasonable 
business purpose of the services.
* * * * *
    (e) Sale of practice. (1) As used in section 1128B of the Act, 
``remuneration'' does not include any payment made to a practitioner by 
another practitioner where the former practitioner is selling his or 
her practice to the latter practitioner, as long as both of the 
following two standards are met--

[[Page 63553]]

    (i) The period from the date of the first agreement pertaining to 
the sale to the completion of the sale is not more than one year.
    (ii) The practitioner who is selling his or her practice will not 
be in a professional position to make referrals to, or otherwise 
generate business for, the purchasing practitioner for which payment 
may be made in whole or in part under Medicare or a State health care 
program after one year from the date of the first agreement pertaining 
to the sale.
    (2) As used in section 1128B of the Act, ``remuneration'' does not 
include any payment made to a practitioner by a hospital or other 
entity where the practitioner is selling his or her practice to the 
hospital or other entity, so long as the following four standards are 
met:
    (i) The period from the date of the first agreement pertaining to 
the sale to the completion date of the sale is not more than three 
years.
    (ii) The practitioner who is selling his or her practice will not 
be in a professional position after completion of the sale to make or 
influence referrals to, or otherwise generate business for, the 
purchasing hospital or entity for which payment may be made in whole or 
in part under Medicare or a State health care program.
    (iii) The practice being acquired must be located in a Health 
Professional Shortage Area (HPSA), as defined in Departmental 
regulations, for the practitioner's specialty area.
    (iv) Commencing at the time of the first agreement pertaining to 
the sale, the purchasing hospital or entity must diligently and in good 
faith engage in commercially reasonable recruitment activities that:
    (A) May reasonably be expected to result in the recruitment of a 
new practitioner to take over the acquired practice within a one year 
period and
    (B) Will satisfy the conditions of the practitioner recruitment 
safe harbor in accordance with paragraph (n) of this section.
    (f) Referral services. As used in section 1128B of the Act, 
``remuneration'' does not include any payment or exchange of anything 
of value between an individual or entity (``participant'') and another 
entity serving as a referral service (``referral service''), as long as 
all of the following four standards are met--
* * * * *
    (2) Any payment the participant makes to the referral service is 
assessed equally against and collected equally from all participants, 
and is only based on the cost of operating the referral service, and 
not on the volume or value of any referrals to or business otherwise 
generated by either party for the other party for which payment may be 
made in whole or in part under Medicare or a State health care program.
* * * * *
    (h) Discounts. As used in section 1128B of the Act, 
``remuneration'' does not include a discount, as defined in paragraph 
(h)(5) of this section, on an item or service for which payment may be 
made, in whole or in part, under Medicare or a State health care 
program for a buyer as long as the buyer complies with the applicable 
standards of paragraph (h)(1) of this section; a seller as long as the 
seller complies with the applicable standards of paragraph (h)(2) of 
this section; and an offeror of a discount who is not a seller under 
paragraph (h)(2) of this section so long as such offeror complies with 
the applicable standards of paragraph (h)(3) of this section:
    (1) With respect to the following three categories of buyers, the 
buyer must comply with all of the applicable standards within one of 
the three following categories--
