[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Rules and Regulations]
[Pages 856-965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4]
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Part II
Department of Health and Human Services
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Health Care Financing Administration
42 CFR Parts 411 and 424
Medicare and Medicaid Programs; Physicians' Referrals to Health Care
Entities With Which They Have Financial Relationships; Final Rule
Federal Register / Vol. 66 , No. 3 / Thursday, January 4, 2001 /
Rules and Regulations
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Parts 411 and 424
[HCFA-1809-FC]
RIN 0938-AG80
Medicare and Medicaid Programs; Physicians' Referrals to Health
Care Entities With Which They Have Financial Relationships
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Final rule with comment period.
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SUMMARY: This final rule with 90-day comment period (Phase I of this
rulemaking) incorporates into regulations the provisions in paragraphs
(a), (b), and (h) of section 1877 of the Social Security Act (the Act).
Under section 1877, if a physician or a member of a physician's
immediate family has a financial relationship with a health care
entity, the physician may not make referrals to that entity for the
furnishing of designated health services (DHS) under the Medicare
program, unless an exception applies. The following services are DHS:
clinical laboratory services; physical therapy services; occupational
therapy services; radiology services, including magnetic resonance
imaging, computerized axial tomography scans, and ultrasound services;
radiation therapy services and supplies; durable medical equipment and
supplies; parenteral and enteral nutrients, equipment, and supplies;
prosthetics, orthotics, and prosthetic devices and supplies; home
health services; outpatient prescription drugs; and inpatient and
outpatient hospital services.
In addition, section 1877 of the Act provides that an entity may
not present or cause to be presented a Medicare claim or bill to any
individual, third party payer, or other entity for DHS furnished under
a prohibited referral, nor may we make payment for a designated health
service furnished under a prohibited referral.
Paragraph (a) of section 1877 of the Act includes the general
prohibition. Paragraph (b) of the Act includes exceptions that pertain
to both ownership and compensation relationships, including an in-
office ancillary services exception. Paragraph (h) includes definitions
that are used throughout section 1877 of the Act, including the group
practice definition and the definitions for each of the DHS.
We intend to publish a second final rule with comment period (Phase
II of this rulemaking) shortly addressing, to the extent necessary, the
remaining sections of the Act. Phase II of this rulemaking will address
comments concerning the ownership and investment exceptions in
paragraphs (c) and (d) and the compensation exceptions in paragraph (e)
of section 1877 of the Act. Phase II of this rulemaking will also
address comments concerning the reporting requirements and sanctions
provided by paragraphs (f) and (g) of the Act, respectively, and
include further consideration of the general exception to the referral
prohibition related to both ownership/investment and compensation for
services furnished in an ambulatory surgical center (ASC), end-stage
renal dialysis facility, or by a hospice in Sec. 411.355(d) of the
regulations (this exception presently is in force and effect as to
clinical laboratory services). In addition, Phase II of this rulemaking
will address section 1903(s) of the Act, which extends aspects of the
referral prohibition to the Medicaid Program. Phase II will also
address comments received in response to this rulemaking, as
appropriate, and certain proposals for new exceptions to section 1877
of the Act not included in the 1998 proposed rulemaking, but suggested
in the public comments.
DATES: Effective date: The regulations delineated in Phase I of this
rulemaking are effective on January 4, 2002 except for Sec. 424.22(d),
which is effective on February 5, 2001.
Comment date: We will consider comments if we receive them at the
appropriate address, as provided below, no later than 5 p.m. on April
4, 2001.
ADDRESSES: Mail written comments (one original and three copies) to the
following address only: Health Care Financing Administration,
Department of Health and Human Services, Attn: HCFA-1809-FC, P.O. Box
8013, Baltimore, MD 21244-8013.
Since comments must be received by the date specified above, please
allow sufficient time for mailed comments to be received timely in the
event of delivery delays. If you prefer, you may deliver your written
comments (one original and three copies) by courier to one of the
following addresses: Room 443-G, Hubert H. Humphrey Building, 200
Independence Avenue, SW., Washington, DC 20201, or C5-15-03, Central
Building, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments
mailed to the two addresses provided in this paragraph may be delayed
and received too late to be considered.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1809-FC.
Comments received timely will be available for public inspection as
they are received, generally beginning approximately 3 weeks after
publication of a document, in Room 443-G of the Department's offices at
200 Independence Avenue, SW., Washington, DC 20201, on Monday through
Friday of each week from 8:30 a.m. to 5 p.m. (phone: (202) 690-7890).
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FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer, (410) 786-4620.
SUPPLEMENTARY INFORMATION: This Federal Register document is also
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At the time that we forward our regulations and notices to the
Office of the Federal Register (OFR) for publication, we announce them
on our Internet website (http://www.hcfa.gov/regs/regsnotices.htm) as a
service to the public. We began providing this service on May 30, 2000.
We note that the OFR may make minor editorial changes to a document
before publishing it. While
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we provide a document on our website, the document that we publish in
the Federal Register is the official HCFA publication.
To help readers locate information in this final rule, we are
providing the following Table of Contents:
I. Background
A. Legislative and Regulatory History
1. Section 1877 of the Act
2. Section 1903(s) of the Act
B. Regulations History
1. Regulations Published by HCFA and the Office of the Inspector
General (OIG) Relating to Section 1877 of the Act
2. Details about Prior Related Regulations
II. Development of Phase I of this Final Rulemaking
A. Technical Explanation of Bifurcation of the Regulation
B. General Comments Regarding the January 1998 Proposed Rule and
Responses
III. General Prohibition Under Section 1877 of the Act
A. When Is There a Financial Relationship Between the Physician
and the Entity?
B. When Does a Physician Make a Referral?
1. ``Referral''
2. ``Consultation''
IV. Physician Compensation Under Section 1877 of the Act: An
Overview
V. ``Volume or Value'' of Referrals and ``Other Business Generated''
Standards: An Overview
VI. Exceptions Applicable to Ownership and Compensation Arrangements
(Section 1877(b) of the Act)
A. Physician Services (Section 1877(b)(1) of the Act)
B. In-office Ancillary Services (Section 1877(b)(2) of the Act)
1. Scope of Designated Health Services That Can Be In-office
Ancillary Services
2. Direct Supervision
3. The Building Requirements
4. The Billing Requirement
C. Group Practice Definition (Section 1877(h)(4) of the Act)
1. General Comments
2. Single Legal Entity Requirement
3. Members of the Group
4. The ``Full Range of Services Test''
5. The ``Substantially All Test''
6. The ``Seventy-five Percent Physician-Patient Encounters
Test''
7. The ``Unified Business Test''
8. Profit Shares and Productivity Bonuses
9. Group Practice Attestations
D. Prepaid Plans (Section 1877(b)(3) of the Act)
VII. New Regulatory Exceptions
A. Academic Medical Centers
B. Fair Market Value (Sec. 411.357(l))
C. Non-Monetary Compensation up to $300 (and Medical Staff
Benefits) (Secs. 411.357(k) and (m))
VIII. Definitions of the Designated Health Services
A. General Principles
B. General Comment: Professional Services as Designated Health
Services
C. Clinical Laboratory Services
D. Physical Therapy Services
E. Occupational Therapy Services
F. Radiology and Certain Other Imaging Services
G. Radiation Therapy
H. Durable Medical Equipment (DME)
I. Parenteral and Enteral Nutrients, Equipment, and Supplies
J. Prosthetics, Orthotics, and Prosthetic Devices and Supplies
K. Home Health Services
L. Outpatient Prescription Drugs
M. Inpatient and Outpatient Hospital Services
N. Other Definitions
1. Consultation
2. Entity
3. Fair Market Value
4. Group Practice
5. Health Professional Shortage Areas
6. Employee
7. Immediate Family Members
8. Referral
9. Remuneration and the Exceptions in Section 1877(h)(1)(C) of
the Act
IX. Collection of Information Requirements
X. Regulatory Impact Statement
A. Overall Impact
B. Anticipated Effects
1. Effects on Physicians
2. Effects on Other Providers
3. Effects on the Medicare and Medicaid Programs
4. Effects on Beneficiaries
C. Alternatives Considered
D. Conclusion
Regulations Text
Attachment
I. Background
A. Legislative and Regulatory History
1. Section 1877 of the Act
Section 6204 of the Omnibus Budget Reconciliation Act of 1989 (Pub.
L. 101-239) (OBRA 1989), enacted on December 19, 1989, added section
1877 to the Act. Section 1877 of the Act prohibited a physician from
referring a patient to an entity for clinical laboratory services for
which Medicare might otherwise pay, if the physician or the physician's
immediate family member had a financial relationship with the entity.
The statute defined ``financial relationship'' as an ownership or
investment interest in the entity or a compensation arrangement between
the physician (or the physician's immediate family member) and the
entity. The statute provided for several exceptions to the prohibition.
Some applied to ownership/investment interests and compensation
arrangements; others applied only to ownership/investment interests or
only to compensation arrangements.
The statute further prohibited an entity from presenting or causing
to be presented a Medicare claim or bill to any individual, third party
payer, or other entity for clinical laboratory services furnished under
a prohibited referral. Additionally, the statute mandated refunding any
amount collected under a bill for an item or service furnished under a
prohibited referral. Finally, the statute imposed reporting
requirements and provided for sanctions, including civil monetary
penalty provisions. Section 1877 of the Act became effective on January
1, 1992.
Section 4207(e) of the Omnibus Budget Reconciliation Act of 1990
(Pub. L. 101-508) (OBRA 1990), enacted on November 5, 1990, amended
certain provisions of section 1877 of the Act to clarify definitions
and reporting requirements relating to physician ownership and referral
and to provide an additional exception to the prohibition.
Several subsequent laws further changed section 1877 of the Act.
Section 13562 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L.
103-66) (OBRA 1993), enacted on August 10, 1993, expanded the referral
prohibition to cover 10 ``designated health services,'' in addition to
clinical laboratory services, modified some of the existing statutory
exceptions, and added new exceptions. Section 152 of the Social
Security Act Amendments of 1994 (SSA 1994) (Pub. L. 103-432), enacted
on October 31, 1994, amended the list of designated services, effective
January 1, 1995, changed the reporting requirements at section 1877(f)
of the Act, and modified some of the effective dates established by
OBRA 1993. Some provisions relating to referrals for clinical
laboratory services were effective retroactively to January 1, 1992,
while other provisions became effective on January 1, 1995.
2. Section 1903(s) of the Act
Title XIX of the Act established the Medicaid program to provide
medical assistance to individuals who meet certain income and resource
requirements. The States operate Medicaid programs in accordance with
Federal laws and regulations and with a State plan that we approve.
Though States administer the Medicaid programs, the Federal and State
governments jointly finance them. We call the Federal government's
share of medical assistance expenditures ``Federal financial
participation'' (FFP).
Until OBRA 1993, there were no statutory or regulatory requirements
affecting a physician's referrals for services covered under the
Medicaid program. Section 13624 of OBRA 1993, entitled ``Application of
Medicare Rules Limiting Certain Physician Referrals,'' added a new
paragraph (s) to section 1903 of the Act, that extends aspects of the
Medicare prohibition on physician referrals to Medicaid. This provision
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bars FFP in State expenditures for DHS furnished to an individual based
on a physician referral that would result in a denial of payment for
the services under the Medicare program if Medicare covered the
services to the same extent and under the same terms and conditions as
under the State Medicaid plan. The statute also made certain reporting
requirements in section 1877(f) of the Act and a civil monetary penalty
provision in section 1877(g)(5) (related to the reporting requirements)
applicable to providers of DHS for which payment may be made under
Medicaid in the same manner as they apply to providers of such services
for which payment may be made under Medicare. Section 1903(s) of the
Act applies to a physician's referrals made on or after December 31,
1994.
B. Regulations History
1. Regulations Published by HCFA and the Office of the Inspector
General (OIG) Relating to Section 1877 of the Act
The following is a summary of the series of regulations we have
published in the Federal Register over the past several years to
implement the provisions of section 1877 of the Act, as amended, and
section 1903(s) of the Act:
On December 3, 1991, we issued an interim final rule with
comment period (54 FR 61374) to set forth the reporting requirements
under section 1877(f) of the Act.
On March 11, 1992, we issued a proposed rule (57 FR 8588)
to implement the self-referral prohibition and exceptions related to
referrals for clinical laboratory services established by section 1877
of the Act, and amended by OBRA 1990.
On August 14, 1995, we issued a final rule with comment
period (60 FR 41914) incorporating the provisions of OBRA 1993 and SSA
1994 that relate to referrals for clinical laboratory services under
section 1877 of the Act, effective January 1, 1992, and revising the
March 11, 1992 proposal based on the public comments we received.
On January 9, 1998, we issued a proposed rule (63 FR 1659)
to amend the provisions of the August 1995 final rule and to reflect
other changes in section 1877 of the Act enacted by OBRA 1993 and SSA
1994 that were effective January 1, 1995. These include, among other
changes, the expansion of the referral prohibition to the 10 additional
DHS, and the Medicaid expansion.
On January 9, 1998, we published a final rule with comment
period (63 FR 1846) incorporating into our regulations the specific
procedures we will use to issue advisory opinions, as required under
section 1877(g)(6) of the Act. Section 1877(g)(6) of the Act requires
that we issue written advisory opinions to outside parties concerning
whether the referral of a Medicare patient by a physician for DHS
(other than clinical laboratory services) is prohibited under section
1877 of the Act.
We also note that on October 20, 1993, the OIG published a proposed
rule (58 FR 54096) to implement the civil money penalty provisions
under sections 1877(g)(3) and (g)(4) of the Act. The OIG followed with
publication of a final rule with comment period (60 FR 16580) on March
31, 1995.
2. Details About Prior Related Regulations
On August 14, 1995, we published in the Federal Register a final
rule with comment period (60 FR 41914) that incorporated into
regulations the provisions of section 1877 of the Act prohibiting
physician referrals for clinical laboratory services under the Medicare
program. That rule incorporated certain expansions and exceptions
created by OBRA 1993, and the amendments in SSA 1994. It included only
the expansions and other changes that related to prohibited referrals
for clinical laboratory services that were retroactively effective to
January 1, 1992, and interpreted the new provisions only in a few
limited instances in which it was essential to implement the law. That
rule also included our responses to the public comments we received on
both the December 3, 1991 interim final rule with comment period (56 FR
61374) that established the reporting requirements under section
1877(f) of the Act, and the March 11, 1992 proposed rule (57 FR 8588)
that covered section 1877 of the Act, as amended by OBRA 1990, and
related to referrals for clinical laboratory services.
Because the August 1995 rule addressed only those changes made by
OBRA 1993 and SSA 1994 that had a retroactive effective date of January
1, 1992, we explained our intent to later publish a proposed rule to
fully implement the extensive revisions to section 1877 of the Act made
by OBRA 1993 and SSA 1994, and to interpret those provisions when
necessary. In the later proposed rule, we intended to include the
revisions that relate to referrals for the additional DHS (including
clinical laboratory services) that became effective January 1, 1995,
and to implement the Medicaid expansion in section 1903(s) of the Act
that became effective for referrals made on or after December 31, 1994.
As intended, on January 9, 1998, we published the proposed rule (63
FR 1659). The rule was organized as follows: In section I (63 FR 1661
through 1663), we summarized the problems associated with physician
self-referrals and the relevant legislative and regulatory background.
In section II (63 FR 1663 through 1673), part A, we summarized the
provisions of our proposed rule and described how we proposed to alter
the final regulation covering referrals for clinical laboratory
services to apply it to the additional DHS and to reflect the statutory
changes in section 1877 of the Act that were effective on January 1,
1995. In section II, part B, we described the changes we proposed to
make to the Medicaid regulations to incorporate section 1903(s) of the
Act. In section III (63 FR 1673 through 1705), we discussed in detail
how we proposed to interpret any provisions in sections 1877 and
1903(s) of the Act that we believed were ambiguous, incomplete, or that
provided us with discretion. We also discussed policy changes or
clarifications we proposed to make to the August 1995 rule covering
referrals for clinical laboratory services. Section IV (63 FR 1705
through 1715) of the proposed rule included our responses to some of
the most common questions concerning physician referrals that we
received from physicians, providers, and others in the health care
community. We included our interpretations of how the law applies in
the situations described to us. Section V (63 FR 1715 through 1719)
included a Regulatory Impact Analysis, and section VI (63 FR 1719
through 1720) covered our policy on responding to comments. The
proposed regulation text appeared at 63 FR 1720 through 1728.
In the January 1998 proposed rule, we proposed to incorporate the
Medicaid expansion in section 1903(s) of the Act into Sec. 435.1012(a)
(Limitation to FFP related to prohibited referrals). Section
435.1012(a) stated that no FFP was available for a State's expenditures
for certain DHS, as they are defined in proposed Sec. 411.351,
furnished to an individual under the State plan. No FFP is available if
the services are those furnished on the basis of a physician referral
that would, if Medicare provided for coverage of the services to the
same extent and under the same terms and conditions as under the State
plan, result in the denial of Medicare payment for the services under
Secs. 411.351 through 411.360. In Sec. 435.1012(c), we included a cross
reference to the procedures we
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established for individuals or entities to request advisory opinions
from us on whether a physician's referrals relating to DHS (other than
clinical laboratory services) are prohibited under section 1877 of the
Act. Although these advisory opinions were meant to reflect our
interpretation of section 1877 of the Act, they can potentially affect
FFP payments to States under the Medicaid program.
Section 1877(b)(3) of the Act excepts from the referral prohibition
services furnished to enrollees of certain ``prepaid'' health plans;
however, these exceptions extend only to services furnished to Medicare
beneficiaries under Medicare contracts and demonstration projects. As a
result, the exception for prepaid arrangements does not apply to
physicians who wish to refer in the context of the Medicaid program. In
order to give effect to this exception in the Medicaid context, we
included, in the January 1998 proposed rule, in Sec. 435.1012(b) an
exception for DHS furnished by managed care entities analogous to the
Medicare entities excepted under section 1877(b)(3) of the Act. The new
exception was meant to cover entities that provide services to
Medicaid-eligible enrollees under contract with State Medicaid agencies
and under certain demonstration projects. (We discussed these analogous
entities in detail in the proposed rule at 63 FR 1697.)
To accommodate the Congress's subsequent creation of the
Medicare+Choice (M+C) Program in the Balanced Budget Act of 1997 (Pub.
L. 105-33) (BBA 1997), we included an amendment to the physician
referral regulations as part of the June 26, 1998 interim final rule
with comment period (63 FR 35066) establishing the M+C Program. We
amended the final physician self-referral regulations covering
referrals for clinical laboratory services by adding an exception in
Sec. 411.355(c)(5) for services furnished to prepaid enrollees by a
coordinated care plan. We defined a coordinated care plan as such a
plan, within the meaning of section 1851(a)(2)(A) of the Act, offered
by an organization in accordance with a contract with us under section
1857 of the Act and the M+C regulations. We are reprinting that
provision in Phase I of this rulemaking.
II. Development of Phase I of This Final Rulemaking
A. Technical Explanation of Bifurcation of the Regulation
Phase I of this rulemaking implements subsections (a) and (b) of
section 1877 of the Act, and related definitions, as applied to the
Medicare program. We intend to issue Phase II of this rulemaking to
cover the remainder of section 1877 of the Act, including its
application to the Medicaid program, shortly.
Phase I of This Rulemaking
Given the importance of subsections (a) and (b), and the
substantial changes we are making to the January 1998 proposed rule, we
are proceeding with the issuance of Phase I of this rulemaking at this
time. Further, we are issuing Phase I for comment and delaying its
effective date for 1 year to allow individuals and entities engaged in
business arrangements affected by Phase I time to restructure those
arrangements to comply with the provisions of Phase I, except for
Sec. 424.22(d), which is effective February 5, 2001. The statutory
provisions interpreted by Phase I remain in effect, as they have been
since 1989 for clinical laboratory services and 1993 for all other DHS.
Phase I of this rulemaking differs substantially from the January
1998 proposed rule in several major respects, which include the
following:
Clarification of the definitions of DHS.
Clarification of the concept of ``indirect financial
relationship'' and creation of a new exception for indirect
compensation arrangements.
Substantial broadening of the in-office ancillary services
exception by easing the criteria for qualifying as a group practice and
conforming the supervision requirements to HCFA coverage and payment
policies for the specific services.
Expansion of the in-office ancillary services exception to
cover certain DME provided in physicians' offices to patients to assist
them in ambulating, and blood glucose monitors.
Allowance of shared facilities in the same building where
physicians routinely provide services that are in addition to Federal
and private pay DHS.
Exclusion of services personally performed by the
referring physician from the definition of ``referral.''
Creation of a new exception for compensation of faculty in
academic medical centers.
Addition of a new ``risk-sharing'' exception for
commercial and employer-sponsored managed care plans.
Interpretation of the ``volume or value'' standard for
purposes of section 1877 of the Act as permitting unit of service or
unit of time-based payments, so long as the unit of service or unit of
time-based payment is fair market value and does not vary over time.
(The details of these and other changes are explained at length in
section VI of this preamble.)
Creation of an exception where DHS are furnished by
entities that did not know of or have reason to suspect the identity of
the referring physician.
In developing Phase I of this rulemaking, we have carefully
reconsidered the January 1998 proposed rule given both the history and
structure of section 1877 of the Act and the extensive comments we
received on the January 1998 proposed regulation. We believe that Phase
I of this rulemaking addresses many of the industry's primary concerns,
is consistent with the statute's goals and directives, and protects
beneficiaries of Federal health care programs.
Our paramount concern is to implement section 1877 of the Act
consistent with congressional intent. Prior to enactment of section
1877, there were a number of studies, primarily in academic literature,
that consistently found that physicians who had ownership or investment
interests in entities to which they referred ordered more services than
physicians without those financial relationships (some of these studies
involved compensation as well). Increased utilization occurred whether
the physician owned shares in a separate company that provided
ancillary services or owned the equipment and provided the services as
part of his or her medical practice. This correlation between financial
ties and increased utilization was the impetus for section 1877 of the
Act.
The approach chosen by the Congress in enacting section 1877 of the
Act is preventive because it essentially prohibits many financial
arrangements between physicians and entities providing DHS.
Specifically, section 1877 of the Act imposes a blanket prohibition on
the submission of Medicare claims (and payment to the States of FFP
under the Medicaid program) for certain DHS when the service provider
has a financial relationship with the referring physician, unless the
financial relationship fits into one of several relatively specific
exceptions. Significantly, no wrongful intent or culpable conduct is
required. The primary remedy is simply nonpayment by the program,
without penalties. In other words, the basic remedy is recoupment of
overpayments by the program. (Of course, wrongful conduct, such as
knowingly submitting a claim in violation of the prohibition, can be
punished through recoupment of overpayments and imposition of
[[Page 860]]
penalties, the False Claims Act, and other Federal statutory and common
law remedies.)
The effect of this statutory scheme is that failure to comply with
section 1877 of the Act can have a substantial financial result. For
example, if a hospital has a $5,000 consulting contract with a surgeon
and the contract does not fit in an exception, every claim submitted by
the hospital for Medicare beneficiaries admitted or referred by that
surgeon is not payable, since all inpatient and outpatient hospital
services are DHS.
While the statutory scheme of the physician self-referral
prohibition is, in large part, the key to its effectiveness, it
obligates us to proceed carefully in determining the scope of
activities that are prohibited. In Phase I of this rulemaking, we have
attempted to minimize the impact of the rule on many common physician
group governance and compensation arrangements.
The potential impact of the regulation was further confirmed by the
voluminous comments we received from the public and health care
community in response to the January 1998 proposed rule. In addition to
specific complaints and objections about the January 1998 proposed
rule, the commenters expressed several general concerns, which include
the following:
The rule inappropriately intruded into the organization
and delivery of medical care within physicians' offices.
The rule, in many respects, was counter to our other long-
standing policies on coverage and similar issues.
The rule was unclear in many areas and that given the
potentially serious consequences (for example, payment denial),
``bright line'' rules were essential.
Some aspects of the rule, such as its treatment of
indirect financial relationships, were administratively impractical or
would have been prohibitively costly in terms of monitoring compliance.
With these overall considerations in mind, we have developed
several criteria for evaluating our regulatory options. First, we have
tried in Phase I of this rulemaking to interpret the prohibitions
narrowly and the exceptions broadly, to the extent consistent with the
statutory language and intent. As a practical matter, we believe that,
while the statute must be implemented to achieve its intent, we should
be cautious in interpreting its reach so broadly as to prohibit
potentially beneficial financial arrangements. Accordingly, we have
tried to focus the regulation on financial relationships that may
result in overutilization, which we believe was the main abuse at which
the statute was aimed. Some provisions of the January 1998 proposed
rule did not appear to address overutilization so much as other
potential abuses, such as unfair competition. At the same time, we do
not believe the Congress intended us to review every possible
designated health service to determine its potential for
overutilization. The Congress has already made that determination, and
we believe that compliance with the exceptions in Phase I of this
rulemaking should not cause undue disruption of the health care
delivery system.
Second, a corollary of the above interpretation is that the
Congress only intended section 1877 of the Act to establish a minimum
threshold for acceptable financial relationships, and that potentially
abusive financial relationships that may be permitted under section
1877 of the Act could still be addressed through other statutes that
address health care fraud and abuse, including the anti-kickback
statute (section 1128B(b) of the Act). In some instances, financial
relationships that are permitted by section 1877 of the Act might merit
prosecution under section 1128B(b) of the Act. Conversely, conduct that
may be proscribed by section 1877 of the Act may not violate the anti-
kickback statute.
Third, we have attempted to ensure that Phase I of this rulemaking
will not adversely impact the medical care of Federal health care
beneficiaries or other patients. In those instances in which we have
determined that the provisions of Phase I of this rulemaking may impact
current arrangements under which patients are receiving medical care,
we have attempted to verify that there are other ways available to
structure the arrangement so that patients could continue to receive
the care in the same location. In almost all cases, we believe the
provisions of Phase I of this rulemaking should not require substantial
changes in delivery arrangements, although they may affect the
referring physician's or group practice's ability to bill for the care.
In other words, while the provisions of Phase I of this rulemaking may
affect a physician's ability to profit financially from the provision
of some services, there should be alternative providers available to
provide the services in the same setting or alternative business
structures that would permit the services to be provided (again,
possibly without physician financial interest).
Fourth, we have revised the provisions of our January 1998 proposed
rule to conform, as much as possible, to our other policies that affect
the same or similar activity. For example, we are dropping the
requirement that an in-office ancillary service be supervised under the
strict ``direct supervision'' standards of the ``incident to'' billing
rules in favor of requiring the level of supervision that is mandated
under Medicare payment and coverage rules applicable to particular DHS.
Fifth, we have attempted, as much as possible, to establish
``bright line'' rules so that physicians and health care entities can
ensure compliance and minimize administrative costs. We agree with the
commenters that as a payment rule, the regulations implementing section
1877 of the Act should establish clear standards, and we have attempted
to do so within the constraints of the statutory and regulatory scheme.
We believe Phase I of this rulemaking substantially addresses the
concerns raised by the commenters and, yet, is consistent with the
statute. Given the breadth of the statute and the myriad of financial
relationships to which it applies, it is impossible to satisfy all
concerns in all instances. We have attempted to read the statute
narrowly to avoid adversely impacting potentially beneficial
arrangements. However, we will continue to monitor financial
arrangements in the health care industry and will revisit particular
regulatory decisions if we determine there is abuse or overutilization.
B. General Comments Regarding the January 1998 Proposed Rule and
Responses
Comment: Many commenters echoed the general views expressed by a
major physician trade association. The trade association noted that
section 1877 of the Act significantly impacts the manner in which
physicians deliver health care services and the manner in which they
relate to one another and to other health care providers. The trade
association urged us to give physicians and other providers clear
direction on how to structure their financial arrangements, while
providing sufficient flexibility for physicians and providers
practicing in numerous and varying arrangements throughout the health
care industry. The trade association and other commenters expressed
concern that the January 1998 proposed rule failed to reflect the
fundamental changes occurring in the health care marketplace--
especially the consolidation and integration of physician practices,
hospitals, and other health care entities. Indeed, the commenters
perceived the proposed regulations as hostile to those changes.
[[Page 861]]
The trade association and others believe that section 1877 of the Act
and our regulations should focus on passive ownership and referral
arrangements and not on partially and fully integrated practices
demanded by the current competitive marketplace.
In addition, some commenters, including the trade association,
thought that the provisions of the January 1998 proposed rule exceeded
our statutory authority and imposed unnecessary and costly burdens on
physicians that would harm patient access to health care facilities and
services, with no apparent public benefit. In their view, the
provisions of the January 1998 proposed rule (1) micro-managed
physician practices in situations that do not pose a real potential for
abuse, (2) limited proper and reasonable management practices, and (3)
inappropriately interfered with the practice of medicine. Finally, a
number of commenters suggested that, instead of promulgating a set of
regulations that micro-manage the business of medicine, we could better
control overutilization of DHS by monitoring the medical necessity of
such services and the competency of those providing them.
Response: In developing Phase I of this rulemaking, we have been
mindful of the criticism that the provisions of the January 1998
proposed rule inappropriately micro-managed physician practices. Given
the purpose, structure, and scope of section 1877 of the Act, some
impact on physician practices is inevitable and, frankly, intended. In
Phase I of this rulemaking, we have endeavored to create ``bright
line'' rules that are easily applied, while providing the health care
industry with as much flexibility as possible. Where possible, we have
tried to simplify the requirements in Phase I of this rulemaking,
consistent with the clear congressional mandate to prohibit certain
physician referrals tainted by physician financial self-interest. We
believe Phase I of this rulemaking offers adequate flexibility to
physician practices as they integrate and consolidate. For example, the
revised unified business test, in the group practice definition, no
longer bars cost-center or location-based distribution of a group
practice's revenues from services that are not DHS. Another example:
the in-office ancillary services exception covers certain ancillary
services provided in facilities shared by practitioners in the same
building in which they practice.
The provisions of Phase I of this rulemaking do not prevent
physicians from directly providing their patients with convenient,
cost-effective DHS. Consistent with the purpose of the statute,
however, the provisions of Phase I of this rulemaking do restrict the
circumstances under which physicians can financially benefit from DHS
they order that are provided by others. This distinction is important.
Section 1877 of the Act regulates the financial relationship between
referring physicians and the provider of the DHS. If a physician
determines not to provide access to such services in the absence of
personal profit, the decision is the physician's, not the statute's.
Nothing in section 1877 of the Act restricts patient access to those
services.
Finally, we cannot agree with the claim that medical necessity
reviews are always an effective control on overutilization. Medical
necessity reviews alone cannot control unnecessary utilization and
contain health care costs. These reviews are costly and only effective
in controlling the most aberrant behavior. Most importantly, the
statute does not permit us--nor would we choose--to override the
Congress' judgement by substituting medical necessity reviews for
existing statutory standards.
Comment: Other commenters expressed concern that neither the
statute nor the January 1998 proposed rule goes far enough in
preventing abusive referral arrangements. Several commenters complained
that allowing physicians to provide ancillary services competitively
disadvantages independent ancillary services providers that are not
owned or controlled by physicians. These commenters believe that an
obvious referral-for-profit scheme occurs when a physician employs his
or her own ancillary personnel. While most commenters who expressed
this view were independent ancillary services providers, one physician
also complained about fellow physicians who ``churn'' patients through
CT/MRI machines in their offices, resulting in what the commenter
termed, a ``cash spigot.'' The commenter expressed the view that such
machines are not standard in a physician's office and are solely added
to physicians' offices to generate profits. Commenters also expressed
concern that, in some cases, physicians do not have appropriate
oversight or credentialing for the ancillary services they provide. One
commenter suggested that physicians should only be permitted to provide
ancillary services if no other provider is available in the area.
Response: While we believe the commenters raised valid concerns
about abuses in the health care system, the plain language of the
statute makes clear that the Congress did not intend section 1877 of
the Act to bar all physician-owned ancillary services facilities. To
the contrary, these facilities are expressly allowed under certain
specific circumstances (see sections 1877(b), (c), and (d) of the Act).
Simply stated, the law is meant to prevent only the most egregious
financial relationships; it does not address every potential act of
fraud and abuse. As we caution throughout this preamble, section 1877
of the Act provides only a threshold check against fraud and abuse;
many arrangements that are lawful under section 1877 of the Act may
still violate other fraud and abuse laws, including the Federal anti-
kickback statute (section 1128B(b) of the Act).
Comment: Several commenters believe that section 1877 of the Act
and implementing regulations would not permit patients to receive
services, such as x-rays, physical therapy, or crutches, at a
physician's office or in a long term care facility where the patient
resides. The commenters observed that requiring patients to seek
services related to their diagnoses or treatment at several different
locations is an inconvenience to patients and may require them to
travel long distances to obtain services, thus, discouraging elderly or
disabled patients from seeking needed health care services.
Response: The commenters misunderstand section 1877 of the Act.
Section 1877 of the Act regulates financial relationships; it does not
regulate the delivery of services. Section 1877 of the Act does not bar
the provision of ancillary services in a physician's office, in a long
term care facility, or at nearby, convenient locations. The law only
imposes restrictions on a physician who makes a referral for a
designated health service if he or she has a financial relationship
with the ancillary services provider, such as an employment contract,
an office space lease, or an ownership interest. Depending on the
structure of the financial relationship, the physician may be able to
profit from ordering ancillary services, thereby creating a risk that
his or her orders may be motivated, in part, by personal financial
considerations. Statutory and regulatory exceptions are designed to
enable physicians to make ancillary services available on-site to their
own patients, provided they meet the conditions set forth in the
applicable exception. However, nothing in the law prevents physicians
from making available convenient ancillary services when the physician
has no financial interest in the provision of the services. For
example, a physician may arrange for a
[[Page 862]]
diagnostic services provider to perform diagnostic tests in the
physician's office for which the diagnostic services provider bills,
provided that any rental arrangement meets the rental exception in
Sec. 411.357(b) and does not violate the anti-kickback statute. Section
1877 of the Act reflects the Congress' unmistakable intent to recognize
and accommodate the traditional role played by physicians in the
delivery of ancillary services to their patients, while constraining
the abuse of the public fisc that results when physician referrals are
driven by financial incentives. These regulations reflect that policy
balance.
Comment: One commenter stated that we had not informed Medicare
beneficiaries about the potential restrictions on their access to care
under section 1877 of the Act and its regulations, or informed Medicare
providers about the potential restrictions on their ability to provide
ancillary services.
Response: Once both Phase I and Phase II of this rulemaking are
published, we intend to educate providers further about the new
regulations. Providers have been on notice as to section 1877 of the
Act since 1989 with respect to clinical laboratory services and 1993
with respect to all other DHS. We intend to provide general information
to beneficiaries as well. However, we do not believe beneficiaries will
face the restrictions on access that the commenters contemplate.
Indeed, these regulations do not restrict the provision of services to
Medicare beneficiaries. If a physician chooses not to make services
available to patients if he or she cannot personally benefit
financially from services he or she orders, but which are provided by
others, the physician is responsible for restricting access. Finally,
Phase I of this rulemaking is being, and Phase II of this rulemaking
will be, published in the Federal Register and noted on the
Department's website, which serves as notice to the affected community.
We believe most providers will also be informed through their trade
press, trade associations, and other sources.
Comment: Two commenters expressed concern that section 1877 of the
Act and associated regulations would criminalize common conduct in
physicians' offices.
Response: Section 1877 of the Act is a civil, not a criminal,
statute. A violation of section 1877 of the Act results in nonpayment
of claims and monetary sanctions. Criminal penalties or deprivation of
liberty are not authorized by section 1877 of the Act.
Comment: Given the alleged complexity of the physician self-
referral law and regulations and their impact on physicians'
traditional business practices, several commenters requested that the
effective date of the regulation be delayed to allow a reasonable time
for physicians to familiarize themselves with the law and that the
regulations be applied prospectively only. One commenter asked that we
issue compliance guidelines. Another commenter inquired about penalties
if physicians ignore the physician self-referral law.
Response: We agree with the commenters that the health care
providers engaged in business arrangements affected by Phase I of this
rulemaking may need time to restructure those arrangements to comply
with Phase I of this rulemaking where it proscribes conduct not
previously prohibited. We are, therefore, delaying the effective date
of Phase I of this rulemaking for 1 year, except for Sec. 424.22(d),
which is effective February 5, 2001. In the meantime, the statute, in
its entirety, remains in full force and effect with respect to all DHS
listed in section 1877(h)(6) of the Act. Until the effective date of
these new final regulations, the August 1995 final rule covering
referrals for clinical laboratory services remains in full force and
effect with respect to clinical laboratory services referrals and
claims for services. Any party or parties who do not comply with the
provisions of the statute, the August 1995 final rule covering
referrals for clinical laboratory services, or the provisions of Phase
I of this rulemaking (when it becomes effective one year from the date
of publication of this Federal Register notice) are subject to all
applicable penalties and sanctions, including those that appear in
section 1877(g) of the Act. (Section 1877(g)(3) and (g)(4) sanctions
are covered in an OIG regulation that was published at 60 FR 16580 on
March 31, 1995.)
Because of the significant changes we are making in Phase I of this
rulemaking, we are publishing these regulations in final form with a
90-day comment period. We are interested in the industry's views as to
the changes we have incorporated into these regulations. Any further
changes we deem necessary based on comments will be addressed in Phase
II of this rulemaking or shortly thereafter.
Regarding the issue of compliance guidelines, we often issue
guidelines in the form of manual provisions or operational policy
letters when we find that the statute and regulations do not address
particular issues in sufficient detail.
Comment: A number of commenters objected to what they perceived as
disparate treatment of solo and group practitioners. One commenter, for
example, complained that under the proposed rule, a solo practitioner
could provide, and keep the profits from, unlimited ancillary services
provided to his or her patients, regardless of how much the physician
self-refers in his or her own office, whereas a group practitioner
could not.
Response: Certain disparities between the treatment of group and
solo practitioners are inherent in the statutory language and
structure. For example, the Congress expressly limited profit shares
for group practice members to methodologies that do not directly take
into account the member's DHS referrals. For obvious reasons, solo
practitioners cannot be similarly limited. On the other hand, the
statute allows group practices greater flexibility in terms of the
locations where they can provide DHS to their patients and still come
within the in-office ancillary services exception. To the extent
possible, and consistent with the statute, we have tried in Phase I of
this rulemaking to minimize the regulatory disparities between group
and solo practitioners.
Comment: In noting that the January 1998 proposed regulation
interpreted the statute to minimize any risk of fraud or abuse, several
commenters stated that the marginal anti-fraud benefit of this approach
is low because of additional post-1993 fraud and abuse legislation, the
implementation of the anti-kickback statute, computer claims payment
edits instituted by our carriers, and the creation of the National
Practitioners Data Bank. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) increased funding for Medicare
program safeguards such as increased coordination between Federal,
State, and local authorities; investigations, audits, and inspections;
and guidance to the industry. HIPAA also established the Medicare
Integrity Program to encourage private entities to engage in anti-fraud
activities. The BBA in 1997 also created more severe criminal penalties
for health care fraud. The commenters stated that the January 1998
proposed regulation prohibits many otherwise appropriate relationships
in order to deter a small proportion of inappropriate practices. The
commenters asked that the final rule be more flexible and not
overcompensate for potential risks because the commenters believe that
post-1993 legislation and enforcement
[[Page 863]]
efforts can address any inappropriate practices that may or may not be
deterred by the physician self-referral law.
Response: As described above, the approach taken by the Congress in
enacting section 1877 of the Act results in important differences
between it and other anti-fraud and abuse measures, especially the
criminal anti-kickback statute (section 1128B(b) of the Act). The laws
are complementary and, although overlapping in some aspects, not
redundant. We believe the Congress intended to create an array of fraud
and abuse authorities to enable the government to protect the public
fisc, beneficiaries of Federal programs, and honest health care
providers from the corruption of the health care system by unscrupulous
providers. We have revisited the January 1998 proposed rule in
significant respects that minimize any unnecessary impact on providers.
Comment: A number of commenters objected to the inclusion in
several of the proposed regulatory exceptions, such as the exception
for fair market value transactions, of a requirement that the
transaction be in compliance with the anti-kickback statute. According
to the commenters, the two statutes are separate and, since the anti-
kickback statute is intent-based, it would be impossible to determine
with certainty whether a transaction meets the exceptions.
Response: We recognize that section 1877 of the Act and the anti-
kickback statute, section 1128B(b) of the Act, are different statutes
and compliance with one does not depend on compliance with the other in
most situations. Notwithstanding, the Secretary's authority to create
additional regulatory exceptions to section 1877 of the Act is limited
by the requirement in section 1877(b)(4) that she determine that the
excepted financial relationship ``does not pose a risk of program or
patient abuse.'' Section 1877 of the Act sets a minimum standard for
acceptable financial relationships; many relationships that may not
merit blanket prohibition under section 1877 of the Act can, in some
circumstances and given necessary intent, violate the anti-kickback
statute. If the requirement that a financial relationship comply with
the anti-kickback statute were dropped, unscrupulous physicians and
entities could potentially protect intentional unlawful and abusive
conduct by complying with the minimal requirements of a regulatory
exception created under section 1877(b)(4) of the Act. (By contrast,
the statutory exceptions require no finding by the Secretary and, thus,
carry no presumptive protection under the anti-kickback statute.) In
addition, some arrangements may pose a risk of improper billing or
claims submission.
As a practical matter, the statutory language authorizing
exceptions leaves us two choices: (1) we can limit the exceptions to
those situations that pose no risk of fraud or abuse--a very stringent
standard that few, if any, of the proposed regulatory exceptions meet;
or (2) we can protect arrangements that, in most situations, would not
pose a risk, and rely on the anti-kickback statute or other fraud and
abuse laws to address any residual risk. Given the commenters'
expressed preference for flexibility, we have chosen the latter
alternative. Moreover, since the parties should be in compliance with
the anti-kickback statute, the additional regulatory burden is minimal.
In the interest of simplification, we are considering an additional
exception under section 1877 of the Act for any arrangement that fits
squarely in an anti-kickback ``safe harbor'' (section 1001.952
(Exceptions)) and plan to address the matter further in Phase II of
this rulemaking.
III. The General Prohibition Under Section 1877 of the Act
Section 1877(a) of the Act establishes the basic structure and
elements of the statutory prohibition: A physician cannot (1) refer
patients to an entity (2) for the furnishing of DHS (3) if there is a
financial relationship between the referring physician (or an immediate
family member of the referring physician) and the entity, (4) unless
the financial relationship fits within one of the specific exceptions
in the statute or regulations issued by the Secretary. (DHS are defined
in Sec. 411.351 and discussed at length in section VIII.A of this
preamble.) In this section, we discuss our interpretations of what
constitutes a financial relationship, especially an indirect financial
relationship, and what constitutes a referral, including an indirect
referral.
Existing Law: Subject to certain exceptions, section 1877(a)(1) of
the Act prohibits a physician from making a referral to an entity for
the furnishing of DHS for which Medicare would otherwise pay, if the
physician (or an immediate family member) has a financial relationship
with the DHS entity, and prohibits the DHS entity from billing Medicare
or any individual (including, but not limited to, the beneficiary),
third party payer, or other entity for those services. A financial
relationship is (i) either an ownership or investment interest in the
DHS entity (or in another entity that holds an ownership or investment
interest in the entity) or (ii) a compensation arrangement with the DHS
entity, either directly or indirectly. An ownership or investment
interest may exist through equity, debt, or other means.
As defined by section 1877(h)(5) of the Act, a ``referral'' means a
request by a physician for an item or service for which payment may be
made under Medicare Part B, including a request for a consultation
(including any tests or procedures ordered or performed by the
consulting physician or under the supervision of the consulting
physician), and the request or establishment of a plan of care by a
physician that includes the furnishing of DHS, with certain exceptions
for consultations by pathologists, diagnostic radiologists, and
radiation oncologists.
Proposed Rule: In general, we proposed interpreting the concept of
``indirect financial relationship'' very broadly. In the January 1998
proposed rule, we proposed including within the reach of section 1877
of the Act any ownership or investment interest, including ownership or
investment interests through intermediate entities, no matter how
indirect, and we proposed to include indirect compensation
relationships by tracing compensation paid by an entity furnishing DHS
through other entities, regardless of how the compensation might be
transformed.
We similarly proposed a broad interpretation of the phrase
``referral to an entity.'' As defined in the statute, a referral is a
``request'' by a physician for a DHS. We proposed defining a
``request'' as any step taken after a physician performs an initial
examination or a physician service on a patient that indicates that the
physician believes the DHS is necessary. Under this broad reading, a
referral could be either written or oral, made on medical charts or
records, or indicated by a prescription or written order. We also
proposed that a referral could be direct or indirect, meaning that a
physician would be considered to have made a referral if he or she
caused the referral to have been made by someone else (for example, an
employee, a hospital discharge planner, or a staff member of a company
that the physician owns or controls). We interpreted ``referrals'' to
include DHS services subsequently performed by the referring physician.
The Final Rule: Given the significance of the general prohibition,
we received many comments related to various aspects of the January
1998 proposed rule. In particular, commenters sought clarification of
fundamental statutory concepts, including direct and indirect
[[Page 864]]
compensation and ownership or investment arrangements. In addition,
many commenters took issue with our interpretation of several of the
key terms, including ``referral,'' ``consultation,'' and
``furnishing.''
We are making a number of significant changes to the general
prohibition sections in Phase I of this rulemaking. These revisions
include the following:
Clarification as to what constitutes a ``direct'' versus
an ``indirect'' financial arrangement, including the addition of a
``knowledge'' element for indirect financial relationships.
Creation of a new exception for indirect compensation
arrangements.
Clarification that payment obligations that are secured,
including those secured by a revenue stream, are among the
relationships considered to be ownership or investment interests.
Revision of the definition of ``referral'' to exclude
services personally performed by the referring physician.
Creation of an exception under section 1877 of the Act for
entities submitting claims for DHS that did not know of and did not
have reason to suspect the identity of the physician who made the DHS
referral to the entity.
These changes are discussed in greater detail below. First, we
address the definition of a ``financial relationship;'' second, we
address the definition of ``referral.'' These two aspects of the
general prohibition under section 1877 of the Act are analytically
distinct and require separate analyses. In general, we believe a
sensible approach is to ask two questions: (1) Is there a direct or
indirect financial relationship between the referring physician and the
entity furnishing DHS? (2) Is there a referral for DHS from the
physician to the entity? If the answer to both questions is
affirmative, section 1877 of the Act is violated, unless an exception
applies.
A. When Is There a Financial Relationship Between the Physician and the
Entity?
The existence of a financial relationship between the referring
physician (or an immediate family member) and the entity furnishing DHS
is the factual predicate for triggering the application of section 1877
of the Act. Section 1877(a)(2) defines a financial relationship as: (1)
An ownership or investment interest of a referring physician (or
immediate family member) in the entity furnishing DHS, or (2) a
compensation arrangement between the referring physician (or an
immediate family member) and the entity furnishing DHS. Any financial
relationship between the referring physician and the DHS entity
triggers application of the statute, even if the financial relationship
is wholly unrelated to a designated health service payable by Medicare.
In many instances, the financial relationship will not relate to DHS.
Unless the financial relationship fits into a statutory or regulatory
exception, however, referrals for DHS are prohibited.
The statute expressly contemplates that ``financial relationships''
include both direct and indirect ownership and investment interests and
direct and indirect compensation arrangements between referring
physicians and DHS entities (sections 1877(a)(2) and 1877(h)(1) of the
Act, respectively). We consider a ``direct'' financial relationship to
be an arrangement between the entity furnishing DHS and a referring
physician or immediate family member with no person or entity (other
than agents) interposed between them. While some commenters inquired
whether particular arrangements or relationships, such as stock options
or vesting in retirement plans, could be characterized as ownership or
compensation arrangements, there were no substantive comments as to the
underlying definition of a direct financial relationship. The specific
questions raised by the commenters are addressed in the comments and
responses that follow.
With respect to ``indirect'' financial relationships, in the
preamble to the January 1998 proposed rule, we proposed to include as
an ``indirect'' financial relationship any ownership or investment
interest, including ownership or investment interests through
intermediate entities, no matter how indirect, and we proposed to
include indirect compensation relationships by tracing compensation
paid by an entity furnishing DHS through other entities, regardless of
how the compensation might be transformed. In short, we proposed very
broad interpretations of indirect financial relationships.
We have generally adopted the overall interpretations of
``financial relationship'' in the January 1998 proposed rule, with the
important exception of ``indirect'' financial relationships. Many
commenters objected to the discussions in the preamble to the January
1998 proposed regulations relating to indirect financial relationships
on the grounds that the discussions were confusing, inconsistent,
administratively impracticable, or unfair. We have responded to the
commenters by substantially revising the regulations pertaining to
indirect financial relationships, especially indirect compensation
arrangements. As described in the paragraphs that follow, we have added
a knowledge element to the definitions of ``indirect'' financial
relationships. We have also made other significant changes in the
treatment of indirect compensation arrangements.
Knowledge Element for Establishing the Existence of an Indirect
Financial Arrangement
We are amending the definitions of (i) ``indirect ownership or
investment interest'' and (ii) ``indirect compensation arrangement'' in
Sec. 411.354 to include a knowledge element. Many commenters expressed
concern that by extending liability for indirect financial
relationships to relationships involving any number of intermediate
persons or entities, the January 1998 proposed regulation imposed an
unfair burden on entities furnishing DHS affirmatively to ferret out
and discover potential indirect financial relationships or else risk
submitting improper claims because of relationships they knew nothing
about. While we believe that, in most circumstances, the referring
physician (or his or her immediate family member) will only be one or
two degrees of separation from the entity furnishing the DHS, we have
nevertheless modified the January 1998 proposed regulation to add a
``knowledge'' element in cases of indirect financial relationships.
This modification limits exposure under section 1877 of the Act to
those circumstances in which the entity furnishing DHS has actual
knowledge of an indirect financial relationship or acts in reckless
disregard or deliberate ignorance as to the existence of an indirect
financial relationship. (We sometimes refer to this ``actual knowledge
or reckless disregard or deliberate ignorance'' standard in this
preamble by the shorthand phrase ``knows or has reason to suspect.'')
We define the ``knowledge'' element in a manner consistent with Federal
law, as described below.