    (i) If the buyer is an entity which is a health maintenance 
organization (HMO) or a competitive medical plan (CMP) acting in 
accordance with a risk contract under section 1876(g) or 1903(m) of the 
Act, or under another State health care program, it need not report the 
discount except as otherwise may be required under the risk contract.
    (ii) If the buyer is an entity which reports its costs on a cost 
report required by the Department or a State health care program, it 
must comply with all of the following four standards--
    (A) The discount must be earned based on purchases of that same 
good or service bought within a single fiscal year of the buyer;
    (B) The buyer must claim the benefit of the discount in the fiscal 
year in which the discount is earned or the following year;
    (C) The buyer must fully and accurately report the discount in the 
applicable cost report; and
    (D) the buyer must provide, upon request by the Secretary or a 
State agency, information provided by the seller as specified in 
paragraph (h)(2)(ii) of this section, or information provided by the 
offeror as specified in paragraph (h)(3)(ii) of this section.
    (iii) If the buyer is an individual or entity in whose name a claim 
or request for payment is submitted for the discounted item or service 
and payment may be made, in whole or in part, under Medicare or a State 
health care program (not including individuals or entities defined as 
buyers in paragraph (h)(1)(i) or (h)(1)(ii) of this section), the buyer 
must comply with both of the following standards--
    (A) The discount must be made at the time of the sale of the good 
or service or the terms of the rebate must be fixed and disclosed in 
writing to the buyer at the time of the initial sale of the good or 
service; and
    (B) the buyer (if submitting the claim) must provide, upon request 
by the Secretary or a State agency, information provided by the seller 
as specified in paragraph (h)(2)(iii)(B) of this section, or 
information provided by the offeror as specified in paragraph 
(h)(3)(iii)(A) of this section.
    (2) The seller is an individual or entity that supplies an item or 
service for which payment may be made, in whole or in part, under 
Medicare or a State health care program to the buyer and who permits a 
discount to be taken off the buyer's purchase price. The seller must 
comply with all of the applicable standards within the following three 
categories--
    (i) If the buyer is an entity which is an HMO a CMP acting in 
accordance with a risk contract under section 1876(g) or 1903(m) of the 
Act, or under another State health care program, the seller need not 
report the discount to the buyer for purposes of this provision.
    (ii) If the buyer is an entity that reports its costs on a cost 
report required by the Department or a State agency, the seller must 
comply with either of the following two standards--
    (A) Where a discount is required to be reported to Medicare or a 
State health care program under paragraph (h)(1) of this section, the 
seller must fully and accurately report such discount on the invoice, 
coupon or statement submitted to the buyer; inform the buyer in a 
manner that is reasonably calculated to give notice to the buyer of its 
obligations to report such discount and to provide information upon 
request under paragraph (h)(1) of this section; and refrain from doing 
anything that would impede the buyer from meeting its obligations under 
this paragraph; or
    (B) Where the value of the discount is not known at the time of 
sale, the seller must fully and accurately report the existence of a 
discount program on the invoice, coupon or statement submitted to the 
buyer; inform the buyer in a manner reasonably calculated to give 
notice to the buyer of its obligations to report such discount and to 
provide information upon request under paragraph (h)(1) of this 
section; when the value of the discount becomes