In order to satisfy this ``knowledge'' element in the case of an
indirect ownership or investment interest, the DHS entity need only
know or have reason to suspect that the referring physician (or
immediate family member) has some ownership or investment interest in
the entity furnishing the DHS (or in an entity that holds an ownership
or investment interest in the DHS entity). Likewise, to satisfy this
``knowledge'' element in the case of an indirect compensation
arrangement, the DHS entity need only
[[Page 865]]
know or have reason to suspect that the referring physician (or
immediate family member) is receiving some aggregate compensation that
varies with, or otherwise reflects, the volume or value of referrals or
other business generated by the referring physician for the entity
furnishing DHS. In other words, we are not requiring that the DHS
entity have knowledge of every link in the chain of entities having
financial relationships that connects the DHS entity to the referring
physician (or immediate family member).
Specifically, we are providing that, in the case of indirect
financial relationships, referrals will only be prohibited (and claims
disallowed) if the DHS entity (i) has actual knowledge that the
referring physician (or immediate family member) has an indirect
financial relationship (that is, that the referring physician or
immediate family member (a) has some ownership or investment interest
in the DHS entity or (b) receives aggregate compensation that takes
into account or otherwise reflects referrals or other business
generated by the referring physician for the entity furnishing DHS), or
(ii) acts in reckless disregard or deliberate ignorance of whether such
an indirect financial relationship exists. Essentially, we are adopting
a ``knowledge'' element comparable to the scienter standard in the
Civil Monetary Penalty Law, section 1128A of the Act. This
``knowledge'' element generally imposes a duty of reasonable inquiry on
providers. In the specific context of indirect financial relationships
under section 1877 of the Act, we wish to make clear that, given the
impracticability of investigating every possible indirect financial
relationship involving a referring physician, the knowledge element
does not impose an affirmative obligation to inquire as to indirect
financial relationships. A duty of reasonable inquiry does require,
however, that providers in possession of facts that would lead a
reasonable person to suspect the existence of an indirect financial
relationship take reasonable steps to determine whether such a
financial relationship exists and, if so, whether that indirect
financial relationship falls within an exception to the statute (such
as the new exception for certain indirect compensation arrangements in
Sec. 411.354) or whether the DHS being furnished fall within an
exception (such as the in-office ancillary services exception) before
submitting a claim for the referred item or service or making a
referral. The reasonable steps to be taken will depend on the
circumstances. Reasonable steps may include the DHS entity obtaining,
in good faith, a good faith, written assurance from the referring
physician (or immediate family member, as applicable) or the entity
from which the referring physician (or immediate family member)
receives direct compensation that the physician's or immediate family
member's aggregate compensation is fair market value for services
furnished and does not take into account or otherwise reflect referrals
or other business generated by the referring physician for the DHS
entity, so as to qualify under the new exception for certain indirect
financial relationships in Sec. 411.354 (discussed below). A written
assurance is not determinative, however, especially if the DHS entity
has knowledge of, or reason to suspect, other, contradictory evidence
or information.
The addition of a knowledge requirement as an element of an
improper indirect financial relationship addresses the concerns
expressed by many commenters that it would be impossible continuously
to investigate and uncover indirect financial relationships of every
referring physician and his or her immediate family members. While the
``knowing'' element we are adopting may allow more claims to be paid
than a requirement that would interpret the statute to impose an
absolute duty to investigate (and may impose a higher evidentiary
burden on the government in an enforcement action), we believe that
incorporating a knowledge element in the definition of indirect
financial relationships more fairly balances the burden of compliance
against the risk of abuse the statute was intended to prevent. We
iterate that for purposes of section 1877 of the Act, the DHS entity
has no affirmative duty to inquire or investigate whether an indirect
financial relationship with a referring physician (or immediate family
member) exists, absent some information that would put a reasonable
person on alert, and that the duty that is imposed is one of reasonable
inquiry in the circumstances.
Indirect Compensation Arrangements
We have substantially revised the January 1998 proposed regulations
by restructuring our approach to indirect compensation arrangements. In
the January 1998 proposed regulation, we had proposed to trace
compensation paid by an entity furnishing DHS through any number of
other persons or entities, regardless of how the compensation might be
transformed. Many commenters complained that the examples provided in
different parts of the preamble to the January 1988 proposed rule were
inconsistent or unclear. Upon reviewing the comments and the preamble,
we understand the commenters' confusion and have revised the provisions
that apply to indirect compensation arrangements by:
Defining ``indirect compensation arrangement'' to
establish a ``bright line'' test, including the ``knowing'' element
described above; and
Creating a new exception under section 1877(b)(4) of the
Act for certain indirect compensation arrangements that is generally
consistent with the new ``fair market value'' exception for direct
compensation arrangements.
This treatment of indirect compensation arrangements more clearly
parallels the analysis and regulatory treatment of direct compensation
arrangements by (i) defining the universe of financial relationships
that potentially triggers disallowance of claims (that is, the
definition of ``indirect compensation arrangement''); and (ii) creating
an exception for the subset of ``indirect compensation arrangements''
that will not trigger disallowance. The standards in the new exception
for indirect compensation arrangements are based in large part on the
standards found in the various statutory and proposed regulatory
exceptions for direct compensation arrangements, especially the fair
market value exception proposed in the January 1998 proposed
regulations, which was received favorably by the commenters and has
been incorporated into the final regulations in Sec. 411.354(d).
The definition of an ``indirect compensation arrangement'' and the
new exception are discussed in detail below.
Definition of ``Indirect Compensation Arrangement.'' We
have developed a simple test to identify whether an indirect
compensation relationship exists. We are adopting in Phase I of this
rulemaking, a definition of ``indirect compensation arrangement'' that
has three elements: (1) There must exist between the referring
physician (or immediate family member) and the DHS entity an unbroken
chain of persons or entities that have financial relationships between
them (that is, each link in the chain has either an ownership or
investment interest or compensation arrangement with the preceding
link); (2) the aggregate compensation received by the referring
physician (or immediate family member) from the person or entity in the
chain with which the physician has a direct financial relationship
varies with, or otherwise reflects, the volume or value of referrals or
other business generated by the
[[Page 866]]
referring physician for the entity furnishing DHS; and (3) the DHS
entity must have actual knowledge that the aggregate compensation
received by the referring physician (or immediate family member) from
the entity with which the physician has a direct financial relationship
varies with, or otherwise reflects, the volume or value of referrals or
other business generated by the referring physician for the entity
furnishing DHS, or act in reckless disregard or deliberate ignorance of
the existence of such relationship.
The first element of the indirect compensation arrangement
definition is met if there is an unbroken chain of financial
relationships from the DHS entity to the referring physician (or
immediate family member), regardless of the form or purpose of the
payments or their relationship to the DHS referrals. This element is
relatively straightforward. The unbroken chain that creates an indirect
compensation arrangement can consist of any combination of excepted or
unexcepted financial relationships, whether ownership or investment
interests or compensation arrangements.
One issue raised by several commenters was whether an ownership or
investment interest could also create a compensation arrangement. An
ownership or investment interest creates a direct compensation
arrangement between the owner/investor and the owned/investment entity,
since the ownership or investment establishes an arrangement for the
distribution of any profits or other benefits (for example, tax
benefits in the case of a pass-through entity) from the venture to the
owners/investors. However, when the ownership or investment interest
itself meets a specific statutory exception under section 1877 of the
Act, any anticipated return on investment or other remuneration flowing
from the ownership or investment is similarly excepted, provided the
return or other remuneration is bona fide and not a sham (sham returns
would include, for example, use of loan proceeds to make distributions
in the absence of bona fide profits from the venture).
An excepted financial relationship may still constitute a link in a
chain that establishes an indirect compensation arrangement between a
referring physician and a DHS entity. For example, if a referring
physician owns an interest in a hospital that meets the exception under
section 1877(d)(3) of the Act (which allows a referring physician to
own an interest in a hospital as a whole, but not in a subdivision of
the hospital), and the hospital contracts for services with a clinical
laboratory to which the physician refers, there would exist a chain of
persons or entities having financial relationships between the
referring physician and the DHS entity (referring physician
whole hospital clinical laboratory), even though the
financial relationship between the referring physician and the hospital
fits in an exception. We address this issue further in the responses to
comments that follow.
The second element of the definition of indirect compensation
arrangement is that the aggregate compensation received by the
referring physician (or immediate family member) from the person or
entity in the chain with which the referring physician (or immediate
family member) has a direct financial relationship varies with, or
otherwise reflects, the value or volume of referrals or other business
generated by the referring physician for the entity furnishing DHS. For
the purpose of the definition of indirect compensation arrangements, we
are looking at whether aggregate compensation in the direct financial
relationship varies with, or otherwise reflects, the value or volume of
referrals or other business generated by the referring physician for
the entity furnishing DHS. Accordingly, for purposes of this element,
any ``per service'' or ``per use'' payment arrangement between the
physician and the person or entity with which the physician has the
direct relationship that is based, in whole or in part, on referrals or
other business generated for the DHS entity would satisfy this element.
So too, any payment or other remuneration conditioned more generally on
referrals or business generated for the DHS entity would satisfy this
element of the definition of ``indirect compensation arrangement,''
except as described in Sec. 411.354(d)(5) (describing limited
circumstances when an entity may condition compensation on referrals).
(For a discussion of Sec. 411.354(d)(5), see section V of this
preamble).
If the financial arrangement between the physician (or immediate
family member) and the person or entity in the chain with which the
physician has the direct financial relationship is an ownership or
investment interest, we will look at the relationship between that
person or entity (that is, the ``owned entity'') and the next person or
entity in the chain with which the owned entity has a direct financial
relationship (if that financial relationship is also an ownership or
investment interest, we will look to the next direct financial
relationship in the chain, and so forth, until we reach a compensation
arrangement with an ``unowned'' entity with which there is a
compensation arrangement--a chain consisting entirely of owned entities
is an indirect ownership or investment interest, not an indirect
compensation arrangement). The inquiry then becomes whether the
aggregate compensation the owned entity receives varies with, or
otherwise reflects, the volume or value of referrals or other business
generated by the referring physician for the entity furnishing DHS.
The third element in the definition of indirect compensation
arrangement is that the entity furnishing DHS must know or have reason
to suspect that the referring physician's (or immediate family
member's) aggregate compensation varies with, or otherwise reflects,
the value or volume of referrals or other business generated by the
referring physician for the entity furnishing the DHS. As discussed
above, reason to suspect a financial relationship will trigger a duty
to make an inquiry into the relationship that is reasonable in the
circumstances. In the context of indirect compensation arrangements, in
most cases, the referring physician (or immediate family member) will
have knowledge of the basis for his or her compensation and be in the
best position to assure compliance with section 1877 of the Act. Thus,
as noted above, reasonable inquiry by the DHS entity may include
obtaining, in good faith, a good faith, written assurance from the
referring physician (or immediate family member, as applicable) or the
entity from which the referring physician (or immediate family member)
receives direct compensation that the physician's or immediate family
member's aggregate compensation falls within the indirect compensation
arrangement exception in Sec. 411.354 (that is, the compensation is
fair market value for services furnished and does not take into account
or otherwise reflect referrals or other business generated by the
referring physician for the DHS entity). As discussed below, we are
creating a new exception for indirect compensation arrangements, for
which we believe most nonabusive indirect compensation arrangements can
readily qualify.
Exception for Indirect Compensation Arrangements. While
the definition of an ``indirect compensation arrangement'' identifies
the universe of potentially improper arrangements, we recognize that
many of those indirect compensation arrangements may be substantially
similar to direct compensation arrangements that fit in one of the
existing statutory exceptions in section 1877 of the Act or one of the
[[Page 867]]
regulatory exceptions we proposed in January 1998. However, many of
these indirect compensation arrangements cannot fit in those direct
compensation arrangement exceptions, because the arrangements are with
persons or entities that are not the person or entity furnishing DHS.
Accordingly, we are creating a new exception, using the Secretary's
authority under section 1877(b)(4) of the Act, to provide an exception
for certain indirect compensation arrangements. The new exception would
protect an indirect compensation arrangement if the following
conditions are satisfied:
The compensation received by the referring physician (or
immediate family member) from the person or entity in the chain with
which the referring physician (or immediate family member) has the
direct financial relationship is fair market value for the items or
services provided under the arrangement and does not take into account
the value or volume of referrals or other business generated by the
referring physician for the entity furnishing DHS;
The compensation arrangement between the referring
physician (or immediate family member) and the person or entity in the
chain with which the physician (or immediate family member) has the
direct financial relationship is set out in writing, signed by the
parties, and specifies the services covered by the arrangement (in the
case of a bona fide employment relationship, the arrangement need not
be set out in a written contract, but it must be for identifiable
services and be commercially reasonable even if no referrals are made
to the employer);
The compensation arrangement does not violate the anti-
kickback statute or any laws or regulations governing billing or claims
submission.
Where the financial relationship between the physician and the
person or entity with whom he or she has a direct financial
relationship is an ownership or investment interest, we will apply the
requirements of this exception to the first compensation arrangement in
the chain of relationships between the physician and the entity
furnishing DHS.
For purposes of the new exception, in determining whether
compensation takes into account the value or volume of referrals or
other business generated by the referring physician for the DHS entity,
we will apply the tests for ``volume or value of referrals'' and
``other business generated'' that are discussed in section V of this
preamble and set forth in Sec. 411.354(d) of these regulations. This is
consistent with our determination to interpret those phrases uniformly
in all exceptions in which they appear. Thus, ``per service'' or ``per
use'' compensation arrangements can fit in the new exception for
indirect compensation arrangements, provided the ``per use'' or ``per
service'' payments are fair market value for the items or services
provided (and do not include any additional amount that might be
attributable to the volume or value of referrals or other business
generated between the referring physician and the entity furnishing
DHS) and the payments do not vary during the term of the compensation
arrangement in any manner that takes into account referrals to the DHS
entity.
Some of the statutory and regulatory exceptions operate to exclude
certain categories of services from the reach of section 1877 of the
Act, when certain criteria are satisfied. In effect, services described
in these exceptions are not DHS for purposes of the statute. These
service-based exceptions include the physicians' services exception,
in-office ancillary services exception, prepaid plans exception, and
academic medical center exception, in Sec. 411.355 of these
regulations. Thus, even if there is an indirect compensation
arrangement between a referring physician and an entity furnishing DHS,
these exceptions may apply to referrals of the particular services
described in the exception. Referrals of DHS that do not fit in a
services-based exception would be prohibited unless the indirect
compensation arrangement fits in the new exception for indirect
compensation arrangements.
Finally, we are not adopting our interpretation in the January 1998
proposed rule with regard to common ownership or investment in the same
entity (which is not the entity furnishing DHS) by the referring
physician (or immediate family member) and the entity furnishing DHS.
In the January 1998 proposed rule, we proposed that such common
ownership would not create a compensation arrangement between the
referring physician and the DHS entity. However, in the light of our
modified and more limited definitions of indirect financial
relationships, we have revisited the issue of common ownership. We
believe that such relationships should be analyzed in the same manner
as any indirect financial relationship.
We are also making the following changes in the general prohibition
sections of the regulations:
Clarification that an ownership or investment interest in
a subsidiary corporation will not be considered a direct ownership or
investment interest in the parent or a sibling corporation. However, an
owner of a subsidiary corporation may have an indirect financial
relationship with the parent or sibling company that could trigger a
violation of section 1877 of the Act.
Treatment of stock options as creating a compensation
relationship and not an ownership interest until such time as the
options are exercised.
Clarification that payment obligations that are secured,
including those that are secured by a revenue stream, are considered
ownership or investment interests.
In the following paragraphs, we address the specific comments we
received on the discussion and proposed interpretations of financial
relationships set out in the January 1998 proposed rule and our
responses to them.
Comment: A number of commenters objected to the concept of
``tracing'' compensation from, and ownership or investment interests
in, an entity furnishing DHS through any number of intermediate
entities to a referring physician. According to these commenters, the
administrative burden of trying to comply would be costly and
ultimately impossible. These commenters believe that our proposed
interpretation would place the entities furnishing the services, as
well as physicians making referrals, at risk for what was unknowable
given potentially complex business arrangements. One commenter
suggested that we keep the same definition of financial relationship as
the August 1995 final rule, which the commenter stated was limited to
direct ownership and compensation arrangements.
Response: The commenter who suggested that the August 1995 final
rule was limited to direct financial relationships is mistaken. In the
August 1995 final rule, we defined financial relationship to include
indirect financial relationships. We did not, however, expand on how we
would interpret and apply the term ``indirect.'' We believe that
limiting the statutory prohibition to direct ownership and compensation
arrangements would seriously weaken the statute. Unscrupulous
physicians and entities furnishing DHS would simply interpose entities
between themselves and funnel the money through them. Furthermore, as
we stated in the preamble to the January 1998 proposed rule, the
statute, by its terms, applies to indirect ownership and investment
interests and compensation arrangements.
As discussed above, we have revised the treatment of indirect
compensation arrangements. First, we are no longer
[[Page 868]]
requiring any tracing of payments. The initial screen is simply whether
there is an unbroken chain of persons or entities having financial
relationships between the referring physician (or an immediate family
member) and the entity furnishing DHS, regardless of the nature of the
payments or financial relationships. Second, we have limited liability
to instances in which the DHS entity knows or has reason to suspect
that aggregate compensation received by the referring physician (or
immediate family member) varies with, or otherwise reflects, the volume
or value of referrals or other business generated for the DHS entity.
Finally, we have made clear that absent information that would put a
reasonable person on alert, a DHS entity has no affirmative duty to
inquire or investigate such arrangements.
Comment: A major trade association representing physicians (and
other commenters) claimed that our explanations of how we would treat
several types of situations involving indirect financial relationships
appeared inconsistent. Specifically, the association referred to the
example of a hospital contracting with a group practice to furnish
physician services and to staff the hospital, and the hospital paying
the group practice for these services, and with the group practice, in
turn, compensating the physicians through salaries that ``in some way''
reflect the hospital services. According to the January 1998 proposed
rule, the physicians would have an indirect compensation relationship
with the hospital that would require an exception. The commenter
complained that this position is inconsistent with another example in
the preamble in which we stated that, when a physician who owned a
physical therapy (PT) company referred patients for treatment including
PT to a skilled nursing facility (SNF) that contracted with the
physician's PT company, we would equate the physician with the PT
provider.
Response: We believe the new provisions for indirect compensation
arrangements address the commenters' concerns.
In the example cited by the commenter involving the payments by a
hospital to a group practice that, in turn, pays its employees a
salary, we would not require evidence that the salary is ``in some
way'' related to the hospital payment. It is enough that the hospital
has a financial relationship (that is, a personal services contract)
with the medical group, which, in turn, has a financial relationship
with its employees. Since there is an unbroken chain of financial
relationships between the referring physician and the DHS entity, the
first element in the indirect compensation definition is satisfied.
The second element of the definition of an indirect compensation
arrangement would be satisfied if the aggregate compensation to the
referring physician from the medical group varied with, or otherwise
reflected, the volume or value of referrals or other business generated
by the referring physician for the DHS entity (that is, the hospital)--
a fact that should be relatively easy to establish.
The final element in the definition of an indirect compensation
relationship requires that the hospital (that is, the DHS entity) (i)
have actual knowledge or reason to suspect that the referring physician
is receiving compensation from the medical group (that is, the entity
in the chain with which the referring physician has a direct financial
relationship) that varies with, or otherwise reflects, the volume or
value of referrals or other business generated for the hospital.
Indirect compensation arrangements that do not fit in the new
exception for such arrangements can be restructured or abandoned.
Arrangements under which a referring physician receives compensation
tied to the volume or value of his or her referrals or other business
generated for a DHS entity are the very arrangements at which section
1877 of the Act is targeted.
Commenters claimed that our discussion at 63 FR 1710 in the
preamble of the January 1998 proposed rule was confusing because of the
way we described a physician's referrals to a SNF, which, in turn,
referred the patients to a PT company in which the referring physician
had an ownership interest and which billed Medicare directly for
services to SNF patients. In that example, the referring physician had
a direct financial relationship (ownership) with the PT company. There
was no indirect financial relationship involving the SNF. Rather, the
referring physician had a referral arrangement with the SNF, but not a
financial relationship, and the SNF had a referral arrangement with the
PT provider, but not a financial relationship. We think the issue in
the example is whether, by sending patients to the SNF, the physician
is making referrals to the PT provider, with which the physician has a
direct financial relationship. We discuss that issue in the following
section on referrals.
However, we think it useful to reconsider the example in light of
consolidated billing for SNFs. (We note that consolidated billing
should not be confused with composite rate payments. Consolidated
billing is a process for submitting claims while composite rate payment
constitutes a distinct payment methodology.) Under consolidated
billing, the SNF in the example will be billing the PT services
directly to Medicare. In this situation, there would be an indirect
compensation relationship between the SNF--which is now the DHS
entity--and the referring physician. Since the SNF would be purchasing
PT services from the PT company owned by the referring physician, a
financial relationship would exist between the SNF and the PT company,
and the physician's ownership interest in the PT company would complete
the chain (SNF PT company referring physician). Thus,
the first element of the definition of an indirect compensation
arrangement would be satisfied. With respect to the second element, the
financial relationship between the referring physician and the person
or entity in the chain with which the referring physician has a direct
financial relationship (that is, the PT company) is an investment
interest. Accordingly, we look to the compensation paid by the SNF to
the owned entity (that is, the PT company) in order to see if the
second element is satisfied. Since the PT company is compensated on a
per service basis that reflects referrals by the referring physician to
the SNF, the second element is met. Assuming knowledge on the part of
the SNF, there would be an indirect compensation arrangement, and the
issue becomes whether the indirect compensation arrangement satisfies
the new exception for indirect compensation arrangements in
Sec. 411.354.
Comment: Several commenters stated that when there is a chain of
payments that begins with a payment by a provider of DHS to another
entity controlled by it, the first payment outside the entities under
common control should be the arrangement that has to meet an exception.
For example, in looking at payments from a hospital to a physician
group practice that is wholly owned by the hospital for hospital
staffing and subsequent payments from the group to its employed
physicians, the payments that would need to qualify for an exception
are the payments to the employed physicians. One commenter proposed
that when tracing indirect financial relationships, the inquiry should
end any time a payment in the chain meets an exception.
Response: The first commenters' suggested approach is problematic
because the ``volume or value'' standard
[[Page 869]]
for the employed physician's compensation is measured based on
referrals to the physician's employer, the medical group. Applying the
commenters' proposed test to the example, the medical group could pay
the physician employees based on the volume and value of referrals and
business generated for the hospital and still comply with the
employment exception. Phase I of this rulemaking would require that the
compensation to the physicians not vary with or otherwise reflect
either referrals to the group (to comply with the employee exception)
or referrals to, or other business generated for, the hospital (so that
it does not qualify as an indirect compensation relationship). To the
extent that the compensation paid to the physicians did vary based on
referrals or other business generated for the hospital, the arrangement
would still be protected if it complied with the new indirect
compensation arrangements exception in Sec. 411.354.
We also considered, but ultimately rejected, the second commenter's
proposal that the inquiry end any time a financial relationship fits in
an exception. The fact that one financial arrangement meets an
exception does not necessarily prevent the referring physician from
receiving payments based on DHS referrals to a DHS entity. For example,
if a person or entity owns both a group practice and a DHS entity, a
compensation arrangement with a physician employee of the group
practice could fit in an exception so long as it did not take into
account referrals between the employee and the group practice. The
exception would not, however, prevent the compensation arrangement from
taking into account referrals or other business generated by the
physician employee for the DHS entity.
Having considered the several views of the commenters, we believe
that Phase I of this rulemaking strikes a balance that protects the
Medicare program while limiting the reach of the regulation to abusive
relationships. Under Phase I of this rulemaking, there would be an
unbroken chain of financial relationships (the DHS entity the
owner medical group referring physician). However,
unless the compensation received by the employed physician varies with
or otherwise reflects his or her referrals to, or other business
generated for, the DHS entity, and the DHS entity has the requisite
knowledge, there would not be an indirect compensation arrangement. If
there were, the arrangement would have to meet an applicable exception.
Comment: One commenter asked whether there would be an indirect
compensation arrangement if an employed physician refers patients for
DHS to an entity that has an ownership or investment interest in the
physician's employer.
Response: There may be an indirect compensation arrangement if a
physician refers patients for DHS to an entity that has an ownership or
investment interest in the physician's employer, since the physician
would be referring to a DHS entity that has a financial relationship
(ownership or investment) with an entity that has a financial
relationship (compensation) with the physician. If the referring
physician's compensation from his or her employer reflected DHS
referrals or other business generated by the referring physician for
the entity providing the DHS, and the DHS entity had actual knowledge
or reason to suspect that the physician's aggregate compensation
reflected the volume or value of referrals or other business for the
DHS entity, there would be an indirect compensation arrangement. Unless
the arrangement fit in the new indirect compensation arrangements or
another exception, referrals to the entity would be prohibited.
Comment: Another commenter asked whether a physician's referrals
would be prohibited in a situation involving a physician practice
management company (PPMC). Specifically, the commenter asked about a
referring physician who has an ownership or investment interest in a
PPMC, which, in turn, controls a captive professional corporation (PC)
through a web of legal agreements, including a long-term management
contract. The physician refers patients for DHS to the captive
professional corporation.
Response: In the scenario described by the commenter, there is very
likely an indirect compensation arrangement, since the captive PC has a
financial relationship with the PPMC (the management contract), which
has a financial relationship (ownership or investment) with the
referring physician. Since the financial relationship between the
physician and the entity in the chain of financial relationships with
which the physician has a direct financial relationship (that is, the
PPMC) is an ownership or investment interest, we look to the
compensation arrangement between the owned entity (that is, the PPMC)
and the next entity in the chain, in this case, the captive PC, to
determine whether the second element of the test for an indirect
compensation arrangement is met. Accordingly, if the entity furnishing
the DHS (the captive PC in this example) knows or has reason to suspect
that the PPMC's compensation from the captive PC varies with, or
otherwise reflects, the value or volume of the captive PC's business
(and consequently varies, in the aggregate, based on the referring
physician's DHS referrals to the captive PC), there would be an
indirect financial relationship between the captive PC and the
referring physician. Unless the indirect compensation arrangement fits
in the new indirect compensation arrangements or another exception, the
physician could not refer DHS to the captive PC, and the captive PC
could not submit claims for those DHS referrals.
Comment: Several commenters objected to our proposal that a
physician can receive indirect compensation through a nonprofit
enterprise if the enterprise is controlled by an individual who is in a
position to ``influence'' the physician's referrals. The example was
the owner of a clinical laboratory who is also the director of research
at a nonprofit research facility that could provide physician research
grants in exchange for referrals to the laboratory.
Response: The issue is whether there is a prohibited indirect
financial relationship between the DHS entity (the clinical laboratory)
and the referring physician. Assuming there is a financial relationship
between the owner of the clinical laboratory and the nonprofit research
facility, there would be a chain of persons or entities with financial
relationships (clinical laboratory research director
not-for-profit referring physician), and the issues
become (i) whether the aggregate amount of the research grants to the
referring physician varies with, or otherwise reflects, the value or
volume of referrals or other business generated by the referring
physician for the clinical laboratory, (ii) whether the clinical
laboratory knows of or has reason to suspect that the referring
physician's aggregate compensation under the research grants varies
with, or otherwise reflects, the volume or value of referrals or other
business generated for the clinical laboratory, and (iii) if there is
an indirect financial relationship, whether an exception applies. Of
course, even if there is no financial relationship between the clinical
laboratory and the nonprofit research facility, there could be a
violation of the anti-kickback statute, section 1128B(b) of the Act, in
the situation described in the comment.
Comment: Several commenters stated that compensation derived from
an
[[Page 870]]
ownership or investment interest (for example, a return on an
investment interest or a dividend) should not give rise to indirect
compensation. To support this position, they referred to discussions in
the preamble to the January 1998 proposed rule and in the preamble to
the August 1995 final regulations, in which we stated that compensation
derived from, or ancillary to, an investment interest that qualified
for an investment exception under sections 1877 (b) through (d) of the
Act would not also have to meet a compensation exception.
Response: We agree with the commenters that dividends or profit
distributions from an ownership or investment interest that qualifies
for an ownership or investment interest exception under sections
1877(b) through (d) of the Act do not also have to meet a separate
compensation exception. In other words, the ownership and investment
exceptions in the statute protect the ownership or investment interest
and any corresponding return on the excepted investment. Our discussion
in the preamble to the January 1998 proposed rule specifically
referenced and clarified the August 1995 final rule preamble
discussion, which was limited to the issue of whether distributions
from an excepted investment interest (that is, an ownership or
investment interest protected under sections 1877(b) through (d) of the
Act) had to meet an additional exception for compensation arrangements.
Nothing in either preamble discussion was intended to be interpreted as
saying that any other ownership or investment interests (that is,
ownership or investment interests that are not specifically excepted)
are not compensation arrangements. We believe that an ownership or
investment interest (including distributions from the interest) creates
a compensation arrangement, as defined in section 1877(h)(1)(A) of the
Act, between the owner/investor and the owned/investment entity and can
be part of a chain of persons or entities having financial
relationships that create an indirect compensation arrangement.
Without this interpretation, unscrupulous physicians could evade
section 1877 of the Act by simply interposing a shell entity, which
they own, between themselves and the DHS entity (which they do not own)
and taking out the compensation as dividends. In short, they would
simply launder the compensation through the shell investment entity.
Comment: Another commenter suggested that a loan and any interest
payments should be treated as either ownership or compensation, but not
both.
Response: We agree with the commenter. If a loan qualifies as a
protected ownership or investment interest, the interest payments do
not create a separate compensation arrangement. Accordingly, the
interest payments need not satisfy a separate compensation exception.
Comment: A number of commenters asked that we clarify that an
investment in a subsidiary that does not furnish DHS is not necessarily
an ownership interest in the parent or a sibling corporation.
Response: An ownership or investment interest in a subsidiary
company is neither an ownership or investment interest in the parent
company, nor in any other subsidiary of the parent, unless the
subsidiary company itself has an ownership or investment interest in
the parent or such other subsidiaries. However, an owner of a
subsidiary company may have an indirect financial relationship with the
parent or sibling company that could trigger a violation of section
1877 of the Act.
Comment: One commenter objected to the suggestion in the preamble
to the January 1998 proposed rule that an interest in a retirement plan
might be treated as an ownership or investment interest. Another
commenter stated that an unsecured loan that was subordinated to an
entity's credit facility should not be treated as an ownership or
investment interest.
Response: We are persuaded by the logic of the commenter and,
accordingly, we withdraw the statement in the preamble to the January
1998 proposed rule that an interest in a retirement plan might be
treated as an ownership or investment interest for purposes of section
1877 of the Act. We will consider contributions (including employer
contributions) to retirement plans to be part of an employee's overall
compensation arrangement with his or her employer. We also agree that
an unsecured loan that is subordinated to a credit facility is a
compensation arrangement and not an ownership or investment interest
for purposes of section 1877 of the Act.
Comment: Another commenter stated that secured debt given by a not-
for-profit hospital, as part of its acquisition of medical practices,
should not be treated as an ownership or investment interest in the
hospital, but as compensation.
Response: Section 1877(a)(2) of the Act provides that ``an
ownership or investment interest * * * may be through equity, debt or
other means.'' Accordingly, we believe that loans, bonds, or other
financial instruments that are secured with an entity's property or
revenue, or a portion thereof, constitute investment interests within
the meaning of section 1877 of the Act. In addition, a contrary reading
would result in disparate treatment of entities based on their
organizational status.
Comment: One commenter asserted that stock options should be
treated as either ownership or investment interests or compensation
arrangements, but not both. Another commenter stated that stock options
should be treated as compensation and not ownership since they do not
carry voting rights or the right to dividends and must be sold upon
conversion.
Response: In Phase I of this rulemaking, we are revising the rule
to treat stock options as compensation at the time they are awarded. At
the time they are exercised or converted, they create an ownership or
investment interest and must meet an appropriate exception. Any
dividends or profit distributions derived from an excepted stock
ownership or investment interest would not have to meet a separate
compensation exception.
Comment: Another commenter stated that stock options could be
structured to discourage referrals for DHS.
Response: The fact that a particular financial arrangement might be
structured to discourage referrals does not provide a basis for
creating an exception. The statute is intended to remove incentives to
overutilize by prohibiting certain financial relationships. If
application of the statute required a case-by-case examination to
determine the effect of the financial relationship, the statute's
efficacy would be undermined.
Comment: One commenter suggested that the determination of whether
a convertible security is a compensation arrangement or an ownership or
investment interest should depend on which party has the right to
convert the security. According to the commenter, if the DHS entity has
the right to convert the security, the interest should be treated as
compensation until conversion.
Response: We are applying the same approach to convertible
securities as we are applying to stock options, and we will classify
them as compensation until they are converted into equity. However,
many convertible securities are bonds that can be converted into stock.
Since bonds are typically secured debt, bonds will be treated as an
ownership or investment interest.
[[Page 871]]
B. When Does a Physician Make a Referral?
As defined by section 1877(h)(5) of the Act, a ``referral'' means a
request by a physician for an item or service for which payment may be
made under Medicare Part B, including a request for a consultation
(including any tests or procedures ordered or performed by the
consulting physician or under the supervision of the consulting
physician), and the request or establishment of a plan of care by a
physician that includes the furnishing of DHS, with certain exceptions
for consultations by pathologists, diagnostic radiologists, and
radiation oncologists. In the January 1998 proposed rule, we
interpreted ``referral'' to mean any request by a physician for a
service, including services subsequently performed by the physician. We
proposed defining a ``request'' as any step taken after a physician
performs an initial examination or a physician service on a patient
that indicates that the physician believes the service is necessary.
Under this broad definition, a referral could be either written or
oral, made on medical charts or records, or indicated by a prescription
or written order. We also proposed that a referral could be direct or
indirect, meaning that a physician would be considered to have made a
referral if he or she caused the referral to have been made by someone
else (for example, an employee, a hospital discharge planner, or a
staff member of a company that the physician owns or controls). As a
general principle, we proposed that a physician may ``cause'' a
referral to be made if he or she has the ability to control or
influence the individual who selects the entity that furnishes the DHS.
In response to the public comments, we are making several
significant changes to the definition of ``referral'' in Phase I of
this rulemaking. These changes include the following:
Revision of the definition of ``referral'' to exclude
services performed personally by the referring physician. Simply
stated, we are persuaded that a physician cannot make a ``request'' of
himself or herself for services he or she personally performs. However,
a physician can make a ``request'' of others, including, without
limitation, his or her employees, co-workers, or independent
contractors. These requests are ``referrals'' under section 1877 of the
Act (although many of them will fit in an exception). We continue to
believe that a referral can occur in a wide variety of formats,
written, oral, or electronic, depending on the particular service.
Adding an exception using our regulatory authority under
section 1877(b)(4) of the Act for certain referrals of DHS to an entity
with which the referring physician has a prohibited financial
relationship that are ``indirect'' referrals (for example, when a
physician has caused a referral to be made by someone else or has
directed or routed a referral through an intermediary) or are oral
referrals (that is, no written request or other documentation that
would identify the referring physician is required). A claim by the
entity furnishing the DHS may be paid for purposes of section 1877 of
the Act if the entity did not know or have reason to suspect the
identity of the referring physician. In these circumstances, there is
minimal risk of patient or program abuse by the entity submitting the
claim (provided that the claim is otherwise valid).
Clarification of the definition of a ``consultation.'' In
light of the clarifications relating to indirect and oral referrals
described above, the practical significance of the definition of a
``consultation'' is substantially reduced.
We believe that these changes address many of the concerns
expressed by commenters. In particular, we have endeavored to respond
to the perceived harshness of section 1877 of the Act by creating a
narrow exception under our section 1877(b)(4) authority. If the entity
furnishing DHS knows of or has reason to suspect the identity of the
physician who prescribed or ordered the DHS or made the referral, the
DHS entity may not submit a claim for the services. If the physician
who prescribes or orders a DHS is someone with whom the DHS entity has
a prohibited financial relationship, we think a reasonable DHS entity
should suspect that the physician referred the patient to the entity,
absent some credible evidence to the contrary.
In the following paragraphs, we discuss and respond to the comments
we received on the proposed interpretations of ``referral'' and
``consultation'' as published in the January 1998 proposed rule.
1. ``Referral''
Comment: Many commenters objected to our interpretation in the
January 1998 proposed rule that a service ordered and personally
performed by a physician is a referral within the meaning of section
1877 of the Act. Commenters asked us to clarify that there is no
referral if the referring physician personally performs the service.
Similarly, some commenters sought clarification that there is no
referral if the services are ``incident to'' services personally
performed by the referring physician.
Response: We are persuaded by the commenters that a physician does
not make a ``request,'' in the ordinary sense of that term, if he or
she personally performs a designated health service. We agree it does
not make sense to consider work that a referring physician initiates
and personally performs as a referral to an entity. Thus, we are
amending our definition of ``referral'' to exclude services that are
personally performed by the referring physician (that is, the referring
physician physically performs the service), and we are revising our
definition of ``entity'' to clarify that the referring physician
himself or herself is not an entity for purposes of section 1877 of the
Act (although the physician's practice is an entity). All other
Medicare-covered DHS performed at the request of a referring physician
are ``referrals'' for purposes of section 1877 of the Act. A service
performed by a hospital for which the hospital bills the technical or
facility component of the charge would be a referred service. In such
circumstances, however, the physician's service performed at the
hospital for which the physician would bill Part B would not be a
referred service.
With respect to services performed by others, including a
physician's employees, we think the issue is more complicated. Services
performed by others are reasonably considered to be performed as a
result of a ``request.'' Moreover, the statutory language in section
1877(h)(4)(B)(i) of the Act indicates that the Congress considered
there to be a difference between personally performed services and
services performed by others. On balance, we have chosen to include
services performed by others, including a physician's employees, in the
definition of referral. We are concerned that a blanket rule exempting
services performed by a physician's employees from the definition of
``referral'' could, in some circumstances, undermine the intent of
section 1877 of the Act. For example, by stationing employees in off-
site DHS facilities, a physician practice could circumvent the
statutory ``building'' requirements of the in-office ancillary services
exception.
Even the more limited suggestion made by some commenters that there
should be no ``referral'' if an employee's services are properly
billable as ``incident to'' a physician's personally performed services
could result in circumvention of the ``building'' requirements in some
cases.
[[Page 872]]
However, we believe the definition of ``referral'' we are adopting
here--in conjunction with the in-office ancillary services exception--
strikes an appropriate balance. Under the final rule, services
performed by anyone other than the referring physician (whether an
employee, a staff member, or a member of the physician's group
practice) is a ``referral'' for purposes of section 1877 of the Act.
Thus, services performed by a physician's employees will be considered
``referrals''. However, in most cases, such referrals will be permitted
under the in-office ancillary services exception, which is
substantially broader in this final rule than in the 1998 proposed
rule. Services performed by employees that do not meet the ``same
building'' or ``centralized building'' tests (as applicable, depending
on whether the physician is a solo or group practitioner) will be
prohibited unless another exception applies.
We recognize that, in many cases, services performed by a
physician's employees are, for practical purposes, tantamount to
services performed by the physician (for example, a physician's
assistant applying a neck brace ordered by a physician for an
individual who has been in an auto accident, when the face-to-face
encounter with the patient, including the physical examination by the
physician, indicates the need for a properly adjusted neck brace.)
While such services are included in the definition of ``referral''
under this final rule, given the significance of this issue, we are
soliciting comments as to whether, and under what conditions, services
performed by a physician's employees could be treated as the
physician's personally performed services under section 1877 of the
Act.
Comment: A commenter asked that we clarify that a plan of care that
includes the provision of DHS by the physician establishing the plan of
care is not a referral. If not clarified as suggested, the commenter
believes that the physician would effectively be barred from treating
his or her own patients.
Response: If the DHS are personally performed by the physician who
established the plan of care, there would be no referral as to those
personally performed services.
Comment: Some commenters objected to our proposed presumption that
a physician has referred his or her patient to an entity for the
furnishing of DHS if the patient obtains the services from the entity
with which the physician has a financial relationship. One commenter
described the following scenario: A physician orally tells a patient or
another person that the patient needs a designated health service. The
patient obtains the service from an entity with which the physician has
a prohibited financial relationship. The entity does not know (and
cannot know) that the physician orally told the patient (or other
person) that the service was needed. The commenter sought clarification
as to the application of section 1877 of the Act in these
circumstances.
Response: We are establishing an exception for indirect and oral
referrals. When there is no written order or other documentation of the
referral, the issue is whether the DHS provider knows or has reason to
suspect the identity of the physician who prescribed or ordered the DHS
or made the referral.
Comment: Several commenters sought clarification that a physician's
ordering, dispensing, or prescribing of drugs does not constitute a
referral to the manufacturer of the drugs. The commenters noted that
the manufacturers are not entities that furnish DHS (that is,
outpatient prescription drugs) to patients. Rather, furnishing of DHS
is performed by physicians, pharmacies, hospitals, and clinics.
Response: We agree that, in most cases, drug manufacturers are not
entities that furnish DHS to patients for purposes of section 1877 of
the Act, and, therefore, the ordering, dispensing, or prescribing of
drugs would not constitute a referral to the manufacturer of the drugs.
However, manufacturer-owned or -affiliated retail pharmacy operations,
or other health care providers may be entities for purposes of section
1877 of the Act, if they furnish DHS to patients.
Comment: A commenter recommended that activities that a solo
practitioner performs as a customary and integral part of patient
treatment should not be considered a ``referral.''
Response: We find the commenter's proposed language too vague to be
used in creating a standard. We believe our revised definition of
``referral'' that excludes personally performed services and our
changes to the in-office ancillary services exception (see section
VII.B.1 of this preamble) adequately address the commenter's concerns.
Comment: A commenter stated that referrals for DHS by a
nonphysician professional employee of a group practice, such as a nurse
practitioner or a physician assistant, should not be imputed to a
physician member of the group practice, when the nonphysician is
authorized and licensed to prescribe treatment on his or her own and
can make independent decisions regarding referrals. For example, if a
nurse practitioner, staffing a group practice office without a
physician member present, orders and performs a plain x-ray, the
referral for the x-ray should not be imputed to a physician member of
the group practice. If the referral is imputed, the service may not
qualify under the in-office ancillary services exception, because it is
not personally performed by the referring physician, another physician
in the group practice, or a person who is directly supervised by the
referring physician or another group practice physician. Alternatively,
the commenter suggested that we modify the ``direct supervision''
standard to mirror our payment and coverage requirements to enable
``imputed'' referrals by a nurse practitioner and a physician assistant
to fit in the in-office ancillary services exception.
Response: As previously stated, we are revising the ``direct
supervision'' standard in the in-office ancillary services exception to
mirror our payment and coverage requirements. (See discussion in
section VI.B.2 of this preamble.) This change should address the
concern identified by the commenter.
We believe that the question of whether a referral by a nurse
practitioner or a physician assistant should be imputed to an employer
physician will depend on the facts and circumstances of the referral.
The inquiry is whether the physician controls or influences the
nonphysician's referral. The Congress and HHS have recognized that many
nurse practitioners and physician assistants are independent providers
authorized and licensed to prescribe treatment and make independent
decisions regarding referrals. However, these practitioners do not
always act independently of their employers. For example, sometimes
services of a nonphysician practitioner are billed ``incident to'' a
physician service rather than directly under the nonphysician's
independent billing number. In short, we are concerned that physicians
could attempt to circumvent section 1877 of the Act by funneling
referrals through nonphysician practitioners. We believe the change in
the supervision requirement affords sufficient protection for
legitimate arrangements.
Comment: Several commenters were confused by our discussion in the
preamble to the January 1998 proposed rule at 63 FR 1710 of a situation
in which a physician who owned a physical therapy (PT) company referred
patients for treatment, including PT, to a skilled nursing facility
(SNF) that
[[Page 873]]
contracted with the physician's PT company. In the preamble, we
indicated that we would analyze the arrangement as an indirect
compensation arrangement and equate the physician with the PT provider.
Response: In the preamble of the January 1998 proposed rule, we
suggested that the critical factor would be the degree of control the
physician had over the PT provider and the extent of the PT provider's
relationship with the SNF. We are abandoning that analysis. We think
the proper focus is whether the physician is making a referral to the
PT provider within the meaning of section 1877 of the Act. In other
words, we believe that a physician can make a referral of DHS ``to an
entity'' even though the referral is first directed or routed through
another person or entity, provided the physician has reason to know the
identity of the actual provider of the service. In the SNF/PT provider
example, the relevant inquiry is whether the physician has made a
referral, directly or indirectly, to the entity furnishing DHS, in
other words, whether he or she is referring ``to'' that entity.
Accordingly, if the physician referring the patient to the SNF knows
that the PT company in which he or she has an investment interest will
furnish DHS to the patient or could reasonably be expected to know that
the PT company will actually furnish DHS to the patient, the referral
is a referral ``to the entity'' and is prohibited, unless an exception
applies. Similarly, where the PT company knows or has reason to suspect
that the referral for DHS came from a referring physician with whom the
PT company has a prohibited financial relationship, the PT company
cannot submit the claim for the DHS. The PT/SNF example will be
affected by the advent of full consolidated billing for SNFs, as
described above in the responses to comments on indirect compensation
arrangements.
To trigger section 1877 of the Act, the direction or steering of a
patient ``to an entity'' does not need to be in writing, nor does it
have to be absolute; it need only be reasonably intended to result in
the patient receiving the service from the entity. Thus, for example,
when a physician provides an order or prescription for a DHS to a
patient that ostensibly can be filled by any of a number of entities
and then suggests or informs the patient that the order can be serviced
by a particular entity, there would be a referral ``to'' that entity.
Given the administrative burden on entities presenting claims, in the
context of an indirect financial relationship, we believe a claim for
DHS should be subject to nonpayment unless the entity does not know
that, and does not have reason to suspect that, the referring physician
had directed the patient to the entity.
2. Consultation
The Existing Law: Section 1877(h)(5)(C) of the Act excepts from the
definition of a ``referral'' by a ``referring physician'' a request by
a pathologist for clinical laboratory tests or pathological examination
services, a request by a radiologist for diagnostic radiology services,
and a request by a radiation oncologist for radiation therapy, if the
services are furnished by, or under the supervision of, the specialist,
pursuant to a consultation requested by another physician. Section
1877(h)(5)(C) creates a narrow exception from the definition of
``referral'' for a small subset of services provided or ordered by
certain specialists pursuant to a consultation requested by another
physician (the referring physician).
The Proposed Rule: In the preamble to the 1998 proposed rule, we
referred to the interpretation of consultation that appeared in the
March 1992 proposed rule for clinical laboratory services (57 FR 8595).
There, we interpreted a consultation to be:
A professional service furnished to a patient by a physician
(the consultant) at the request of the patient's attending
physician. A consultation includes the history and examination of
the patient as well as a written report that is transmitted to the
attending physician for inclusion in the patient's permanent record.
If, in the course of that consultation, the consulting physician
deems it necessary to order clinical laboratory services, those
services may not be ordered from a laboratory in which the referring
[attending] physician has a financial interest. Other referrals,
such as sending a patient to a specialist who assumes responsibility
for furnishing the appropriate treatment, or providing a list of
referrals for a second opinion, are not ``consultations'' or
``referrals'' that would trigger the [physician referral provision].
We did not add anything to this definition in the August 1995 final
rule concerning referrals for clinical laboratory services.
Commenters to the 1998 proposed rule took issue with this
interpretation for several reasons, including the requirement that the
consulting physician examine and take a history of the patient, and the
interpretation's failure to demarcate clearly when a consultant takes
over treatment of the patient.
The Final Rule: The final rule adopts a very broad interpretation
of a consultation. We want to make clear that this definition is only
for the very limited purpose of determining when a pathologist's,
diagnostic radiologist's, or radiation oncologist's ordering of DHS
from a facility with which he or she has an otherwise prohibited
financial relationship will not prohibit submission of a claim to
Medicare. Most importantly, this definition is not intended to, and has
no bearing on, coverage or payment rules relating to consultations.
Coverage and payment rules related to consultations raise many issues
that are irrelevant for the very limited application of the term in
section 1877 of the Act. Simply put, while there may be many difficult
issues in determining when certain specialty services are
consultations, as opposed to routine treatment, such difficulties are
relatively rare in the context of the three exceptions in section
1877(h)(5)(C) of the Act (namely, a request by a pathologist for
clinical laboratory services or pathological examination services, a
request by a radiologist for diagnostic radiology services, or a
request by a radiation oncologist for radiation therapy).
As a preliminary matter, we think it important to recognize that
section 1877 of the Act defines referrals very broadly. Section
1877(h)(5) specifically includes referrals or requests for services
made by the referring physician, as well as any DHS provided pursuant
to a consultation with another physician, including DHS provided by the
consulting physician or any DHS ordered by the consulting physician.
Section 1877(h)(5)(A) of the Act having established that a referral
includes all DHS ordered by a consulting physician, section
1877(h)(5)(C) then carves out: (i) A request by a pathologist for
clinical laboratory services or pathological examination services, (ii)
a request by a radiologist for diagnostic radiology services, and (iii)
a request by a radiation oncologist for radiation therapy, if the
services are furnished by, or under the supervision of, the
pathologist, radiologist, or radiation oncologist pursuant to a
consultation requested by another physician.
The final rule adopts the following criteria to identify a
consultation for purposes of section 1877:
(1) A consultation is provided by a physician whose opinion or
advice regarding evaluation and/or management of a specific medical
problem is requested by another physician.
(2) The request and need for the consultation is documented in the
patient's medical record.
(3) After the consultation is provided, the consulting physician
prepares a
[[Page 874]]
written report of his or her findings, which is provided to the
physician who requested the consultation.
(4) With respect to radiation therapy services provided by a
radiation oncologist, a course of radiation treatments over a period of
time will be considered to be pursuant to a consultation, provided the
radiation oncologist communicates with the referring physician on a
regular basis about the patient's course of treatment and progress.
Finally, we want to make clear that the exception in section
1877(h)(5)(C) of the Act only protects the referral of DHS from the
pathologist, diagnostic radiologist, or radiation oncologist to the DHS
provider. If the DHS provider-- (1) knows or has reason to suspect that
the referral originated from the referring physician, and (2) has a
direct or indirect financial relationship with the referring physician,
the DHS provider cannot submit a claim to Medicare for the DHS unless
the financial relationship fits into an exception. Moreover, the
referring physician may not make the referral to the consultant if he
or she knows or has reason to suspect that the consultant will order
DHS from an entity with which the referring physician has a direct or
indirect financial relationship to which no exception applies.