[[Page 63554]]

known, provide the buyer with documentation of the calculation of the 
discount identifying the specific goods or services purchased to which 
the discount will be applied; and refrain from doing anything which 
would impede the buyer from meeting its obligations under this 
paragraph.
    (iii) If the buyer is an individual or entity not included in 
paragraph (h)(2)(i) or (h)(2)(ii) of this section, the seller must 
comply with either of the following two standards--
    (A) Where the seller submits a claim or request for payment on 
behalf of the buyer and the item or service is separately claimed, the 
seller must provide, upon request by the Secretary or a State agency, 
information provided by the offeror as specified in paragraph 
(h)(3)(iii)(A) of this section; or
    (B) Where the buyer submits a claim, the seller must fully and 
accurately report such discount on the invoice, coupon or statement 
submitted to the buyer; inform the buyer in a manner reasonably 
calculated to give notice to the buyer of its obligations to report 
such discount and to provide information upon request under paragraph 
(h)(1) of this section; and refrain from doing anything that would 
impede the buyer from meeting its obligations under this paragraph.
    (3) The offeror of a discount is an individual or entity who is not 
a seller under paragraph (h)(2) of this section, but promotes the 
purchase of an item or service by a buyer under paragraph (h)(1) of 
this section at a reduced price for which payment may be made, in whole 
or in part, under Medicare or a State health care program. The offeror 
must comply with all of the applicable standards within the following 
three categories--
    (i) If the buyer is an entity which is an HMO or a CMP acting in 
accordance with a risk contract under section 1876(g) or 1903(m) of the 
Act, or under another State health care program, the offeror need not 
report the discount to the buyer for purposes of this provision.
    (ii) If the buyer is an entity that reports its costs on a cost 
report required by the Department or a State agency, the offeror must 
comply with the following two standards--
    (A) The offeror must inform the buyer in a manner reasonably 
calculated to give notice to the buyer of its obligations to report 
such a discount and to provide information upon request under paragraph 
(h)(1) of this section; and
    (B) The offeror of the discount must refrain from doing anything 
that would impede the buyer's ability to meet its obligations under 
this paragraph.
    (iii) If the buyer is an individual or entity in whose name a 
request for payment is submitted for the discounted item or service and 
payment may be made, in whole or in part, under Medicare or a State 
health care program (not including individuals or entities defined as 
buyers in paragraph (h)(1)(i) or (h)(1)(ii) of this section), the 
offeror must comply with the following two standards--
    (A) The offeror must inform the individual or entity submitting the 
claim or request for payment in a manner reasonably calculated to give 
notice to the individual or entity of its obligations to report such a 
discount and to provide information upon request under paragraphs 
(h)(1) and (h)(2) of this section; and
    (B) The offeror of the discount must refrain from doing anything 
that would impede the buyer's or seller's ability to meet its 
obligations under this paragraph.
    (4) For purposes of this paragraph, a rebate is any discount the 
terms of which are fixed and disclosed in writing to the buyer at the 
time of the initial purchase to which the discount applies, but which 
is not given at the time of sale.
    (5) For purposes of this paragraph, the term discount means a 
reduction in the amount a buyer (who buys either directly or through a 
wholesaler or a group purchasing organization) is charged for an item 
or service based on an arms-length transaction. The term discount does 
not include--
    (i) Cash payment or cash equivalents (except that rebates as 
defined in paragraph (h)(4) of this section may be in the form of a 
check);
    (ii) Supplying one good or service without charge or at a reduced 
charge to induce the purchase of a different good or service, unless 
the goods and services are reimbursed by the same Federal health care 
program using the same methodology and the reduced charge is fully 
disclosed to the Federal health care program and accurately reflected 
where appropriate, and as appropriate, to the reimbursement 
methodology;
    (iii) A reduction in price applicable to one payer but not to 
Medicare or a State health care program;
    (iv) A routine reduction or waiver of any coinsurance or deductible 
amount owed by a program beneficiary;
    (v) Warranties;
    (vi) Services provided in accordance with a personal or management 
services contract; or
    (vii) Other remuneration, in cash or in kind, not explicitly 
described in paragraph (h)(5) of this section.
    (n) Practitioner recruitment. As used in section 1128B of the Act, 
``remuneration'' does not include any payment or exchange of anything 
of value by an entity in order to induce a practitioner who has been 
practicing within his or her current specialty for less than one year 
to locate, or to induce any other practitioner to relocate, his or her 
primary place of practice into a HPSA for his or her specialty area, as 
defined in Departmental regulations, that is served by the entity, as 
long as all of the following nine standards are met--
    (1) The arrangement is set forth in a written agreement signed by 
the parties that specifies the benefits provided by the entity, the 
terms under which the benefits are to be provided, and the obligations 
of each party.
    (2) If a practitioner is leaving an established practice, at least 
75 percent of the revenues of the new practice must be generated from 
new patients not previously seen by the practitioner at his or her 
former practice.
    (3) The benefits are provided by the entity for a period not in 
excess of 3 years, and the terms of the agreement are not renegotiated 
during this 3-year period in any substantial aspect; provided, however, 
that if the HPSA to which the practitioner was recruited ceases to be a 
HPSA during the term of the written agreement, the payments made under 
the written agreement will continue to satisfy this paragraph for the 
duration of the written agreement (not to exceed 3 years).
    (4) There is no requirement that the practitioner make referrals 
to, be in a position to make or influence referrals to, or otherwise 
generate business for the entity as a condition for receiving the 
benefits; provided, however, that for purposes of this paragraph, the 
entity may require as a condition for receiving benefits that the 
practitioner maintain staff privileges at the entity.
    (5) The practitioner is not restricted from establishing staff 
privileges at, referring any service to, or otherwise generating any 
business for any other entity of his or her choosing.
    (6) The amount or value of the benefits provided by the entity may 
not vary (or be adjusted or renegotiated) in any manner based on the 
volume or value of any expected referrals to or business otherwise 
generated for the entity by the practitioner for which payment may be 
made in whole or in part under Medicare or a State health care program.
    (7) The practitioner agrees to treat patients receiving medical 
benefits or assistance under any Federal health care

[[Page 63555]]