Comment: A commenter suggested that the ``diagnostic radiology''
exception should be expanded to include other DHS performed or
supervised by nonradiologist physicians to assure quality of care and
access to a broad variety of services. The commenter asked that we
broaden the consultation exception to include all DHS used to diagnose
disease that are ordered pursuant to a consultation initiated by
another physician.
Response: We agree that section 1877(h)(5)(C) of the Act creates an
exception for the referrals of some specialists and not others.
However, the Congress specifically excepted the requests of
radiologists for diagnostic radiology services if the services are
furnished by, or under the supervision of, the radiologist, pursuant to
a consultation requested by another physician. It is our view that the
Congress regarded most radiologists in this situation and the other
excepted specialists as physicians who were not instigating a referral
for services, but merely implementing the request of another physician
who has already determined that the patient is likely to need radiology
services. The Congress believes that, in general, a radiologist in this
situation would not be likely to overutilize services.
We do not believe that we have the authority to extend this
exception to other specialists, some of whom provide separate physician
services to patients and would be in a position to instigate the
referral for radiology.
Comment: One commenter was concerned about our willingness to
exempt pathologists, radiologists, and radiation oncologists, yet
require other arrangements and physicians to alter their referral
methods. The commenter asserted that pathologists will order further
stains or studies on specimens to aid in a diagnosis. Radiologists, not
infrequently, recommend further studies as part of their
interpretation, again to help make a diagnosis. The commenter stated
that given the current medico-legal atmosphere, it is rare that he does
not follow the suggestions of these consultants. In addition, the
commenter stated that he has seen cancer patients with new or
progressive diseases who are being treated by radiation oncologists
without any direct input from attending or primary care physicians. In
the commenter's view, these examples are standard medical practice and
self-serving. Since radiologists often have an ownership interest in
the diagnostic facility and pathologists in a laboratory facility, they
are doubly benefitted by the referral.
Response: The statute clearly establishes special rules for
diagnostic radiologists, pathologists, and radiation oncologists.
Comment: A number of commenters explained their problems with
distinguishing a consultation from a referral based on their particular
speciality area. For example, one commenter stated that during an
active phase of an oncologic, hematologic, or pneumatologic illness,
the care of the patient specific to that illness may be managed by the
subspecialist and the overall care of the patient may be managed by the
referring physician using the information obtained from the
consultation. This commenter believes that a referral would occur only
if the total care of the patient were transferred.
Another commenter asserted that rarely does a treating physician
completely give up the care of a patient to another physician, and
rarely does the treating physician completely retain responsibility for
the care of the patient. Rather, a physician will send a patient to a
specialist for testing, diagnosis, and initial treatment, and then the
originating physician will take over the care of the patient.
Representing specialists who frequently perform consultations and
assume the neurological care of patients at the request of referring
physicians, one commenter asserted that it is appropriate to bill for a
consultation when care is transferred, rather than a lower-paying
evaluation and management visit, because of the extra work for the
consulting physician involved in preparing a report for the attending
physician.
Response: We agree with the commenters that it can be difficult to
determine whether a first physician initiating a visit to a second
physician should constitute a referral to another physician or the
request for a consultation with that physician. However, as discussed
above, in the three specific instances identified in the statute, we
think there will be little disagreement in determining when there is a
consultation. In any event, for purposes of section 1877(h)(5)(C) of
the Act, we are adopting a broader interpretation of a consultation
than is in the coverage rules. Finally, payment and coverage for
consultations are not addressed or affected by this rule.
Comment: One commenter, representing an association of
radiologists, discussed the case of what happens when a patient is sent
to a radiation oncologist for treatment of a tumor. The commenter
stated that radiation oncology treatment occurs over a period of weeks
or months, and is provided within a continuum of care involving the
radiation oncologist, the referring physician, and even other
physicians.
Response: We agree with the commenter and have clarified the
definition to recognize that radiation therapy may extend over a
prolonged period of time and still be considered to be pursuant to a
consultation, provided the radiation oncologist regularly communicates
with the referring physician as to the patient's care.
Comment: Commenters stated that when a referring physician sends a
patient to a radiation oncologist for radiation therapy, the referring
physician may not see the patient for some time. The radiation
oncologist may decide during this time that the patient needs services
other than radiation therapy services. The commenter asked whether the
radiation oncologist's referrals for nonradiation therapy services
falls within the scope of the consultation exception.
Response: Under section 1877(h)(5)(C) of the Act, for radiation
oncology, only a request for radiation therapy by a radiation
oncologist is not considered to be a referral. We understand that in
some situations when a patient is undergoing radiation therapy, the
patient's care is not supervised by a physician other than the
radiation
[[Page 875]]
oncologist. However, the radiation oncologist cannot send the patient
for DHS other than radiation therapy services to an entity with which
the radiation oncologist has a financial relationship without meeting
an appropriate exception.
Comment: Section 1877(h)(5)(C) of the Act excepts DHS provided by
consulting pathologists, diagnostic radiologists, and radiation
oncologists if the services are furnished by, or under the supervision
of, the consulting physician. A commenter inquired whether the required
supervision could be delegated to a member of the consulting
physician's group practice.
Response: The plain language of section 1877(h)(5)(C) of the Act
does not allow for supervision by anyone other than the consulting
physician. However, we are broadly interpreting the supervision
requirement in this section to be consistent with the supervision
requirements elsewhere in these regulations. Thus, the level of
supervision required is whatever level is required under the applicable
Medicare payment and coverage requirements. Furthermore, the in-office
ancillary services exception may be available for services supervised
by a physician in the consulting physician's group practice.
Comment: A commenter stated that neither diagnostic radiologists
nor pathologists perform physical examinations on patients. An
association representing certain specialists stated that the definition
of a consultation should be modified so as not to require a patient
history and physical examination except when appropriate; for example,
diagnostic radiologists and nuclear medicine physicians generally do
not take a patient's history or perform a medical examination. However,
a nuclear medicine physician would perform a history and physical
examination when a patient is referred for therapy. In addition, an
association representing clinical laboratories declared that it is
unlikely that a pathologist would ever see a patient or take a history
from a patient. An association representing radiologists asserted that
diagnostic radiologists generally do not take a patient's history or
conduct a medical examination; therefore, we should clarify that a
history and examination of the patient is not required as part of a
radiologic consultation.
Response: For purposes of section 1877 of the Act, we agree that a
consultation does not necessarily include either taking the history of
a patient or performing a physical examination. Certainly, pathologists
would rarely see a patient. We do expect that, on occasion, a
consulting physician, such as a radiologist, might interview a patient
to gain additional information about the patient's condition, but this
might not amount to a full scale history. Similarly, the radiologist
might examine a patient, but focus only on a particular area of
concern. We are amending our description of a ``consultation'' to
clarify that there is no requirement that these steps be performed.
Comment: A commenter asked whether the prohibition under section
1877 of the Act is triggered when a physician, who has no financial
relationship with a diagnostic imaging center, initiates a referral to
the imaging center rather than to a particular radiologist.
Response: We understand the commenter to be asking whether the
consultation exception set forth in section 1877(h)(5)(C) of the Act
applies if the request for the consultation is made to the entity that
employs or contracts with a consulting radiologist rather than to the
consulting radiologist. The commenter's main concern seemed to be
whether a subsequent request by the employed or contractor radiologist
for diagnostic radiology services furnished by the imaging center would
be protected under section 1877(h)(5)(C) of the Act. We believe that
under section 1877(h)(5)(C) of the Act, the request for a consultation
can be made to either a particular radiologist or an entity. Also, if
the referring physician does not have a financial relationship with the
diagnostic imaging center, the referral to the center is not prohibited
under the general prohibition in section 1877(a) of the Act.
IV. Physician Compensation Under Section 1877 of the Act: An
Overview
Many public comments addressed physician compensation issues. The
statute touches on physician compensation in several places: the
definition of group practice, the employee exception, and the personal
services exception. The interplay of section 1877 of the Act and
physician compensation is one of the most significant aspects of the
self-referral law.
Obviously, the issue of physician compensation is of critical
importance to the physician community. As a starting point, we do not
believe that the Congress intended section 1877 of the Act to regulate
physician compensation practices, except as necessary to minimize
financial incentives to refer DHS to entities with which the physicians
have financial relationships. Having carefully studied the public
comments and having reconsidered the statutory provisions, the
legislative history, and our January 1998 regulatory proposals, we
believe the following general principles govern the application of the
statute to the manner in which physicians are paid:
First, as explained in section III.B of this preamble, for
purposes of section 1877 of the Act, the term ``referral'' does not
include DHS that are personally performed by the physician. As a
practical matter, the statutory language and structure indicate
Congressional recognition that physicians are commonly compensated
based on productivity with respect to services they personally perform.
Second, with respect to group practices, the Congress
intended to confer group practice status on bona fide group practices
and not on loose confederations of physicians who come together as a
``group'' substantially in order to capture the profits of DHS under
the in-office ancillary services exception to section 1877 of the Act.
To that end, we proposed adding a ``unified business'' standard to the
group practice definition, using the statutory authority the Congress
conferred on the Secretary to impose additional standards on group
practices. However, in response to comments, we have reconsidered the
test for a ``unified business''; the final regulations under Phase I of
this rulemaking adopt a considerably more flexible approach to the same
end. Under Phase I of this rulemaking, one of several characteristics
of a ``unified business'' is that the group's physician compensation
methodologies are established by the centralized management of the
group practice. For the limited purposes of establishing that a group
practice is a unified business, we think it is appropriate to look at
physician compensation derived from all sources, not just from DHS.
However, location- and specialty-based compensation practices are
expressly permitted with respect to the distribution of revenues
derived from services that are not DHS. Such practices may also be
allowed for DHS, depending on the circumstances. (See the discussion of
the group practice definition in section VI.C of this preamble.)
Third, except for the limited purpose of determining
whether a group practice is a unified business, the physician
compensation provisions for group practices under section 1877 of the
Act only affect the distribution of revenues derived from DHS. In
general, these revenues are likely to comprise a relatively small
portion of the total
[[Page 876]]
revenues of most group practices. As we indicated in 1998, section 1877
of the Act does not affect the distribution of monies earned from other
services. From a practical business standpoint, however, some group
practices may find it impractical to segregate DHS revenues. These
parties may find it more expedient to allocate compensation in
accordance with the methods permitted for DHS revenues under section
1877 of the Act.
Fourth, the statute implicitly recognizes that solo
practitioners will keep all the profits from DHS that fit in the in-
office ancillary services exception, whether performed personally or by
others.
Fifth, section 1877 of the Act contemplates that
physicians--whether group practice members, independent contractors, or
employees--can be paid in a manner that directly correlates to their
own personal labor, including labor in the provision of DHS. In other
words, ``productivity,'' as used in the statute, refers to the quantity
and intensity of a physician's own work, but does not include the
physician's fruitfulness in generating DHS performed by others (that
is, the fruits of passive activity). ``Incident to'' services are not
included in productivity bonuses under the statute unless the services
are incident to services personally performed by a referring physician
who is in a bona fide group practice. (``Incident to'' services must
meet the requirements of section 1861(s)(2)(A) of the Act and section
2050, ``Services and Supplies,'' of the Medicare Carriers Manual (HCFA
Pub. 14-3), Part 3--Claims Process.) In the case of independent
contractors under the personal service arrangements exception and
employees under the bona fide employment exception, the amount of
compensation for personal productivity is limited to fair market value
for the services they personally perform. The fair market value
standard in these exceptions acts as an additional check against
inappropriate financial incentives. (The personal service arrangements
exception, as well as several other exceptions, contains additional
restrictions on compensation that varies based on the volume or value
of referrals. The volume or value standard is discussed in section V of
this preamble.)
Sixth, the Congress recognized that in the case of group
practices, revenues derived from DHS must be distributed to the group
practice members in some fashion, even though the members generate the
DHS revenue. However, the Congress wished to minimize the economic
incentives to generate unnecessary referrals of DHS. Accordingly, the
Congress permitted group practice members (and independent contractors
who qualify as ``physicians in the group practice'') to receive shares
of the overall profits of the group, so long as those shares do not
directly correlate to the volume or value of referrals generated by the
member or ``physician in the group practice'' for DHS performed by
someone else. In addition, the Congress permitted groups to pay their
physicians productivity bonuses based directly on personal productivity
(including services incident to personally performed services), but
precluded groups from paying group practice physicians any productivity
bonus based directly on referrals of DHS performed by someone else. As
detailed below, we are establishing under Phase I of this rulemaking
certain methodologies that describe compensation practices that will be
deemed to be indirectly related to the volume or value of DHS referrals
for purposes of section 1877(h)(4)(B)(i) of the Act and therefore
allowable under section 1877 of the Act. Groups are free to develop
their own indirect methodologies, but such methodologies are subject to
case-by-case review.
V. ``Volume or Value'' of Referrals and ``Other Business
Generated'' Standards: An Overview
Many of the exceptions in section 1877 of the Act covering specific
kinds of compensation arrangements include as one element of the
exception a requirement that the compensation not take into account the
volume or value of any referrals and, in some of the exceptions, the
further requirement that the compensation not take into account other
business generated between the parties.
In the preamble to the January 1998 proposed regulation, we had
interpreted this volume or value standard as follows:
Compensation could be based on units of service (for
example, ``per use'' equipment rentals) so long as the units of service
did not include services provided to patients who were referred by the
physician receiving the payment. For example, a physician who owned a
lithotripter could rent it to a hospital on a per procedure basis,
except for lithotripsies for patients referred by the physician-owner;
payments for the use of the lithotripter for those patients would have
to use a methodology that did not vary with referrals.
The language ``or other business generated between the
parties'' meant that the payment in an arrangement had to be fair
market value for the services expressly covered by the arrangement and
could not include any payment for services not covered by the
arrangement.
Physician compensation arrangements that were fixed in
amount but conditioned either expressly or implicitly on the physicians
referring patients to a particular provider or supplier took into
account the value or volume of referrals within the meaning of the
statute.
After reviewing the comments received, we are substantially
revising the regulation with respect to the scope of the volume or
value standard. Most importantly, we are permitting time-based or unit-
of-service-based payments, even when the physician receiving the
payment has generated the payment through a DHS referral. We have
reviewed the legislative history with respect to the exception for
space and equipment leases and concluded that the Congress intended
that time-based or unit-of-service-based payments be protected, so long
as the payment per unit is at fair market value at inception and does
not subsequently change during the lease term in any manner that takes
into account DHS referrals. In the case of those exceptions that
include the additional restriction that the payment not take into
account ``other business generated between the parties,'' the per unit
payment also may not take into account any other business, including
non-Federal health care business, generated by the referring physician.
We are interpreting the phrase ``generated between the parties'' to
mean business generated by the referring physician for purposes of
section 1877 of the Act.
Applying Phase I of this rulemaking to the lithotripter example
noted above, the ``per use'' rental payments would be protected, even
for lithotripsies performed on patients referred by the physician-
owner, provided that the ``per use'' rental payment was at fair market
value, did not vary over the lease term, and met the other requirements
of the rental exception. In other words, if the ``per use'' payment is
fair market value, we will not require a separate payment arrangement
for use of the equipment on patients referred by the physician-owner.
In determining whether the initial ``per use'' payment is at ``fair
market value,'' we will generally look to the price a hospital would
pay to rent the equipment from a company that did not have any
physician ownership or investment (and thus was not in a position to
generate referrals or other business--DHS or otherwise--for the
hospital) in an arm's-length transaction. In some cases, all the
available
[[Page 877]]
comparables or market values may involve transactions between entities
that are in a position to refer or generate other business. In such
situations, we would look to alternative valuation methodologies,
including, but not limited to, cost plus reasonable rate of return on
investment on leases of comparable medical equipment from disinterested
lessors. (The definition of fair market value is discussed in more
detail in section VII.B of this preamble.)
In the light of our interpretation of the volume or value standard
as permitting unit of service or unit of time-based payments, we have
determined that the additional limiting phrase ``not taking into
account * * * other business generated between the parties'' means
simply that the fixed, fair market value payment cannot take into
account, or vary with, referrals of Medicare or Medicaid DHS or any
other business generated by the referring physician, including other
Federal and private pay business. Simply stated, section 1877 of the
Act establishes a straightforward test that compensation arrangements
should be at fair market value for the work or service performed or the
equipment or space leased--not inflated to compensate for the
physician's ability to generate other revenues.
In order to establish a ``bright line'' rule, we are applying this
interpretation of the volume or value standard uniformly to all
provisions under section 1877 of the Act and part 411 where the
language appears (for example, the employee, personal service
arrangements, rental of office space/equipment, fair market value, non-
monetary compensation under $300, hospital medical staff benefits,
academic medical center exceptions, indirect compensation arrangements,
and the group practice definition). The ``other business generated''
restriction applies only to those exceptions in which it expressly
appears.
Consistent with this interpretation, we have determined that we
will not consider the volume or value standard implicated by otherwise
acceptable compensation arrangements for physician services solely
because the arrangement requires the physician to refer to a particular
provider as a condition of payment. So long as the payment is fixed in
advance for the term of the agreement, is consistent with fair market
value for the services performed (that is, the payment does not take
into account the volume or value of the anticipated or required
referrals), and otherwise complies with the requirements of the
applicable exception, the fact that an employer or a managed care
contract requires referrals to certain providers will not vitiate the
exception. Any such contract, however, must expressly provide
exceptions (1) when the patient expresses a different choice, (2) when
the patient's insurer determines the provider, or (3) when the referral
is not in the best medical interest of the patient in the physician's
judgment. We caution that these mandatory arrangements could still
implicate the anti-kickback statute, depending on the facts and
circumstances.
Finally, we want to clarify that ownership or investment interests
that are not protected under sections 1877(b) through (d) of the Act
(and are therefore compensation arrangements under section
1877(h)(1)(A) of the Act) are deemed to take into account the value or
volume of referrals. We believe this view is consistent with the
general prohibition on investment and ownership interests in the
statute.
Our responses to comments follow below:
Comment: One commenter asked us to clarify the statement in the
preamble of the January 1998 proposed rule at 63 FR 1780 that the
volume or value standard that is in the compensation and other
exceptions is uniformly meant to cover (and thus exclude from an
exception) other business generated between the parties. Another
commenter asked us to clarify that the requirement that the
compensation not take into account the volume or value of referrals or
other business generated between the parties refers only to referrals
of DHS.
Response: The discussion of the phrase ``other business generated
between the parties'' in the preamble to the January 1998 proposed rule
caused confusion. Based on our review of the legislative history, we
believe that the Congress intended the language to be a limitation on
the compensation or payment formula parallel to the statutory and
regulatory prohibition on taking into account referrals of DHS
business. Simply stated, in the provisions in which the phrase appears,
affected payments cannot be based or adjusted in any way on referrals
of DHS or on any other business referred by the physician, including
other Federal and private pay business.
Comment: One commenter urged us to amend the language of the
regulation to correspond to the extensive discussion of the volume or
value standard in the preamble.
Response: We are modifying the regulation to clarify the meaning of
the volume or value standard.
Comment: One commenter asked us to clarify that a valuation of a
physician's practice could include the value of self-generated DHS in
the purchase price as long as the purchase agreement was not contingent
on future referrals.
Response: For purposes of section 1877 of the Act, the valuation of
a physician practice could include the value of DHS in the purchase
price if the DHS provided by the selling physician fit into an
exception, such as the in-office ancillary services exception, and the
purchase agreement (and purchase price) is not contingent on future
referrals. Depending on the identity of the purchaser, however, the
inclusion of the value of ancillary revenues could implicate the anti-
kickback statute.
Comment: Several commenters asked us to clarify that the language
requiring that the payment be fixed in advance and not be determined in
a manner that takes into account the value or volume of referrals or
other business generated between the parties does not require that the
aggregate compensation be established in advance, but only that the
methodology (for example, a rental per use, or payment per service) be
fixed in advance.
Response: We are modifying the regulation to make it clear that the
aggregate payment need not be specified in advance. However, if the
aggregate amount is not specified, the amount of the payment on a ``per
use,'' ``per service,'' or ``per time period'' basis must be fixed in
advance. For example, a contract could include a fee schedule for
services, provided the fee schedule is uniformly applied to all
services provided to the contracting party. In addition, the payment
must be fair market value compensation not taking into account the
volume or value of referrals or other business generated by the
referring physician either at inception or during the term of the
agreement.
Comment: Commenters also wished us to clarify whether the following
arrangements take into account the volume or value of referrals or
other business generated between the parties: (1) Payments based on a
percentage of gross revenues; (2) payments based on a percentage of
collections; (3) payments based on a percentage of expenses; and (4)
payments based on a percentage of a fee schedule.
Response: A compensation arrangement does not take into account the
volume or value of referrals or other business generated between the
parties if the compensation is fixed in advance and will result in fair
market value compensation, and the compensation does not vary over the
term of the
[[Page 878]]
arrangement in any manner that takes into account referrals or other
business generated. The first three arrangements described by the
commenters are neither aggregate fixed compensation amounts, nor fixed
``per service,'' ``per use,'' or ``per time period'' payment amounts.
Percentage compensation that is determined by calculating a percentage
of a fluctuating or indeterminate amount, such as revenues,
collections, or expenses, is not fixed in advance. Accordingly, the
first three arrangements do not meet the requirement that compensation
be fixed in advance. Whether the fourth arrangement mentioned by the
commenters--a percentage of a fee schedule--is fixed in advance
compensation depends on the circumstances. If the percentage payments
are based on a single fee schedule, such that there is, in effect, a
single fixed fee for each service, the arrangement meets the
requirement that the compensation be fixed in advance. However, a
percentage of fee schedule arrangement that bases payments on multiple
fee schedules, such that there may be different fees for a particular
service depending on the ultimate payer, is not fixed in advance. Thus,
for example, if a physician has a contract for services with a hospital
that has a chargemaster for all services, the physician can be paid a
fixed percentage of that chargemaster fee schedule for each service.
However, when the hospital accepts different payment amounts from
different payers for a service, the physician cannot be paid a
percentage of those varying amounts.
Comment: Several commenters requested that the final rule make
clear that payments based on ``per use'' or ``per service'' meet the
volume or value standard in the exceptions so long as the payments are
at fair market value and the ``per use'' or ``per service'' amount does
not change over the term of the contract based on the value or volume
of referrals of DHS. The commenters stated that their position was
consistent with the intent of the Congress and supported their position
with language from the Conference Committee report.
Response: As described above, we are modifying the regulation to
reflect the Conference Committee report, H. Rep. No. 213, 103rd Cong.,
1st Sess. 814 (1993). The ``per use,'' ``per service,'' or ``per time
period'' amount must reflect fair market value at inception not taking
into account the volume or value of referrals and must not change over
the term of the contract based on the volume or value of DHS referrals,
or, when applicable, other business (that is, other Federal or private
pay business) generated by the referring physician.
Comment: One commenter specifically objected to our proposed
interpretation that a ``per use'' payment was acceptable except when
the payment was for a referral from a physician with an ownership or
investment interest in the equipment. According to the commenter, the
physician's ownership or investment interest should not matter so long
as the physician does not have a controlling interest.
Response: We believe equipment rental arrangements are subject to
abuse whether the payment received is only a small portion of the
rental or the entire amount. Control is irrelevant; it is the financial
incentive that has been shown repeatedly to result in overutilization.
Despite the obvious potential for abuse, given the clearly expressed
congressional intent in the legislative history, we are permitting
``per use'' payments even when the physician is generating the
referrals. We wish to make clear that these arrangements may violate
the anti-kickback statute.
Comment: A commenter asked that we clarify that a hospital can
lease equipment on a ``per use'' basis to a physician for use in the
physician's practice.
Response: A hospital can lease equipment to a physician for use in
the physician's practice on a ``per use'' basis, provided the lease
arrangement otherwise fits in the rental exception. As noted above,
these arrangements may violate the anti-kickback statute.
Comment: Many commenters objected to our proposed interpretation in
the preamble that fixed payments to a physician could be determined to
take into account the volume or value of referrals if a condition or
requirement for receiving the payment was that the physician refer DHS
to a given entity, such as an employer or an affiliated entity. A
number of commenters stated that we did not have statutory authority
for our proposed interpretation. Some commenters said these
arrangements were necessary to develop integrated networks and ensure
quality control. Another commenter stated that the proposal would
interfere with exclusive hospital-based physician relationships. One
commenter argued that the proposed interpretation was inconsistent with
the employee exception, while yet another stated the position was
inconsistent with the common law duty of loyalty owed by an employee to
his or her employer and the employer's right to set the terms and
conditions of employment. Another commenter stated that the proposed
interpretation would adversely impact managed care arrangements by, in
effect, requiring all managed care arrangements to meet the physician
incentive plan regulations. Finally, a commenter proposed that we allow
entities to require physicians to refer to a particular provider as
part of a contract, except (1) when the patient expresses a different
choice, (2) when the patient's insurer determines the provider, or (3)
when the referral is against the physician's judgment.
Response: While we believe that payments tied to referral
requirements can be abused, we agree that the proposed interpretation
potentially would have had far-reaching effects, especially for managed
care arrangements and group practices. We are adopting in modified form
the one commenter's suggestion for appropriate conditions listed in the
last sentence of the comment. We believe the suggested conditions will
not impose a significant burden, since they are likely to be required
anyway under existing laws, professional codes, and most contracts.
Thus, so long as the referral requirement does not apply if a patient
expresses a different choice, the patient's insurer determines the
provider, or the referral is not in the best medical interest of the
patient in the physician's judgment and the payment to the physician is
fixed in advance at fair market value for the services actually
rendered and does not vary based on referrals or, when applicable,
other business generated by the physician, the fact that referrals may
be required to be made to specific providers will not nullify an
exception.
Comment: One commenter stated that the final rule should not
prohibit primary care case management arrangements.
Response: As discussed in the preceding comment, we are no longer
viewing these arrangements as violating the volume or value standard
simply because referrals may be required to be made to certain
providers. The arrangement would have to meet the other provisions of
an exception.
Comment: According to two commenters, many covenants not to compete
could be called into question by the proposed interpretation that fixed
payments tied to referral requirements can violate the volume or value
standard, a component of many of the exceptions. The commenters argued
that these covenants are necessary adjuncts to many business
acquisitions and personal services or management arrangements and urged
us to affirm their legitimacy.
Response: The commenters were unclear as to how the proposed
[[Page 879]]
interpretation would have adversely impacted covenants not to compete.
A requirement to refer to a specific provider is different from an
agreement not to establish a competing business. In other words, a
covenant not to compete might prevent a physician from setting up a
private practice or offering services that compete with the entity that
purchased his or her practice. If an agreement also included the
requirement that the physician refer business to the purchaser, the
agreement would be suspect under the anti-kickback statute.
Comment: One commenter asked us to clarify that the discussion in
the preamble about the volume or value standard applies not only to its
interpretation in the context of the compensation exceptions, but also
to its interpretation in the other exceptions in which the same
language appears.
Response: The meaning of the volume or value standard as set forth
in the preamble and regulations text under Phase I of this rulemaking
applies to the standard wherever it appears in the statute and
regulations.
Comment: One commenter stated that the interpretation of the volume
or value standard in the January 1998 proposed rule at 63 FR 1701 would
permit hospitals to pressure physicians to refer to network and other
providers that the hospitals own or control.
Response: It is not clear from the comment what aspect of the
proposed rule would lead the commenter to believe that this kind of
coercion would occur. Nonetheless, section 1877 of the Act is limited
in its application and does not address every abuse in the health care
industry. The fact that a particular arrangement is not prohibited by
section 1877 of the Act does not mean that the arrangement is not
abusive; it simply means that a referral and submission of a claim for
DHS is not prohibited under section 1877 of the Act.
VI. Exceptions Applicable to Ownership and Compensation
Arrangements (Section 1877(b) of the Act)
A. Physician Services (Section 1877(b)(1) of the Act)
The Existing Law: Section 1877(b)(1) of the Act specifies that the
general prohibition under section 1877 of the Act does not apply to
services furnished on a referral basis, if the services are physician
services, as defined in section 1861(q) of the Act, and are furnished
(1) personally by another physician in the same group practice as the
referring physician or (2) under the personal supervision of another
physician in the same group practice as the referring physician.
Section 1861(q) defines ``physicians' services'' as ``professional
services performed by physicians, including surgery, consultation, and
home, office, and institutional calls (but not including services
described in subsection (b)(6) [certain intern and resident
services]).'' A physician is defined in the Act as a duly licensed and
authorized doctor of medicine or osteopathy, doctor of dental surgery
or dental medicine, doctor of podiatric medicine, doctor of optometry,
or chiropractor who meets certain qualifications specified in the Act.
(See section 1861(r) of the Act.)
The August 1995 final rule incorporated this provision in
Sec. 411.355 (General exceptions to the referral prohibition related to
both ownership/investment and compensation), paragraph (a) (Physician
services), covering physician services as defined in Sec. 410.20
(Physicians' services), paragraph (a) (Included services). The
definition of a physician service in Sec. 410.20(a) generally parallels
the definition in section 1861(r) of the Act, with the addition of
diagnosis and therapy services. Under the August 1995 final rule,
physician services need not be performed in any specific location.
The Proposed Rule: The January 1998 proposed rule retained
Sec. 411.355(a) as set forth in the August 1995 final rule. In the
preamble to the January 1998 proposed rule, we noted that the exception
would apply to physician services that constitute DHS under section
1877 of the Act and regulations and that the exception in the Medicare
context would not apply to services performed by nonphysicians, even
though furnished under a physician's supervision, such as ancillary or
``incident to'' services. We interpreted ``personal supervision'' to
mean that the group practice physician must be legally responsible for
monitoring the results of any test or other designated health service
and must be available to assist the individual who is furnishing the
service, even though the group practice physician need not be present
while the service is being furnished.
The Final Rule: In general, we believe that the physician services
exception is of limited application. However, the physician services
exception does afford protection for referrals of the narrow class of
physician services that are included in the definitions of DHS,
especially in the area of radiology. (See discussion in section VIII.A
of this preamble.) The physician services exception enables physicians
in group practices to make referrals for physician services that are
DHS within their group practices. In addition, the in-office ancillary
services exception may also apply, depending on the circumstances. We
are interpreting the physician services exception to apply to referrals
to (or referral services supervised by) a member of the group practice
or an independent contractor who qualifies as a ``physician in the
group'' as defined in Sec. 411.351 (Definitions).
In particular, we are incorporating the physician services
exception in Sec. 411.355(a) as proposed in our January 1998 proposed
rule, with the following modifications:
First, we are interpreting ``personal supervision'' to correspond
with our revised interpretation of ``direct supervision'' in the
context of the in-office ancillary services exception. (See discussion
in section VI.B.2 of this preamble.) We can discern no compelling
reason to have separate and potentially inconsistent supervision
standards in the exceptions under section 1877 of the Act. Accordingly,
the level of supervision required under the physician services
exception is the level of supervision required under the payment and
coverage rules applicable to the particular physician service at issue.
Second, as noted above, we are expressly interpreting the exception
to apply to referrals to (or physician's services supervised by) a
member of the group practice or an independent contractor who qualifies
as a ``physician in the group'' as defined in Sec. 411.351.
Finally, as many have pointed out, the physician services exception
(unlike the in-office ancillary services exception) does not cover
referred services that are performed by the referring physician. We
believe this narrower scope of the physician services exception is
evidence that personally performed physician services fall outside the
scope of section 1877 of the Act. For this and other reasons expressed
elsewhere in this preamble, in Sec. 411.351 of Phase I of this
rulemaking, we are defining a ``referral'' for purposes of section 1877
of the Act to exclude referrals for work personally performed by the
referring physician, and we have made clear that a referring physician
is not himself or herself an entity to which he or she makes referrals.
Comment: A commenter asked that the regulations include a clear
provision for providing compensation for professional reading fees
within an outpatient group practice for diagnostic procedures such as
EKG, pulmonary function testing, EEG, etc.
Response: To the extent that the professional reading fees
mentioned by
[[Page 880]]
the commenter are DHS (see Sec. 411.351), the rules set forth in these
regulations apply. (We note, however, that pulmonary function testing
and EKGs and ECGs typically will not be DHS unless furnished in a
hospital setting.) First, if the professional reading is performed
personally by the referring physician, no referral occurs for purposes
of section 1877 of the Act (though there may still be a referral of the
technical component). Second, if the professional reading is performed
by a physician other than the referring physician, the physician
services and in-office ancillary services exceptions are available. In
the case of a group practice, physician compensation will be governed
by the rules in Sec. 411.352 (Group practice). Subject to those rules,
the physician performing the professional reading may be paid directly
based on his or her personal performance of professional services.
Comment: A commenter expressed the view that all physician services
are excluded from the scope of section 1877 of the Act. The commenter
asserted that no evidence exists that the Congress intended to include
in section 1877 of the Act physician services within the meaning of
section 1861(s)(1) of the Act. The commenter, therefore, concluded that
including professional components of services is beyond the scope of
section 1877 and our regulatory authority.
Response: We disagree. A number of the DHS enumerated by the
Congress in section 1877(h)(6) of the Act include substantial physician
services components, and the Congress provided no exclusion or carve
out. Indeed, we believe the physician services exception itself clearly
evidences the Congress's recognition that the DHS categories set forth
in section 1877(h)(6) of the Act include some physician services. At
the very least, the Congress anticipated that there might be situations
in which it would be difficult to demarcate clearly professional and
technical components of the DHS. For those situations, the Congress
provided an exception that makes clear that group practice physicians
may refer physician services within their group practices when the
conditions of the exception are satisfied.
Comment: A commenter inquired whether the physician services
exception applies to services performed by a nonphysician. In the
commenter's view, if the exception does not apply to these services,
the exception would conflict directly with our other rules on the
practice parameters applicable to nonphysician practitioners.
Response: We are cognizant of the expanding and evolving role of
nonphysician practitioners in the health care delivery system for
Medicare beneficiaries. Notwithstanding, we are not persuaded that an
expansion of the physicians' services exception is appropriate or, in
the light of other interpretations set forth in these regulations,
necessary to accommodate the commenter's concerns.
Section 1877(b)(1) expressly applies only to physicians' services
as defined in section 1861(q) of the Act. Section 1861(q) of the Act
provides that physician services are ``professional services performed
by physicians.'' The Act provides for Medicare coverage for certain
services that would be physicians' services if furnished by a physician
when such services are performed by a physician assistant (under the
supervision of a physician) or a nurse practitioner or clinical nurse
specialist (working in collaboration with a physician) (see sections
1861(s)(K)(i) and (s)(K)(ii) of the Act.) However, while such services
may be identical to physicians' services, they are not physicians'
services under section 1861(q) of the Act. Congress has provided for
separate treatment of such services under the payment rules. To define
nonphysician services as physician services for purposes of section
1877(b)(1) of the Act would distort Medicare's overall payment and
coverage scheme.
We are also concerned that expanding the physicians' services
exception, which has no building or billing requirements, to include
nonphysician practitioners' services would permit group practices to
circumvent the requirements of the in-office ancillary services
exception.
However, while we are not including nonphysician services under
section 1877(b)(1) of the Act, we have made other changes in the
regulations that address the commenter's concerns. Specifically, we
have interpreted the direct supervision requirement of the in-office
ancillary services exception as requiring the level of supervision
mandated under the relevant Medicare payment and coverage rules. See
section VII.B.2 of this preamble. In other words, in the case of
nonphysician practitioners, the supervision requirement of the in-
office ancillary services exception corresponds to the supervision
requirements applicable to such practitioners. Thus, the in-office
ancillary services exception will cover most referral DHS provided by
nonphysician practitioners in a group practice setting (provided the
exception's building and billing requirements are also satisfied),
without imposing additional supervision requirements on such
practitioners.
Moreover, referrals made by nonphysician practitioners generally do
not implicate section 1877 of the Act, which focuses exclusively on
referrals by physicians. However, if a referral made by a physician
assistant or nurse practitioner (or other nonphysician) is directed or
controlled by a physician, we are treating the referral as an indirect
referral made by the directing or controlling physician, who is, in
fact, the ``referring physician.'' This interpretation is necessary to
prevent the use of nonphysician practitioners to circumvent section
1877 of the Act.
We believe these interpretations adequately address the commenter's
concerns and are consistent with the statutory language and structure.
However, we invite public comments as to the need for a further
exception for referred DHS performed by nonphysician practitioners in a
group practice setting.
Comment: A commenter sought clarification as to the treatment of
``incident to'' services under the physicians' services exception. The
commenter believed that unless ``incident to'' services are included in
the exception, the exception would conflict with other payment and
coverage rules.
Response: We are interpreting the physicians' services exception to
apply only to ``incident to'' services (as defined in Sec. 411.351)
that are physician services under section 1861(q). All other ``incident
to'' services would need to qualify under the in-office ancillary
services or another exception.
Comment: A commenter suggested that the term ``physician'' should
be defined in the regulations.
Response: The Act defines ``physician'' in section 1861(r). We
agree that it would be helpful to incorporate this definition into
these regulations and are doing so.
B. In-office Ancillary Services (Section 1877(b)(2) of the Act)
The Existing Law: We have divided our discussion of the in-office
ancillary services exception into four subsections that correspond with
the statutory structure: DHS included in the in-office ancillary
services exception, supervision, building requirements, and billing
requirements. The relevant provisions of the existing law are described
in each subsection below.
The Proposed Rule: The relevant provisions of the proposed rule are
described in each subsection below.
The Final Rule: Many commenters were highly critical of the January
1998
[[Page 881]]
proposed rule's interpretation of the exception for in-office ancillary
services, contending that the rule was arbitrary, inconsistent with our
existing policies, and inefficient. We have revisited the premises of
the January 1998 proposed rule, reexamined the statutory language and
legislative history, and restructured the exception. The in-office
ancillary services exception in Phase I of this rulemaking is
consistent with the language of section 1877 of the Act and the
organization and operation of many modern physicians' offices. While in
most respects the exception is broader and administratively simpler
than the proposed exception, we have substantially limited the ability
of group practices to use part-time arrangements to provide DHS in
buildings or facilities in which they do not routinely provide a wide
range of services other than Federal or private pay DHS.
In revising the exception, we were cognizant of several key
considerations. First, the Congress clearly was concerned with
regulating physicians' ordering of DHS, even in the context of their
own practices; otherwise, a detailed exception would not have been
necessary. Second, the Congress intended to protect some in-office
ancillary services provided they were truly ancillary to the medical
services being provided by the physician or group; otherwise, the
Congress would not have created the exception. Finally, we believe the
boundaries of the exception as intended by the Congress are best
expressed in the building requirement in section 1877(b)(2)(A)(ii) of
the Act, which permits DHS to be provided in the same building where
the physicians provide their regular medical services, or, in the case
of a group practice, in a central DHS building.
Based on those considerations, we have revised the in-office
ancillary services exception to permit the provision of DHS in the same
building in which a group or a physician routinely provides the full
range of the group's or physician's medical services with a minimum of
restrictions. In general, the final exception will protect shared DHS
facilities, so long as the physicians or groups that share the facility
also routinely provide their full range of services in the same
building. Moreover, in certain circumstances, part-time practitioners
would be permitted to share the DHS facility, as long as they are also
providing medical services they routinely provide that are not DHS
(whether Federal or private pay). Coupled with a relaxation of the
proposed supervision requirement described below, we believe the final
exception captures what the Congress intended to protect.
What will not be protected by Phase I of this rulemaking are a
number of part-time, intermittent arrangements that functionally are
nothing more than shared off-site facilities. Many of these part-time,
off-site ancillary services arrangements are inconvenient for patients
both as to location and time, and are created by physicians principally
to capture revenue rather than to enhance patient care. To preclude
such arrangements, and as a counter-balance to allowing certain shared
facilities, we have interpreted the same building requirement as
including a ``full range of services'' condition, and the centralized
building requirement as requiring exclusivity. These interpretations
are consistent with the statutory language and structure. To the extent
the January 1998 proposed rule would have permitted these arrangements,
it is no longer operative. To qualify under the ``centralized
building'' standard, Phase I of this rulemaking will require, among
other things, the group practice to own or lease and use the space
exclusively on a full-time basis.
In addition to the changes to the ``building'' requirements, the
exception for in-office ancillary services under Phase I of this
rulemaking contains a number of other significant changes (all
described in more detail in the relevant comments and responses
sections that follow):
Significantly expanding the scope of services potentially
included in the in-office ancillary services exception by--(1) making
clear that outpatient prescription drugs may be ``furnished'' in the
office, even if they are used by the patient at home; (2) explicitly
permitting external ambulatory infusion pumps that are DME to be
provided under the in-office ancillary services exception; (3) making
clear that chemotherapy infusion drugs may be provided under the in-
office ancillary services exception through the administration or
dispensing of the drugs to patients in the physician's office; and (4)
creating a new exception for certain items of durable medical equipment
(DME) furnished in a physician's office for the convenience of the
physician's patients.
Substantially modifying the ``direct supervision''
requirement to conform it to relevant Medicare and Medicaid payment and
coverage rules for the specific service, in keeping with our premise
that the Congress did not intend to revamp radically the provision of
ancillary services in physicians' offices.
Allowing independent contractors to provide the requisite
supervision, provided they are ``physicians in the group practice,''
meaning that they have contracted with the group practice to treat
group practice patients on group premises and have reassigned their
claims to the group under Sec. 424.80 of these regulations (as further
explained in section 3060, ``Reassignment,'' of the Medicare Carriers
Manual (HCFA Pub. 14-3), Part 3--Claims Process).
Additional revisions and modifications to the rule are addressed in
the discussion below. The discussion is divided into four subparts: the
scope of DHS, supervision, building requirements, and billing
requirements. The discussion of each subpart contains summaries of
public comments and our responses to them.
1. Scope of Designated Health Services That Can Be In-Office Ancillary
Services
The Existing Law: As a threshold matter, the DHS that are
potentially protected by the in-office ancillary services exception are
any of the DHS enumerated in section 1877(h)(6) of the Act, except DHS
specifically excluded from the exception under section 1877(b)(2) of
the Act. Excluded are all parenteral and enteral nutrients, equipment,
and supplies (PEN) and DME (except for infusion pumps, which remain
eligible for the exception). Referrals--in-office or otherwise--for
services that are not DHS need not fit in the exception, since they do
not implicate the statute. The scope of services that are considered to
be DHS is discussed in section VIII.A of this preamble.
The Proposed Rule: We proposed that DHS would be considered
furnished in the location where the service was actually performed or
where a patient receives and begins using an item. We also proposed
expanding the category of DHS included in the in-office ancillary
services exception to include crutches, provided the physician does not
mark up the cost of the crutches.
The Final Rule: First, we are revising the rule to provide that
services will be considered ``furnished'' for purposes of the exception
(1) in the location where the service is actually performed upon a
patient or (2) when an item is dispensed to a patient in a manner that
is sufficient to meet Medicare billing and coverage rules. This change
will make application of the rule clearer in the case of outpatient
prescription drugs and ambulatory infusion pumps that are DME. Second,
in the interests of patient convenience, we are using our
[[Page 882]]
regulatory authority under section 1877(b)(4) of the Act to expand the
exception to include certain DME, including crutches, canes, walkers,
and folding manual wheelchairs, that meet conditions set forth in the
regulations. (Braces and collars are orthotics and, thus, may already
qualify under the statute for the in-office ancillary services
exception.) These conditions generally will require that--(1) the items
are DME, such as canes, crutches, walkers, and folding wheelchairs,
that a patient uses to ambulate in order to leave the physician's
office; (2) the items are furnished in a building that meets the ``same
building'' requirements of section 1877(b)(2) of the Act and
Sec. 411.355(b)(2)(i) as part of the treatment for the specific
condition for which the physician-patient encounter occurred; (3) the
items must be furnished personally by the physician who ordered the
DME, by another physician in the group practice, or by an employee of
the physician or the group practice; (4) the physician who furnishes
the DME must meet all DME supplier standards; (5) the arrangement does
not violate the anti-kickback statute; (6) the billing and claims
submission for the DME complies with all applicable laws and
regulations; and (7) all other requirements of the in-office ancillary
services exception are satisfied. We are similarly excepting blood
glucose monitors.
We are withdrawing our proposal that physicians not mark up these
items when provided in-office to their patients; we believe the current
DME Regional Carrier (DMERC) reimbursement provisions provide
sufficient cost containment controls. We believe these limited
modifications to the DME exclusion will promote quality of patient care
without any significant increased risk of patient or program abuse.
Finally, with respect to infusion pumps (other than pumps that are
PEN equipment or supplies), we are including, under Phase I of this
rulemaking, the furnishing of external ambulatory infusion pumps as in-
office ancillary services covered by the exception (which uses the
generic term ``infusion pumps''), provided all other conditions of the
exception are satisfied. Because they are specifically included in the
statutory exception, external ambulatory infusion pumps need not meet
the added requirements for DME outlined in the preceding paragraph.
Comment: A hospital-based pathologist in a hospital with a full-
service laboratory urged that the in-office ancillary services
exception should not protect laboratories based in physicians' offices.
The pathologist asserted that these laboratories are merely enterprises
that enable physicians to profit from referrals for laboratory tests
and create unfair competition for pathology laboratories that are not
owned by physicians. The pathologist expressed skepticism about the
justification proffered by many physicians that in-office laboratories
exist for the convenience of patients, noting that, in his case, his
hospital laboratory is located directly across the street from the
offices of physicians with in-office laboratories.
Response: Despite the fact that physician-owned or controlled
laboratories and other DHS facilities may competitively disadvantage
entities that do not have physician ownership or control, the Congress
made a policy determination not to apply the prohibition under section
1877 of the Act to DHS referrals that occur within the parameters of a
physician's or group practices' own medical practice, provided these
referrals fit squarely in an exception under section 1877 of the Act.
Comment: The in-office ancillary services exception applies to DHS
that are ``furnished'' in accordance with certain statutory conditions.
A number of commenters objected to our interpretation that the term
``furnished'' excluded items provided to a patient (or delivered to a
patient's home) that are meant to be used at home rather than in the
physician's office. The commenters observed that such a rule does not
make sense in the case of outpatient prescription drugs, which are
commonly dispensed to patients for later consumption at home.
Response: In general, we believe the Congress intended to exclude
from the reach of the statute only items and services provided (or
used, as the case may be) in the physician's office. However, we
believe that our definition of those circumstances can be simplified to
accommodate the provision of outpatient prescription drugs, as well as
ambulatory infusion pumps that are DME. Accordingly, we are revising
the rule to provide that services will be considered ``furnished,'' for
purposes of the exception, in the location where the service is
actually performed upon a patient or where an item is dispensed to a
patient in a manner that is sufficient to meet the Medicare billing and
coverage rules.
Comment: One commenter suggested that we should make clear that so
long as the in-office ancillary services exception is met, discounts on
drugs do not need to be passed on to Medicare.
Response: Nothing in section 1877 of the Act or these regulations
is intended to require physicians to pass discounts on to the Medicare
program. Whether a discount must be passed on to the program by
physicians or others remains the subject of other statutory and
regulatory provisions.
Comment: Commenters requested clarification that the furnishing of
chemotherapy drugs can meet the in-office ancillary services exception.
Commenters also sought clarification with respect to chemotherapy-
related laboratory tests, x-rays, and prescription drugs that are
secondary to the provision of chemotherapy.
Response: Chemotherapy infusion drugs and ancillary laboratory
tests, x-rays, and prescription drugs are DHS for purposes of section
1877 of the Act that may be provided by physicians as in-office
ancillary services if all of the conditions of the exception are
satisfied. In light of the changes we are making in Phase I of this
rulemaking--including revisions to the definition of ``furnish'' and to
the supervision requirement in Sec. 411.355(b)(5)--we believe the
exception is sufficiently broad to accommodate virtually all existing
arrangements for the provision of chemotherapy drugs and related
services to patients in physicians' offices. Under Phase I of this
rulemaking, referrals for chemotherapy infusion drugs may be protected
by the in-office ancillary services exception if they are administered
or dispensed to patients in the referring physician's office (or
through the referring physician's group practice) in accordance with
the supervision requirements already imposed by the Medicare program.
We anticipate no appreciable disruption of chemotherapy services to
Medicare or other patients as a result of Phase I of this rulemaking.
Comment: A commenter sought clarification whether the furnishing of
allergen treatment sets would be protected under the in-office
ancillary services exception.
Response: The provision of allergen treatment sets is protected by
the in-office ancillary services exception so long as all of the
conditions of the exception are satisfied. We believe that the changes
in Phase I of this rulemaking to the definition of ``furnish'' in
Sec. 411.355(b)(5) and the supervision requirements make clear that
allergen treatment sets may be furnished to patients under the in-
office ancillary services exception.
Comment: A number of commenters questioned the scope of our
proposed extension of the in-office ancillary services exception to
include the
[[Page 883]]
furnishing of crutches (DME being otherwise excluded by statute). The
proposed extension would permit physicians to provide crutches if they
make no profit on them and otherwise meet certain criteria. We proposed
that the physician could bill only for the cost of acquiring and
supplying the crutches. Commenters were confused as to how these costs
would be determined and found the proposal to be unnecessarily
restrictive. In addition, commenters wondered why crutches were
included, but not canes, walkers, collars, splints, and the like. Other
commenters variously sought inclusion of other DME, including DME for
rheumatological conditions, orthopedic DME, and blood glucose monitors.
Commenters suggested various measures for determining when DME should
be permitted as an in-office ancillary service. One commenter proposed
that whatever test we adopt should take into account the following: (1)
the intended use of the item (that is, whether the item is an integral
element in the customary continuum of patient care); (2) the cost of
the item (that is, fair market value or a dollar cap); (3) the life-
expectancy of the item (that is, whether items are limited to one-time
prescriptions for 5 or 6 weeks); and (4) physician instruction (that
is, whether some physician instruction in the use of the item is
required). Other commenters proposed dollar caps as a means of
excluding from the exception physician-directed sales of expensive
wheelchairs, beds, and other pieces of equipment on which markups are
significant.
Response: In the interest of patient convenience, we are using our
regulatory authority under section 1877(b)(4) of the Act to expand the
in-office ancillary services exception to include certain DME,
including crutches, canes, walkers, and folding wheelchairs, that meet
conditions set forth in the regulation (in our January 1998 proposed
rule, we proposed a more limited exception for crutches only). (Braces
and collars are classified as orthotics and already potentially qualify
under the statute for the in-office ancillary services exception;
splints are covered under section 1861(s)(5) of the Act and are not
included in any category of DHS.) In doing so, we are concerned
primarily with enabling the patient to depart from the physician's
office. The narrow scope of this expansion and the fact that the need
for ambulation equipment is objectively verifiable mitigate the
potential for overutilization.