program in a nondiscriminatory manner.
    (8) At least 75 percent of the revenues of the new practice must be 
generated from patients residing in a HPSA or a Medically Underserved 
Area (MUA) or who are part of a Medically Underserved Population (MUP), 
all as defined in paragraph (a) of this section.
    (9) The payment or exchange of anything of value may not directly 
or indirectly benefit any person (other than the practitioner being 
recruited) or entity in a position to make or influence referrals to 
the entity providing the recruitment payments or benefits of items or 
services payable by a Federal health care program.
    (o) Obstetrical malpractice insurance subsidies. As used in section 
1128B of the Act, ``remuneration'' does not include any payment made by 
a hospital or other entity to another entity that is providing 
malpractice insurance (including a self-funded entity), where such 
payment is used to pay for some or all of the costs of malpractice 
insurance premiums for a practitioner (including a certified nurse-
midwife as defined in section 1861(gg) of the Act) who engages in 
obstetrical practice as a routine part of his or her medical practice 
in a primary care HPSA, as long as all of the following seven standards 
are met--
    (1) The payment is made in accordance with a written agreement 
between the entity paying the premiums and the practitioner, which sets 
out the payments to be made by the entity, and the terms under which 
the payments are to be provided.
    (2)(i) The practitioner must certify that for the initial coverage 
period (not to exceed one year) the practitioner has a reasonable basis 
for believing that at least 75 percent of the practitioner's 
obstetrical patients treated under the coverage of the malpractice 
insurance will either--
    (A) Reside in a HPSA or MUA, as defined in paragraph (a) of this 
section; or
    (B) Be part of a MUP, as defined in paragraph (a) of this section.
    (ii) Thereafter, for each additional coverage period (not to exceed 
one year), at least 75 percent of the practitioner's obstetrical 
patients treated under the prior coverage period (not to exceed one 
year) must have--
    (A) Resided in a HPSA or MUA, as defined in paragraph (a) of this 
section; or
    (B) Been part of a MUP, as defined in paragraph (a) of this 
section.
    (3) There is no requirement that the practitioner make referrals 
to, or otherwise generate business for, the entity as a condition for 
receiving the benefits.
    (4) The practitioner is not restricted from establishing staff 
privileges at, referring any service to, or otherwise generating any 
business for any other entity of his or her choosing.
    (5) The amount of payment may not vary based on the volume or value 
of any previous or expected referrals to or business otherwise 
generated for the entity by the practitioner for which payment may be 
made in whole or in part under Medicare or a State health care program.
    (6) The practitioner must treat obstetrical patients who receive 
medical benefits or assistance under any Federal health care program in 
a nondiscriminatory manner.
    (7) The insurance is a bona fide malpractice insurance policy or 
program, and the premium, if any, is calculated based on a bona fide 
assessment of the liability risk covered under the insurance. For 
purposes of paragraph (o) of this section, costs of malpractice 
insurance premiums means:
    (i) For practitioners who engage in obstetrical practice full-time, 
any costs attributable to malpractice insurance; or
    (ii) For practitioners who engage in obstetrical practice on a 
part-time or sporadic basis, the costs:
    (A) Attributable exclusively to the obstetrical portion of the 
practitioner's malpractice insurance and
    (B) Related exclusively to obstetrical services provided in a 
primary care HPSA.
    (p) Investments in group practices. As used in section 1128B of the 
Act, ``remuneration'' does not include any payment that is a return on 
an investment interest, such as a dividend or interest income, made to 
a solo or group practitioner investing in his or her own practice or 
group practice if the following four standards are met--
    (1) The equity interests in the practice or group must be held by 
licensed health care professionals who practice in the practice or 
group.
    (2) The equity interests must be in the practice or group itself, 
and not some subdivision of the practice or group.
    (3) In the case of group practices, the practice must:
    (i) Meet the definition of ``group practice'' in section 1877(h)(4) 
of the Social Security Act and implementing regulations; and
    (ii) Be a unified business with centralized decision-making, 
pooling of expenses and revenues, and a compensation/profit 
distribution system that is not based on satellite offices operating 
substantially as if they were separate enterprises or profit centers.
    (4) Revenues from ancillary services, if any, must be derived from 
``in-office ancillary services'' that meet the definition of such term 
in section 1877(b)(2) of the Act and implementing regulations.
    (q) Cooperative hospital service organizations. As used in section 
1128B of the Act, ``remuneration'' does not include any payment made 
between a cooperative hospital service organization (CHSO) and its 
patron-hospital, both of which are described in section 501(e) of the 
Internal Revenue Code of 1986 and are tax-exempt under section 
501(c)(3) of the Internal Revenue Code, where the CHSO is wholly owned 
by two or more patron-hospitals, as long as the following standards are 
met--
    (1) If the patron-hospital makes a payment to the CHSO, the payment 
must be for the purpose of paying for the bona fide operating expenses 
of the CHSO, or
    (2) If the CHSO makes a payment to the patron-hospital, the payment 
must be for the purpose of paying a distribution of net earnings 
required to be made under section 501(e)(2) of the Internal Revenue 
Code of 1986.
    (r) Ambulatory surgical centers. As used in section 1128B of the 
Act, ``remuneration'' does not include any payment that is a return on 
an investment interest, such as a dividend or interest income, made to 
an investor, as long as the investment entity is a certified ambulatory 
surgical center (ASC) under part 416 of this title, whose operating and 
recovery room space is dedicated exclusively to the ASC, patients 
referred to the investment entity by an investor are fully informed of 
the investor's investment interest, and all of the applicable standards 
are met within one of the following four categories--
    (1) Surgeon-owned ASCs--If all of the investors are general 
surgeons or surgeons engaged in the same surgical specialty, who are in 
a position to refer patients directly to the entity and perform surgery 
on such referred patients; surgical group practices (as defined in this 
paragraph) composed exclusively of such surgeons; or investors who are 
not employed by the entity or by any investor, are not in a position to 
provide items or services to the entity or any of its investors, and 
are not in a position to make or influence referrals directly or 
indirectly to the entity or any of its investors, all of the following 
six standards must be met--
    (i) The terms on which an investment interest is offered to an 
investor must not be related to the previous or

[[Page 63556]]

expected volume of referrals, services furnished, or the amount of 
business otherwise generated from that investor to the entity.
    (ii) At least one-third of each surgeon investor's medical practice 
income from all sources for the previous fiscal year or previous 12-
month period must be derived from the surgeon's performance of 
procedures (as defined in this paragraph).
    (iii) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor) must not loan funds to 
or guarantee a loan for an investor if the investor uses any part of 
such loan to obtain the investment interest.
    (iv) The amount of payment to an investor in return for the 
investment must be directly proportional to the amount of the capital 
investment (including the fair market value of any pre-operational 
services rendered) of that investor.
    (v) All ancillary services for Federal health care program 
beneficiaries performed at the entity must be directly and integrally 
related to primary procedures performed at the entity, and none may be 
separately billed to Medicare or other Federal health care programs.
    (vi) The entity and any surgeon investors must treat patients 
receiving medical benefits or assistance under any Federal health care 
program in a nondiscriminatory manner.
    (2) Single-Specialty ASCs--If all of the investors are physicians 
engaged in the same medical practice specialty who are in a position to 
refer patients directly to the entity and perform procedures on such 
referred patients; group practices (as defined in this paragraph) 
composed exclusively of such physicians; or investors who are not 
employed by the entity or by any investor, are not in a position to 
provide items or services to the entity or any of its investors, and 
are not in a position to make or influence referrals directly or 
indirectly to the entity or any of its investors, all of the following 
six standards must be met--
    (i) The terms on which an investment interest is offered to an 
investor must not be related to the previous or expected volume of 
referrals, services furnished, or the amount of business otherwise 
generated from that investor to the entity.
    (ii) At least one-third of each physician investor's medical 
practice income from all sources for the previous fiscal year or 
previous 12-month period must be derived from the surgeon's performance 
of procedures (as defined in this paragraph).
    (iii) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor) must not loan funds to 
or guarantee a loan for an investor if the investor uses any part of 
such loan to obtain the investment interest.
    (iv) The amount of payment to an investor in return for the 
investment must be directly proportional to the amount of the capital 
investment (including the fair market value of any pre-operational 
services rendered) of that investor.
    (v) All ancillary services for Federal health care program 
beneficiaries performed at the entity must be directly and integrally 
related to primary procedures performed at the entity, and none may be 
separately billed to Medicare or other Federal health care programs.
    (vi) The entity and any physician investors must treat patients 
receiving medical benefits or assistance under any Federal health care 
program in a nondiscriminatory manner.
    (3) Multi-Specialty ASCs--If all of the investors are physicians 
who are in a position to refer patients directly to the entity and 
perform procedures on such referred patients; group practices, as 
defined in this paragraph, composed exclusively of such physicians; or 
investors who are not employed by the entity or by any investor, are 
not in a position to provide items or services to the entity or any of 
its investors, and are not in a position to make or influence referrals 
directly or indirectly to the entity or any of its investors, all of 
the following seven standards must be met--
    (i) The terms on which an investment interest is offered to an 
investor must not be related to the previous or expected volume of 
referrals, services furnished, or the amount of business otherwise 
generated from that investor to the entity.
    (ii) At least one-third of each physician investor's medical 
practice income from all sources for the previous fiscal year or 
previous 12-month period must be derived from the physician's 
performance of procedures (as defined in this paragraph).
    (iii) At least one-third of the procedures (as defined in this 
paragraph) performed by each physician investor for the previous fiscal 
year or previous 12-month period must be performed at the investment 
entity.
    (iv) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor) must not loan funds to 
or guarantee a loan for an investor if the investor uses any part of 
such loan to obtain the investment interest.
    (v) The amount of payment to an investor in return for the 
investment must be directly proportional to the amount of the capital 
investment (including the fair market value of any pre-operational 
services rendered) of that investor.
    (vi) All ancillary services for Federal health care program 
beneficiaries performed at the entity must be directly and integrally 
related to primary procedures performed at the entity, and none may be 
separately billed to Medicare or other Federal health care programs.
    (vii) The entity and any physician investors must treat patients 
receiving medical benefits or assistance under any Federal health care 
program in a nondiscriminatory manner.
    (4) Hospital/Physician ASCs--If at least one investor is a 
hospital, and all of the remaining investors are physicians who meet 
the requirements of paragraphs (r)(1), (r)(2) or (r)(3) of this 
section; group practices (as defined in this paragraph) composed of 
such physicians; surgical group practices (as defined in this 
paragraph); or investors who are not employed by the entity or by any 
investor, are not in a position to provide items or services to the 
entity or any of its investors, and are not in a position to refer 
patients directly or indirectly to the entity or any of its investors, 
all of the following eight standards must be met--
    (i) The terms on which an investment interest is offered to an 
investor must not be related to the previous or expected volume of 
referrals, services furnished, or the amount of business otherwise 
generated from that investor to the entity.
    (ii) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor) must not loan funds to 
or guarantee a loan for an investor if the investor uses any part of 
such loan to obtain the investment interest.
    (iii) The amount of payment to an investor in return for the 
investment must be directly proportional to the amount of the capital 
investment (including the fair market value of any pre-operational 
services rendered) of that investor.
    (iv) The entity and any hospital or physician investor must treat 
patients receiving medical benefits or assistance under any Federal 
health care program in a nondiscriminatory manner.
    (v) The entity may not use space, including, but not limited to, 
operating and recovery room space, located in or owned by any hospital 
investor, unless