For somewhat different reasons, we are also creating an exception
to permit blood glucose monitors (and one starter set of testing strips
and lancets, consisting of no more than 100 of each; this number is at
least one month's supply) to be provided under the in-office ancillary
services exception (under the authority granted in section 1877(b)(4)
of the Act). In light of section 4105 of the BBA 1997, which added a
Medicare benefit for diabetes self-management training services, we do
not believe that the Congress intended the physician self-referral law
to interfere with a physician's efforts to provide blood glucose
monitors to patients. Therefore, the in-office ancillary services
exception may be used by a physician or group practice to furnish a
blood glucose monitor and a starter set of strips and lancets if the
physician or group furnishes outpatient diabetes self-management
training to patients for whom the blood glucose monitors are furnished.
While commenters sought the inclusion in this exception of various
other items of DME, we decline to extend the in-office ancillary
services exception further. To do so would, in essence, vitiate the
congressional determination to exclude DME from the in-office ancillary
services exception. We do not find--and we believe that the Congress
did not find--that the in-office furnishing of other DME would pose no
risk of fraud or abuse, as required under section 1877(b)(4) of the
Act.
Having considered the various suggestions made by the commenters,
we are adopting the following conditions for DME provided as an in-
office ancillary service (these conditions being in addition to all
other conditions of the exception):
The item is one that a patient requires for the purposes
of ambulating, uses in order to depart from the physician's office, or
is a blood glucose monitor (including one starter set of test strips
and lancets).
The item is furnished in a building that meets the ``same
building'' requirements in the in-office ancillary services exception
as part of the treatment for the specific condition for which the
physician-patient encounter occurred.
The item is furnished personally by the physician who
ordered the DME, by another physician in the group practice, or by an
employee of the physician or the group practice.
A physician or group practice that furnishes the DME meets
all DME supplier standards located in paragraph (c) of Sec. 424.57
(Special payment rules for items furnished by DMEPOS suppliers and
issuance of DMEPOS supplier billing numbers).
The arrangement does not violate the anti-kickback statute
or any law or regulation governing billing and claims submission. (This
condition is necessary to meet the ``no risk of fraud or abuse''
standard in 1877(b)(4) of the Act.)
All other requirements of the in-office ancillary services
exception are satisfied.
We agree with the commenters that our proposal with respect to not
marking up costs was confusing and unnecessarily restrictive, and we
are not adopting it. While we find the commenters' suggestions for
dollar caps on DME items attractive, we have concluded that it is not
feasible to devise dollar caps that would appropriately include low-
value DME and exclude high-value DME in all cases (for example, a $150
limit might be high for some types of DME and low for others). Upon
further reflection, we believe the current DMERC reimbursement
provisions provide sufficient cost containment controls, with respect
to these items of DME we are including in the exception. We believe the
modifications to the DME exclusion that we are making will promote
quality of patient care without any significant increased risk of
patient or program abuse.
Finally, we note with respect to DME furnished in physicians'
offices that these arrangements remain subject to our conditions of
participation for DME suppliers and other applicable payment and
coverage rules.
Comment: A commenter asked that the final rule address whether the
use of consignment closets as a means of providing DME in a physician's
office implicates section 1877 of the Act. For example, a surgeon
enters into an arrangement for a DME supplier to rent space (for
example, a closet) in the surgeon's office at fair market value under a
lease that meets the rental exception. The technician who measures for
braces or DME supplies is a shared employee of the surgeon's practice
and the supplier, with the supplier paying for the time the technician
spends measuring the braces and supplying DME. The billing is done by
the supplier. The commenter asserted that in this example, there is no
financial relationship because the surgeon does not bill Medicare.
Response: If the lease fits squarely in the rental exception and
the arrangement for the personal services of the technician fits
squarely in the personal service arrangements exception, the
``consignment closet'' arrangement described in the preceding comment
may not create a prohibited financial relationship under section
[[Page 884]]
1877 of the Act. We wish to clarify that this result does not depend on
whether the physician bills Medicare. To the contrary, the essential
prohibition under section 1877 of the Act is on physicians making
referrals to entities with which they have prohibited financial
relationships and on those entities billing Medicare. Nothing in this
rule is intended to, or should be interpreted as, legitimizing
consignment closet arrangements. These arrangements raise significant
questions under other legal authorities, including the anti-kickback
statute and our supplier standards. Physicians and suppliers who are
considering ``consignment closet'' arrangements would be well-advised
to read the OIG's Special Fraud Alert on the Rental of Physician Office
Space by Persons or Entities to Which They Refer published in the
Federal Register on February 24, 2000 (65 FR 9274).
Comment: One commenter expressed concern about the interaction of
section 1877 of the Act and the proposed surety bond rule that would
exempt physicians from the surety bond requirement if they provide DME
incident to patient care. Specifically, the commenter asked whether we
believe that physicians are allowed to disburse DME, orthotics, and
prosthetics incident to patient care without violating the provisions
of section 1877 of the Act and whether these provisions are applicable
if a physician has a surety bond.
Response: Section 1877 requirements under the exception exist
wholly apart from other requirements of law that may apply. In
addition, the commenter is mistaken in asserting that we proposed to
exempt physicians who furnish DME in their offices from the proposed
surety bond requirements that would apply to all suppliers. We assume
that the commenter is referring to our proposed rule concerning
supplier standards that was published on January 20, 1998 (63 FR 2926).
Such an exception is not included in the proposed rule.
Comment: Oncologists complained that the proposed regulations--
which interpreted the in-office ancillary services exception as
applying only to infusion pumps that are implanted in a physician's
office--would prohibit them from furnishing external ambulatory
infusion pumps to their patients, contravening clear congressional
intent and causing substantial inconvenience to patients. External
ambulatory infusion pumps are used to administer chemotherapy agents
and pain medication to cancer patients. The pumps are typically filled
in the oncologist's office, and the drug flow is ordinarily initiated
before the patient leaves the office. The statutory in-office ancillary
services exception excludes DME (which typically is used by patients in
their homes), but includes ``infusion pumps.'' Thus, the commenters
asserted that the plain language of the exception indicates clear
congressional intent to authorize physicians to furnish a certain
category of DME--infusion pumps--to patients, even though those pumps
will be used at home.
Response: We agree. The statute uses the general term ``infusion
pumps.'' We are revising the regulation in Sec. 411.355(b) to make
clear that the in-office ancillary services exception protects external
ambulatory infusion pumps (other than pumps that are PEN equipment or
supplies) that are filled or serviced in the physician's office, even
though the patient uses them at home. However, the in-office ancillary
services exception does not protect an infusion pump that is used to
deliver PEN because that pump is not classified as DME, but is
considered PEN. PEN is categorically excluded from the exception under
section 1877(b)(2) of the Act. The statutory language addressing
infusion pumps in the in-office ancillary services exception applies
only to DME.
Comment: Two commenters requested clarification as to the
application of the in-office ancillary services exception to home care
physicians who primarily treat patients in their homes. These
commenters asserted that home care physicians play an important role in
the delivery of cost-effective, quality care to patients and provide
services that, in some cases, preclude the need for more expensive
hospitalizations. These commenters believe that section 1877 of the Act
should not apply to home visits. In the alternative, these commenters
requested clarification of the following issues:
Are DHS performed in a patient's home concurrently with
the performance of a physician service included in the in-office
ancillary services exception (for example, a physician uses a hand-held
portable laboratory during a physician visit in the home)? Can a
technician accompanying the physician perform the DHS during the home
visit?
What is the application of section 1877 of the Act to
group practices that own home health agencies that in turn provide DHS
to group patients?
Are referrals from medical directors of home health
agencies protected by the employee or another exception?
Response: We find nothing in the statute that excludes referrals
for DHS by home care physicians from the reach of the statute. To the
contrary, the Congress expressly included home health services as a
designated health service. That said, we generally agree with the
commenters that the provision of DHS in a patient's home should be
protected by the in-office ancillary services exception, provided that
all of the conditions of the exception are satisfied. However, in many
cases, services provided by home care physicians will not fit neatly
into the in-office ancillary services exception. For example, under the
``same building'' requirements, we are requiring that physicians
provide substantial physician services unrelated to DHS in the building
and that the services provided there be the full range of the
physicians' services. We believe that a home care physician meets these
``same building'' tests if his or her principal medical practice
consists of treating patients in their private homes (for purposes of
determining whether a physician is principally a home care physician,
private homes do not include nursing, long term care, or other
facilities), and the physician (or a staff member accompanying him or
her) provides a designated health service in a private home
contemporaneously with a physician service (provided by the referring
physician) that is not a designated health service and the other
exception requirements are met. (DHS provided in facilities, such as
nursing homes, by home care or other physicians may qualify under the
in-office ancillary services exception if all conditions of the
exception are satisfied.) We have concluded that it may be appropriate
to develop additional rules for home care physicians under the in-
office ancillary services exception. We are expressly soliciting
comments on this issue and will consider it further in Phase II of this
rulemaking.
As to the commenter's second question, section 1877 of the Act
applies to a group practice's ownership of a home health agency in the
same manner it applies to the ownership by a group practice of any DHS
entity. Referrals to the entity by the group practice or by members of
the group must qualify under an ownership exception, such as the in-
office ancillary services exception. In general, we do not believe that
the furnishing of most home health services will meet the requirements
of the in-office ancillary services exception. Unless a physician in
the group personally conducts the home visit and provides a physician
service unrelated to the furnishing of DHS, the ``same building''
requirements will not be satisfied (we see no plausible way for
[[Page 885]]
home health services to qualify under the ``centralized building''
option under section 1877(b)(2)(A)(ii)(II) of the Act). In some cases,
the ``rural provider'' exception may apply (that exception will be
discussed in the Phase II rulemaking).
Finally, with respect to referrals from medical directors of home
health agencies, these referrals may be protected by the employee
exception or the personal service arrangements exception, depending on
the facts and circumstances of the medical director's relationship with
the home health agency. However, if the medical director is an owner of
a group practice that owns the home health agency, an ownership
exception would still need to apply.
Comment: A commenter sought clarification as to whether a referral
to a physician spouse in another group practice, who subsequently
orders a designated health service for the referred patient, could come
within the in-office ancillary services exception. The commenter
observed that there are many two-physician marriages in the health care
industry and that many spouses engage in different specialities and
practice in different group practices. The commenter argued that the
referrals between physician spouses to each other's group practices
should not constitute prohibited referrals, so long as either the
referring physician or the physician spouse accepting the referral
complies with an exception. In our January 1998 proposed rule, we took
the position that a physician in one group practice will be prohibited
from referring to his or her physician spouse in another group practice
because the referring physician cannot meet the in-office ancillary
services exception. The commenter found this interpretation overly
restrictive and narrow. In the commenter's view, if the physician
receiving the referral meets the in-office ancillary services
exception, he or she should be able to accept the referral, because the
accepting spouse and not the referring spouse is ordering the
designated health service.
Response: On reconsideration, we generally agree with the
commenter, with one important distinction. We believe that the referral
to a spouse should be allowed, if the referral is for a physician
service unrelated to the furnishing of a designated health service
(that is, a designated health service is not the reason for the
referral) and any subsequent DHS referrals by the spouse fit within the
in-office ancillary services exception with respect to the spouse
receiving the referral. We recognize that there may be some
circumstances, particularly in underserved areas, where a spouse may be
the only qualified provider of a particular DHS. We are considering
whether a limited additional exception is warranted and will address
the issue further in Phase II of this rulemaking. We invite comments on
this issue.
2. Direct Supervision
The Existing Law: Section 1877(b)(2) of the Act provides an
exception for in-office ancillary services. To qualify as in-office
ancillary services, the services must, among other things, be furnished
personally by a referring physician or another physician member in the
same group practice, or be furnished by individuals who are ``directly
supervised'' by the referring physician or another physician in the
group practice. The August 1995 final rule covering referrals for
clinical laboratory services defined ``direct supervision'' in
Sec. 411.351 as supervision by a physician who is present in the office
suite and immediately available to provide assistance and direction
throughout the time services are being performed.
The Proposed Rule: The January 1998 proposed rule retained this
definition, with several clarifications and changes. In the preamble to
the January 1998 proposed regulation, we expressed our view that the
Congress intended the in-office ancillary services exception to apply
to services that are closely attached to the activities of the
referring physician. Consistent with this interpretation, we used the
definition of ``direct supervision'' that appears in section 2050,
``Services and Supplies,'' of the Medicare Carriers Manual (HCFA Pub.
14-3), Part 3--Claims Process, which describes services that are
incident to a physician's professional services under section
1861(s)(2)(A) of the Act. Under this rule, supervision must be provided
by a physician who is present in the office suite in which the services
are being furnished, throughout the time they are being furnished, and
who is immediately available to provide assistance and direction. The
definition in the proposed rule also clarified the meaning of the term
``present in the office suite'' to mean that the physician is actually
physically present. However, we would still have considered the
physician ``present'' during brief unexpected absences, as well as
during routine absences of a short duration (such as during a lunch
break), provided the absences occur during time periods in which the
physician is otherwise scheduled and ordinarily expected to be present
and the absences do not conflict with any other requirements in the
Medicare program for a particular level of physician supervision.
The Final Rule: Our interpretation of the ``direct supervision''
standard produced the largest number of public comments about the in-
office ancillary services exception, virtually all suggesting that our
proposal would be overly burdensome, result in enigmatic technical
rules, and require wasteful and inefficient practices.
We have revisited the direct supervision requirement and are now
interpreting ``directly supervised'' in the statute to mean that the
supervision meets the supervision requirements under applicable
Medicare and Medicaid payment or coverage rules for the specific
services at issue. Upon further review and consideration, we concluded
that the Congress did not use the phrase ``directly supervised'' in any
technical sense. Rather, the Congress sought to establish a nexus
between the referring physician and the individual performing the
ancillary services in order to limit the exception to services that are
truly ``ancillary'' to the referring physician's medical practice. We
believe that the Congress did not intend section 1877 of the Act to
supersede or replicate existing statutory and regulatory structures
that address supervision of services from the perspective of quality of
care or patient safety. This interpretation is consistent with the
often cited legislative history for section 1877 of the Act indicating
that the Congress did not intend to require physicians to be present at
all times that ancillary services were being performed. (See Conference
Report for OBRA 1993, H. Rep. No. 213, 103d Congress 810 (1993).)
Instead, we believe a sensible approach is to defer to existing
Medicare and Medicaid supervision requirements. (Those rules are not
addressed in Phase I of this rulemaking.)
In our January 1998 proposed rule with respect to the group
practice definition, we proposed eliminating independent contractors as
members of the group practice. This created the prospect that
independent contractors would not be able to provide the supervision
required under the in-office ancillary services exception. The statute
provides that physicians ``in the group practice'' may supervise the
furnishing of ancillary services to patients of a referring physician
who is a member of the group practice. Under Phase I of this
rulemaking, physicians ``in the group practice'' include owners of the
group practice, employees of the group practice, and independent
contractors who are ``in the group practice.'' Owners and employees may
also be
[[Page 886]]
members of the group; independent contractors may not. We will consider
an independent contractor physician to be ``in the group practice'' if
he or she has a contractual arrangement to provide services to the
group's patients in the group practice's facilities and the independent
contractor's arrangement with the group complies with the reassignment
rules in Sec. 424.80(b)(3) of these regulations and in section 3060.3,
``Payment to Health Care Delivery System,'' of the Medicare Carriers
Manual (HCFA Pub. 14-3), Part 3-- Claims Process. Independent
contractors who qualify as physicians ``in the group practice'' may
receive overall profit shares and productivity bonuses described in
section 1877(h)(4)(B)(i) of the Act, as implemented by these
regulations, and may provide the supervision required under the in-
office ancillary services exception.
Comment: Many commenters raised concerns about the level of
supervision required under the in-office ancillary services exception.
Many commenters objected to our proposed interpretation of the direct
supervision requirement, which would have adopted the supervision
requirement applicable to ``incident to'' services in section 2050,
``Services and Supplies,'' of the Medicare Carriers Manual (HCFA Pub.
14-3), Part 3--Claims Process, including a ``present in the office
suite'' requirement, with an exception for brief absences by the
physician. These commenters variously found the ``presence''
requirement overly burdensome, impractical, confusing, and unclear.
Commenters believe that a general requirement of a physician's physical
presence for all ancillary services would create unnecessary
inefficiencies in the delivery of health care services, drive up costs,
and inconvenience patients. For example, some commenters noted that
tests are often scheduled in the mornings when physicians are making
rounds or attending hospital meetings, with the physicians interpreting
the tests when they arrive later at the office. Some commenters
observed that they could discern no obvious connection between direct
supervision and curtailing fraud and abuse. Others noted that a strict
direct supervision requirement does not guarantee that DHS are
medically appropriate and are not simply being performed for financial
gain.
Commenters suggested various alternative standards, including
``appropriate supervision,'' ``professional responsibility,'' ``general
supervision,'' and ``employee status.'' The vast majority of
commenters, however, urged that the in-office ancillary services
exception ``direct supervision'' requirement be interpreted to comport
with the applicable supervision requirements under our other payment
and coverage rules. These commenters stressed that these rules
adequately take into account quality concerns and the health and safety
of patients and that there is no justification for imposing an
additional layer of supervision requirements.
Response: Upon further review and consideration of the statute, the
legislative history, and the public comments, we have concluded that
the Congress did not use the phrase ``directly supervised'' in any
technical sense in the statute. Rather, we believe the Congress sought
to establish a nexus between the referring physician and the individual
performing the ancillary services in order to limit the exception to
services that are truly ``ancillary'' to the referring physician's
medical practice. We believe that the Congress did not intend section
1877 of the Act to supersede or replicate existing statutory and
regulatory structures that address supervision of services from the
perspective of quality of care or patient safety. This interpretation
is consistent with the often cited legislative history indicating that
the Congress did not intend in the context of section 1877 of the Act
to require physicians to be present at all times that ancillary
services were being performed (``The conferees intend that the
requirement for direct supervision by a physician would be met if the
lab is in the physician's office which is personally supervised by a
lab director, or a physician, even if the physician is not always on
site'' (H. Rep. No. 213, 103d Cong. 810 (1993)). We are persuaded that
a more sensible approach is to defer to existing Medicare and Medicaid
supervision requirements. (Those rules are not addressed in Phase I of
this rulemaking.) Thus, the in-office ancillary services exception
supervision requirements will be satisfied if the level of supervision
provided meets all applicable Medicare or Medicaid payment and coverage
requirements.
Comment: One commenter viewed the strict ``direct supervision''
standard established in the August 1995 final rule as an important
check on inappropriate referrals and objected to any liberalization of
the requirement, arguing that it would allow the connection between a
physician's activities and DHS to ``grow too thin.'' The commenter
believes it is appropriate for us to impose higher standards of care to
protect patients who are referred for DHS, because these services have
been determined to present a particularly high risk of inappropriate
referrals. The commenter further noted that as the health and safety
rationale for supervision declines (supervision being less necessary
for certain low-risk services), the risk of unnecessary referrals and
overutilization increases. The commenter recommended that we retain the
``incident to'' direct supervision standard. In the alternative, the
commenter proposed a ``sphere of service'' test under which a physician
would be allowed to refer a patient for services only if that
physician, and not another licensed practitioner, normally would
perform the services. According to the commenter, this approach would
eliminate physician incentives to establish ``backroom'' practices to
provide services that could be provided more efficiently elsewhere.
Response: We share this commenter's concerns about inappropriate
financial incentives driving the provision of DHS. We are concerned
that heightened downward pressure on physician incomes will generate
increased upward pressure to expand in-office ancillary services as a
means of offsetting income losses. However, we believe the Congress
clearly articulated a policy determination to allow in-office ancillary
services that meet certain statutory criteria. While the stricter
``incident to'' supervision standard might serve to reduce the risk of
overutilization somewhat, on balance, we believe that using section
1877 of the Act to superimpose a separate supervision requirement on
existing regulatory structures governing appropriate levels of
supervision would be overly burdensome, inefficient, and inconsistent
with the overall design of the statute. We note, however, that
physicians wishing to bill DHS ``incident to'' (and group practice
physicians wishing to obtain productivity bonuses for services incident
to their personally performed physician services) must comply with the
``incident to'' supervision requirements, including the ``present and
available'' requirement and the employee requirement, as set forth in
section 2050, ``Services and Supplies,'' of the Medicare Carriers
Manual (HCFA Pub. 14-3), Part 3--Claims Process.
Comment: One commenter asked whether technicians must be directly
supervised if a group practice provides technician services to a
hospital. If so, the commenter requested that we clarify whether the
group practice must follow self-referral supervision standards or
hospital supervision standards.
Response: If a hospital is billing for the services, as this
commenter implied,
[[Page 887]]
the in-office ancillary services exception does not apply (along with
its supervision requirement). Any hospital standards would always
apply, since any requirement for supervision under section 1877 of the
Act is separate and distinct from other supervision requirements under
the Medicare and Medicaid statute and regulations.
Comment: While many commenters approved of our proposal to exclude
independent contractors as members of a group practice for purposes of
complying with the definitional tests for a group practice (making it
easier for many groups, especially smaller groups, to qualify as a
group practice for purposes of section 1877 of the Act), many
commenters also urged that independent contractors be included as
members of a group practice for purposes of the direct supervision
requirement of the in-office ancillary services exception. Many
commenters expressed concern that our bar on direct supervision by
independent contractors would undercut the ability of group practices
to deliver necessary health care services in situations in which
employment of the physician is not possible or desirable. To support
their claim that the statute does not require that the direct
supervision be provided by a ``member'' of the group, commenters
observed that section 1877(b)(2)(A)(i) of the Act only requires
supervision ``by the [referring] physician or by another physician in
the group.'' One commenter noted that this language is consistent with
section 3060.3, ``Payment to the Health Care Delivery System,'' of the
Medicare Carriers Manual (HCFA Pub. 14-3), Part 3--Claims Process,
which treats independent contractors as ``in the group'' for
reassignment purposes. Another commenter suggested that an independent
contractor could properly be considered ``in the group'' if the
physician provides services to the group practice's patients in the
group practice's facility under a contract with the group, and the
services are billed by the group.
Response: Having reviewed the comments and reconsidered the
statutory language, we are persuaded that independent contractors may
be physicians ``in the group'' for purposes of the in-office ancillary
services exception. We are considering an independent contractor
physician to be ``in the group practice'' if (1) he or she has a
contractual arrangement to provide services to the group's patients in
the group practice's facilities, (2) the contract contains compensation
terms that are the same as those that apply to group members under
section 1877(h)(4)(iv) of the Act or the contract fits in the personal
services exception, and (3) the contract complies with the reassignment
rules at Sec. 424.80(b)(3) of these regulations and in section 3060.3,
``Payment to the Health Care Delivery System,'' of the Medicare
Carriers Manual (HCFA Pub. 14-3), Part 3--Claims Process, so that his
or her services are billed by the group practice. We are codifying this
new test in Sec. 411.351 of the regulations. This latter requirement
presents a technical problem under the plain language of the statute,
which we address as follows. The billing requirements under section
1877(b)(2)(B) of the Act do not provide for billing by the group
practice when a supervising physician is ``a physician in the group
practice,'' rather than a member of the group. Given the statutory
structure and language, particularly the language of the direct
supervision requirement under section 1877(b)(2)(A)(i)of the Act, we
are interpreting the billing requirements to extend to billing by the
group practice when the supervising physician is ``in the group
practice'' in order to effectuate the direct supervision requirement.
Independent contractors who qualify as ``physicians in the group
practice'' may receive overall profit shares and productivity bonuses
described in section 1877(h)(4)(B)(i) of the Act, as implemented by
these regulations. As discussed in section VI.C.3 of this preamble,
independent contractors are not ``members'' of the group.
Comment: Several commenters sought clarification with respect to
the application of the in-office ancillary services exception to
referrals for DHS from an independent contractor to the group practice
with which he or she contracts (for example, referrals from an
independent contractor to the group's in-office laboratory).
Response: Independent contractor physicians will have compensation
relationships with the group practices with which they contract. In
order for an independent contractor to refer DHS to the group practice,
an exception must apply. Possible exceptions, depending on the
circumstances, include the in-office ancillary services exception for
independent contractors who are ``physicians in the group'', the
physicians'' services exception, the personal service arrangements
exception, or the risk-sharing exception for services provided to
certain managed care enrollees. We note that under the in-office
ancillary services exception, the furnishing of DHS would have to take
place in a ``same building'' location under section
1877(b)(2)(A)(ii)(I) of the Act, as the ``centralized building''
provision (section 1877(b)(2)(A)(ii)(II) of the Act) only applies to
referring physicians who are group members.
Comment: Several practitioners of ultrasonography commented that a
direct supervision requirement that mandates physician presence for in-
office ancillaries unfairly benefits radiologists, who are generally
available on-site because they do not have ``patients'' to see or other
responsibilities, while disadvantaging vascular laboratories that
operate without physicians on-site. The commenters suggested that the
rule require that ultrasound examinations and interpretations be
performed in accordance with standards set by independent professional
associations. However, another commenter--radiologist--urged us to
retain the direct supervision requirement in the interest of patient
health and safety.