[[Page 63557]]

such space is leased from the hospital in accordance with a lease that 
complies with all the standards of the space rental safe harbor set 
forth in paragraph (b) of this section; nor may it use equipment owned 
by or services provided by the hospital unless such equipment is leased 
in accordance with a lease that complies with the equipment rental safe 
harbor set forth in paragraph (c) of this section, and such services 
are provided in accordance with a contract that complies with the 
personal services and management contracts safe harbor set forth in 
paragraph (d) of this section.
    (vi) All ancillary services for Federal health care program 
beneficiaries performed at the entity must be directly and integrally 
related to primary procedures performed at the entity, and none may be 
separately billed to Medicare or other Federal health care programs.
    (vii) The hospital may not include on its cost report or any claim 
for payment from a Federal health care program any costs associated 
with the ASC (unless such costs are required to be included by a 
Federal health care program).
    (viii) The hospital may not be in a position to make or influence 
referrals directly or indirectly to any investor or the entity.
    (5) For purposes of paragraph (r) of this section, procedures means 
any procedure or procedures on the list of Medicare-covered procedures 
for ambulatory surgical centers in accordance with regulations issued 
by the Department and group practice means a group practice that meets 
all of the standards of paragraph (p) of this section. Surgical group 
practice means a group practice that meets all of the standards of 
paragraph (p) of this section and is composed exclusively of surgeons 
who meet the requirements of paragraph (r)(1) of this section.
    (s) Referral agreements for specialty services. As used in section 
1128B of the Act, remuneration does not include any exchange of value 
among individuals and entities where one party agrees to refer a 
patient to the other party for the provision of a specialty service 
payable in whole or in part under Medicare or a State health care 
program in return for an agreement on the part of the other party to 
refer that patient back at a mutually agreed upon time or circumstance 
as long as the following four standards are met--
    (1) The mutually agreed upon time or circumstance for referring the 
patient back to the originating individual or entity is clinically 
appropriate.
    (2) The service for which the referral is made is not within the 
medical expertise of the referring individual or entity, but is within 
the special expertise of the other party receiving the referral.
    (3) The parties receive no payment from each other for the referral 
and do not share or split a global fee from any Federal health care 
program in connection with the referred patient.
    (4) Unless both parties belong to the same group practice as 
defined in paragraph (p) of this section, the only exchange of value 
between the parties is the remuneration the parties receive directly 
from third-party payors or the patient compensating the parties for the 
services they each have furnished to the patient.

    Dated: February 4, 1999.
June Gibbs Brown,
Inspector General.
    Approved: June 9, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-29989 Filed 11-18-99; 8:45 am]
BILLING CODE 4150-04-P