Response: As noted above, we are modifying the direct supervision
requirement under the in-office ancillary services exception to apply
the requisite supervision requirements under Medicare and Medicaid
payment and coverage rules.
3. The Building Requirements
The Existing Law: Under section 1877(b)(2)(A)(ii) of the Act, in-
office ancillary services must be furnished in a building in which the
referring physician, or another physician who is a member of the same
group practice, furnishes physician services unrelated to the
furnishing of DHS. Alternatively, in the case of a referring physician
who is a member of a group practice, the in-office ancillary services
can be furnished in another building that is used by the group practice
for the provision of some or all of the group's clinical laboratory
services, or for the centralized provision of the group's DHS (other
than clinical laboratory services). (The existing regulations address
the same and other building requirements only with respect to clinical
laboratory services.)
The Proposed Rule: In our January 1998 proposed rule, we proposed
defining the ``same building'' in Sec. 411.355(b)(2)(i) as the same
physical structure, with one address, and not multiple structures
connected by tunnels or walkways.
The Final Rule: The building requirements are designed to ensure
that the DHS qualifying for the exception are truly ``in-office'' (that
is, part of the physician's routine medical office practice) and not
provided as part of a separate business enterprise. The location
requirements do not pertain to
[[Page 888]]
the furnishing of DHS that are not payable by Medicare or Medicaid;
these services may be furnished anywhere, subject to any restrictions
in other applicable Federal, State, or local laws.
In general, the structure of the statutory language suggests that
the Congress had two main objectives: permitting the provision of in-
office ancillary services for the convenience of patients during their
patient visits and, in the group practice context, permitting the
provision of in-office ancillary services in a dedicated building used
for these services (for example, a central clinical laboratory). By
contrast, we believe the Congress did not intend to protect part-time
rentals of ancillary services facilities under this exception.
Upon further consideration, we believe that the Congress did not
intend the application of the in-office ancillary services exception to
turn on the nuances of architectural design. Thus, for purposes of
Phase I of this rulemaking, a ``building'' is defined as a structure
with, or combination of structures that share, a single street address
as assigned by the U.S. Postal Service. For purposes of this rule, the
``same building'' does not include exterior spaces, such as courtyards,
lawns, driveways, or parking lots, or interior parking garages. The
building could include a SNF or other facility or a patient's home,
provided all other conditions of the exception are satisfied. A mobile
van or trailer is not a building or a part of a building.
The statute implements congressional intent by offering two
location options: the ``same building'' option, available to solo
practitioners and group practices, and the ``centralized building''
option, available only to groups. (See section 1877(b)(2)(A)(ii)(I) and
(b)(2)(A)(ii)(II) of the Act.)
``Same Building''
Under section 1877(b)(2)(A)(ii)(I) of the Act, services qualify for
the in-office ancillary services exception if they are furnished ``in a
building in which the referring physician (or another physician who is
a member of the same group practice) furnishes physician services
unrelated to the furnishing of designated health services.'' We believe
the underlying intent of this provision is to allow physicians to
furnish DHS that are ancillary to the physician's core medical practice
in the location where the core medical services are routinely
delivered. We believe the Congress did not intend to permit the
wholesale provision of DHS in locations in which physicians perform
only token services that are not related to the furnishing of DHS (that
is, only token physician services that are not Federal or private pay
DHS). Simply stated, the DHS should be ancillary to physician services
that are not DHS, and not the other way around. The exception was
intended as an accommodation to physicians' customary practice of
medicine and not as a loophole for physicians and group practices to
operate DHS enterprises that are unconnected--or only marginally
connected--to their medical practices. In addition, the significant
easing of the ``direct supervision'' requirement described above
necessitates a somewhat stricter interpretation of the location
standards than we proposed in our January 1998 proposed rule, in order
to ensure an adequate nexus between in-office ancillary DHS and the
physician's core medical practice. Thus, we are making the following
changes (except where noted) in the ``same building'' requirements:
In our January 1998 proposed rule, we proposed
interpreting the rule as allowing any quantity of services unrelated to
DHS to be furnished in the same building. We are revising the rule to
require that the referring physician (or another physician who is a
member of the same group practice) must furnish in the same building
substantial physician services unrelated to the furnishing of Federal
or private pay DHS. We are defining the phrase ``services unrelated to
the furnishing of designated health services'' to mean physician
services that are neither Federal nor private pay DHS, even if the
physician service leads to the ordering of DHS. In addition, to
preclude single-service DHS enterprises from the in-office ancillary
services exception, we are requiring that the unrelated physician
services furnished in the building represent substantially the full
range of physician services unrelated to the furnishing of DHS that the
physician routinely provides (or, in the case of a member of a group
practice, the full range of physician services that the physician
routinely provides for the group practice).
We are adding a requirement that the DHS furnished in the
building be furnished to patients whose primary nexus with the
referring physician (or his or her group practice) is the receipt of
physician services unrelated to the furnishing of DHS. Simply stated,
obtaining DHS should not be the main reason the patient has contact
with the referring physician (or his or her group practice). Again,
this standard will ensure that self-referred DHS are ancillary and not
primary services for the patients who receive them. Thus, for example,
a physician who provides physician services and DHS for his or her
patients in a nursing home may not also provide token physician
services to other nursing home patients in order to provide DHS under
the in-office ancillary services exception.
The space in the building in which the DHS are provided
need not be adjacent to the space in which services that are not DHS
are provided (subject to the dictates of any Medicare or Medicaid
payment or coverage supervision rules).
Shared facilities in the same building are permitted to
the extent they comply with the supervision, location, and billing
requirements of the in-office ancillary services exception; we are not,
however, creating a broader shared-facility exception.
We believe that a home care physician whose principal
medical practice consists of treating patients in their private homes
meets the ``same building'' requirements if the physician (or a staff
member accompanying the physician) provides a designated health service
contemporaneously with a physician service (provided by the referring
physician) that is not a designated health service in the patient's
private home and the other exception requirements are met. Because the
location requirements of the in-office ancillary services exception may
disadvantage home care physicians, we are considering whether special
rules should be developed under the ``same building'' requirements for
physicians who primarily practice as home care physicians. We are
soliciting comments on that issue and intend to address it further in
Phase II of this rulemaking.
``Centralized Building''
Under section 1877(b)(2)(A)(ii)(II) of the Act, in the case of a
referring physician who is a member of a group practice, services
qualify for the in-office ancillary services exception if they are
furnished ``in another building which is used by the group practice * *
* for the provision of some or all of the group's clinical laboratory
services, or * * * for the centralized provision of the group's
designated health services (other than clinical laboratory services).''
We believe that this statutory provision--which allows group practices
to have ``off-site'' DHS locations--was intended to accommodate the
concerns of group practices with multiple office locations that wanted
to consolidate DHS operations for cost containment purposes. However,
in permitting group practices to provide centralized DHS, the Congress
did not intend to
[[Page 889]]
eviscerate the ``in-office'' element of the exception. We are therefore
interpreting the ``centralized building'' standard as follows:
The space (whether an entire building, subpart of a
building, or mobile unit) used for the provision of the group
practice's clinical laboratory services or centralized DHS qualifies
for the exception only if it is used exclusively by the group, that is,
it is wholly owned by the group practice or leased by the group
practice on a full-time basis (that is, 24 hours per day, 7 days per
week). To preclude part-time arrangements in the form of one-day
rentals, we are requiring that the centralized building be owned or
leased exclusively by the group practice for at least 6 months. This
rule precludes facilities shared by group practices in off-site
buildings.
Part-time ``centralized'' DHS arrangements are precluded.
For example, a group practice may not rent a magnetic resonance imaging
(MRI) facility 1 day per week and treat that facility as a
``centralized'' building under section 1877(b)(2)(A)(ii)(II) of the
Act.
Under the authority granted to the Secretary in the
unnumbered paragraph that follows section 1877(b)(2)(A)(ii)(II)(bb) of
the Act (that allows the Secretary to determine other terms and
conditions related to section 1877(b)(2)(A)(ii)(II)(bb) under which the
provision of DHS does not present a risk of program or patient abuse),
we are determining that a mobile facility (for example, an x-ray van)
owned and used exclusively by a group practice (24 hours per day, 7
days per week, for at least six months) will be considered to meet the
``centralized building'' standard, even though a mobile facility is not
a building.
Group practices may lease or sublease DHS facility space
(including mobile units) to or from other group practices or solo
practitioners on a part-time basis, but DHS provided to patients of
part-time lessee or sublessee group practices will not fit in the in-
office ancillary services exception, unless the ``same building''
requirements are met.
Referrals for ancillary services from other physicians or
group practices that are not affiliated with the group practice
providing the DHS do not implicate section 1877 of the Act, provided
there are no impermissible financial relationships between the parties.
A referral for a designated health service does not create a financial
relationship.
These building rules are designed to give physicians and group
practices a meaningful opportunity to provide bona fide in-office
ancillary DHS to their patients, while preventing group practices from
using the in-office ancillary services exception to operate enterprises
that are functionally nothing more than self-referred DHS enterprises,
providing minimal services that are not DHS so as to comply nominally
with the exception and capture DHS profits. We believe the Congress did
not intend the exception to include these operations. Far from
promoting patient convenience and quality of care, these arrangements
pose a significant risk of overutilization of services and shuttling of
patients to DHS locations for the economic betterment of the
physicians, without regard to the patient's best interests.
Comment: Many commenters found the proposed regulations and
interpretations of the ``building'' requirements to be confusing, over
broad, potentially contradictory, and, in the words of one commenter,
``metaphysical.'' With respect to our proposed ``physical structure''
requirements, many commenters urged us not to place the agency or
physicians into surveying real estate to determine whether a structure
is one building. Commenters variously observed that while some walkways
or tunnels between commercial medical office buildings may be sidewalks
between distinct and separate buildings, other walkways or tunnels are
part of the modern architecture of these buildings or are required to
comply with zoning, land use, open space, or other real estate laws or
to surmount natural barriers present on the site of the building.
There were a number of suggestions for revising the requirement.
One group of commenters urged us to adopt a mailing address rule
stating that a building would be considered as one building for all
suites or room numbers located inside that are required by the U.S.
Postal Service to use the same street address, regardless of suite
number. Under this rule, suites operated by the same group practice or
solo physician in buildings that use separate street addresses would be
treated as separate buildings for the purposes of the in-office
ancillary services exception. Other commenters objected to a street
address test, noting that physicians have no control over the manner in
which their buildings are assigned street addresses and that the
parameters for assigning street addresses may vary by State and
locality. One commenter expressed concern about buildings located on
corner lots that might have two street addresses.
A second approach proposed by one commenter was to revise the
regulations to allow connected buildings or portions of buildings that
are owned or controlled by the same group practice. Still other
commenters claimed that the emphasis should be on the proximity of the
supervising physician to the patient during the performance of DHS.
Under this view, the location requirement of the in-office ancillary
services exception should focus on whether the physician is
``immediately available'' to the support personnel and not on an
artificially imposed physical design constraint. Along these lines,
several commenters proposed that services be considered in the ``same
building'' if the physician is within a certain number of minutes (for
example, 10 minutes) from the patient or if the physician is ``close at
hand.''
Response: We regard the building requirement of the in-office
ancillary services exception, in combination with the supervision and
billing requirements, as the Congress's attempt to circumscribe the
exception so that it applies only to services provided within the
referring physician's actual sphere of practice. Without these
requirements, physicians could refer to, and profit from, almost any
entity, with the claim that somehow the referred services are ``in-
office'' services that are being supervised from some remote place.
Notwithstanding, we realize that our proposed definition of a
``building''--which attempted to define a building in architectural
terms--could cause practical problems for some physicians and that a
clearer, ``bright line'' rule would be preferable. Accordingly, having
considered the various alternatives suggested by the commenters, we
have concluded that for purposes of Phase I of this rulemaking, we are
defining a ``building'' as a structure with, or combination of
structures that share, a single street address as assigned by the U.S.
Postal Service. A building will be considered as one building for all
suites or room numbers located inside that are required by the U.S.
Postal Service to use the same street address, regardless of the suite
number. Under this rule, suites used by the same group practice or solo
physician in buildings with separate street addresses will be treated
as separate buildings for the purposes of the in-office ancillary
services exception. While we recognize that this mailing address rule
may result in an occasional anomaly, we are persuaded that it creates a
``bright line'' rule that will be easy to apply and will produce fair
results in the vast majority of cases. Questionable cases may be
appropriate candidates for an advisory opinion.
The space in the building in which the DHS are provided need not be
adjacent to the space in which services
[[Page 890]]
that are not DHS are provided (subject to the dictates of any Medicare
or Medicaid payment or coverage supervision rules). Shared facilities
in the same building are permitted under section 1877 of the Act to the
extent they comply with the supervision, location, and billing
requirements of the in-office ancillary services exception; we are not
creating a broader shared facility exception.
Because of the increased risk of abuse, we do not intend to protect
DHS provided by mobile vans or other mobile facilities under the in-
office ancillary services exception, except in very limited
circumstances described in section VI.B.3 of this preamble. Thus, we
wish to make clear that for purposes of this rule, a ``building'' does
not include exterior spaces, such as courtyards or parking lots, nor
does it include interior parking garages. For purposes of the in-office
ancillary services exception, a building consists of usable
professional office space and common areas such as lobbies, corridors,
elevator banks, and restrooms.
In light of the changes we are making in the supervision standard,
we believe it is necessary to revisit the building standards in order
to effectuate congressional intent to limit the scope of the in-office
ancillary services exception to services that are truly ancillary to
physician services and are not a primary business of the practice.
Thus, we are revising the ``same building'' requirements to more
definitively tie in-office ancillary services to the referring
physician's core medical practice. Simply stated, we want to ensure
that services covered by the exception are, in fact, furnished ``in
office.'' Under section 1877(b)(2)(A)(ii)(I) of the Act, services
qualify for the in-office ancillary services exception if they are
furnished ``in a building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
physicians' services unrelated to the furnishing of designated health
services.'' We believe the underlying intent of this provision is to
allow physicians to furnish DHS that are ancillary to the physician's
core medical practice in the location where the core medical practice
occurs. We believe the Congress did not intend to permit the wholesale
provision of DHS in locations in which physicians perform only token
services unrelated to the furnishing of DHS. Thus, we are interpreting
the ``same building'' requirements as follows:
The referring physician (or another physician who is a
member of the same group practice) must furnish in the same building
substantial physician services unrelated to the furnishing of DHS. In
addition, we are requiring that the unrelated physician services
furnished in the building represent substantially the full range of
physician services unrelated to the furnishing of DHS that the
physician routinely provides (or, in the case of a member of a group
practice, the full range of physician services that the physician
routinely provides for the group practice). Independent contractors are
not members of a group practice for purposes of section 1877 of the
Act; thus, their activities do not count for purposes of compliance
with the substantial physician services test or the full range of
services test under the ``same building'' requirements, unless they are
the referring physician. (See discussion in section VI.B.3 of this
preamble.)
For purposes of this exception, we are defining the phrase
``services unrelated to the furnishing of designated health services''
to mean physician services that are neither Federal nor private pay
DHS, even if the services might generate orders or referrals of DHS.
Thus, for example, a cardiologist who examines a patient and thereafter
orders a diagnostic radiology test has performed a service unrelated to
the furnishing of DHS. On the other hand, a cardiologist who reads the
results of a diagnostic radiology test (such as, for example, a
transthoracic echocardiography for congenital cardiac anomalies, CPT
code 93303) (whether for a Federal or private pay patient) has
performed a service that is related to the furnishing of DHS.
The DHS furnished in the building are furnished to
patients whose primary nexus with the referring physician (or the group
practice of which the referring physician is a member) is the receipt
of physician services unrelated to the furnishing of DHS. Thus, for
example, a physician who provides physician services and DHS for his or
her patients in a nursing home may not also provide token physician
services to other nursing home patients in order to provide those
services under the in-office ancillary services exception.
Comment: One commenter believes that our proposed interpretation of
the ``same building'' requirements contradicts the purpose of section
1877(b)(2)(A)(ii) of the Act. The commenter focused on the part of this
provision that requires that ancillary services be furnished in a
building ``in which the referring physician * * * furnishes physicians'
services unrelated to the furnishing of designated health services.''
The proposed rule regarded a physician's examination and diagnosis of a
patient that leads to the physician requesting a designated health
service as acts that are ``unrelated to the furnishing of designated
health services.'' The commenter is concerned that this interpretation
would allow a physician's office to be a single specialty ``mill'' in
which the physician could quickly generate a large quantity of
referrals for profit. In other words, the exception could apply to a
physician who does little more than conduct cursory evaluations and
refer patients for a particular designated health service (for example,
physical therapy). The commenter believes that, instead, the
physician's office is meant to be a location in which the physician
provides bona fide diagnostic and curative services to individuals
presenting a variety of conditions.
Response: We share the commenter's general concern about
inappropriate DHS arrangements, although we believe that the statute
does not require us to include in the in-office ancillary services
exception only services referred by physicians who treat a variety of
conditions. The focus of the exception, in our view, is the requirement
that the services be provided or performed in conjunction with a
physician's own professional activities or as adjuncts to physician
services, in a location in which the physician (or a member of his or
her group practice) practices. If we were to limit this exception as
the commenter suggested, some physician specialists might be prohibited
from referring within their own practices. On the other hand, we agree
that some restriction in the definition is appropriate to preclude
physicians from providing virtually nothing more than referrals for
DHS. Thus, as discussed above, in Phase I of this rulemaking, we are
requiring that the unrelated physician services furnished in the
building represent substantially the full range of physician services
unrelated to the furnishing of DHS that the physician routinely
provides (or, in the case of a member of a group practice, the full
range of physician services that the physician routinely provides for
the group practice).
Comment: Several commenters believe that our proposal to have our
regional carriers determine whether the building requirements are
satisfied was unworkable and impractical and would result in
inequitable application of the law. Commenters noted that local
carriers are often reluctant to express opinions on these issues and
disinclined to provide written opinions. If the proposal survives, one
commenter urged us, at a minimum, to give carriers
[[Page 891]]
explicit authority and direction to issue these written opinions.
Response: We have endeavored to develop regulations that provide
sufficiently clear rules so that parties can determine compliance
without resorting to a regional carrier's determination.
Comment: A commenter expressed concern about DHS performed by
physicians who travel to see patients. The commenter is a physician in
a group practice of six physiatrists who perform electromyography and
nerve conduction studies in a midwestern State. The group travels to
rural counties in the State in which it practices to evaluate patients
for musculoskeletal and neurologic problems. The patients often need
nerve testing, and the group's physiatrists are often the only health
care professionals in the county able to perform this testing. The
commenter expressed concern that the regulations would prohibit the
physiatrists from providing needed medical assessment and care to
patients in these circumstances.
Response: Electromyography and nerve conduction studies are not
physical therapy services under our definition in Sec. 411.351;
therefore, referrals for these services do not implicate section 1877
of the Act. Nonetheless, we wish to address the commenter's underlying
question regarding traveling practitioners. Assuming that the
physiatrist group meets the definition of a group practice under
section 1877(h)(4) of the Act and the DHS are performed in the same
building where the physiatrist (or a member of the group) also performs
substantial physician services unrelated to the furnishing of Federal
or private pay DHS, we believe the in-office ancillary services
exception may apply in the situation described by the commenter. As
noted elsewhere, we are soliciting comments on problems faced by
physicians who principally practice in patients' homes and may be
disadvantaged by the location requirements of the in-office ancillary
services exception. We note also that the rural provider exception (to
be addressed in Phase II of this rulemaking) may apply in the situation
described by the commenter.
Comment: A commenter asked that we make clear that if a solo
practitioner provides a designated health service for his or her own
patients in the solo practitioner's own office, then the solo
practitioner is not in violation of section 1877 of the Act.
Response: In the vast majority of situations we can envision, if a
solo practitioner provides a designated health service for his or her
own patients in the solo practitioner's own office, then the solo
practitioner will not violate section 1877 of the Act. First, we are
revising the definition of a ``referral'' for purposes of section 1877
of the Act to exclude DHS personally performed by the referring
physician. Second, with respect to DHS performed by employees of the
solo practitioner (including ``incident to'' services), we believe the
Congress intended for the in-office ancillary services exception to
apply to solo practitioners as well as group practices. Thus, so long
as a solo practitioner's provision of DHS meets the in-office ancillary
services exception, section 1877 of the Act would not be violated.
Comment: Commenters were divided about the provision of ancillary
services through mobile units. Some believe that the use of mobile
units and equipment leads to abusive arrangements. Other commenters
supported the use of mobile units as cost-efficient means of sharing
expensive DHS resources, particularly in rural areas. One commenter
noted that State certificate of necessity (CON) volume requirements
would be nearly impossible to meet without mobile units. The same
commenter argued that sharing equipment is a critical part of cost
containment, because idle equipment may lead to overutilization. One
commenter pointed out that Federal antitrust agencies approve joint
ownership of high technology equipment and that Blue Cross/Blue Shield
has many policy provisions requiring joint ownership. These commenters
generally advocated that mobile units be permitted and that mobile
units qualify as a centralized location for the provision of DHS. A
commenter observed that under the January 1998 proposed rule, a group
practice could move any piece of equipment from office to office and,
applying the ``same building'' requirements, use that piece of
equipment for the provision of DHS. In light of this, the commenter
questioned whether it made sense for the group practice to be
prohibited from transporting the piece of equipment in a mobile vehicle
to the various practice sites and using the equipment in the vehicle,
if the mobile unit were exclusively used by the group practice and is
not leased to any other health care provider. The commenter requested
clarification that in these circumstances, the mobile unit would meet
either the ``same building'' requirements or ``centralized building''
standard. Other commenters urged a broader exception for mobile units,
for example, including them if they are parked in the parking lot of a
physician's medical office building or treating the units themselves as
buildings.
Response: The treatment of mobile units presents difficult
questions under section 1877 of the Act. On the one hand, we have
serious concerns about the potential for fraud and abuse when services
are provided with mobile units. These are the same concerns we have
(and believe the Congress shares) about all shared physician-owned or
controlled ancillary services facilities. We believe that section 1877
of the Act is aimed at arrangements that enable physicians to profit
from referrals to free-standing, money-making services ventures that
are not central to their medical practices. On the other hand, we agree
that the statute clearly permits services provided by mobile units that
qualify under the ``same building'' requirements. Thus, we agree with
the commenter that a group practice can move any piece of equipment
from office to office and use that ``in-office'' piece of equipment for
the provision of DHS in a location that meets the ``same building''
requirements. Because we are defining ``building'' narrowly to exclude
parking lots and interior parking garages, services provided in mobile
vans or trailers will not comply with the ``same building''
requirements. We believe it reasonable to conclude that these services
are not ``in-office'' when a van circulates among various physicians'
offices and is rented serially by each. These arrangements would seem
to be calculated to enhance physician revenues, rather than patient
convenience, since patients would likely be encouraged, if not
required, to schedule appointments on the day that the physician stands
to profit from the services.
That said, we believe that mobile services can constitute an
important part of the health care delivery system for many patients.
Nothing in the statute or these regulations precludes a physician or
group practice from arranging for a mobile provider to treat the
physician's patients at his or her office location, so long as the
financial arrangement, if any, between the physician or group practice
and the ancillary services provider fits in an exception under section
1877 of the Act. In addition, in rural areas, the ``rural provider''
exception (to be addressed in Phase II of this rulemaking) may apply to
protect some physician-owned mobile service providers. Finally, we are
persuaded that the risk is low if a group practice exclusively owns and
uses its own mobile van or trailer that
[[Page 892]]
circulates among its group practice locations. In that limited
circumstance, we are treating the mobile unit as akin to a
``centralized'' building under section 1877(b)(2)(A)(ii)(II) of the
Act.
Comment: Several commenters sought clarification in the regulations
text that group practices can have more than one centralized location
for the provision of DHS. However, one commenter offered a contrary
view. This commenter expressed the view that the Congress intended that
the in-office ancillary services exception be interpreted narrowly with
respect to centralized, free-standing locations. Specifically, the
commenter cites the Conference Report for OBRA 1993 in H. Rep. No. 213,
1st Sess., 810 (1993), which states: ``The conference agreement
includes an exception for clinical laboratory services provided by a
group practice with multiple office locations. For all other DHS the
exception for group practices applies only if the services are provided
in a centralized location'' (emphasis added). Based on this language,
the commenter believes that the Congress intended to permit group
practices to have a single centralized location to provide DHS, but not
to permit group practices to establish multiple wholly owned locations
or franchises for DHS.
Response: Under section 1877(b)(2)(A)(ii)(II) of the Act, in the
case of a referring physician who is a member of a group practice,
services qualify for the in-office ancillary services exception if they
are furnished ``in another building which is used by the group practice
* * * for the provision of some or all of the group's clinical
laboratory services, or * * * for the centralized provision of the
group's designated health services (other than clinical laboratory
services).'' Neither the statute nor the legislative history for this
provision specifically requires one single centralized location for a
group to provide DHS. In addition, we see no compelling reason to
impose such a requirement. We are interpreting the word ``centralized''
to apply when a group practice has established a separate facility for
furnishing DHS to patients, without the requirement that it service all
of the practice's offices or provide all of the practice's DHS. We are
incorporating this interpretation into the regulations text.
If we were to require only one centralized facility for DHS, a
group practice could be in the position of having to send patients from
some offices to inconvenient locations or to house a variety of
different kinds of ancillary services in one location, such as
combining all physical therapy, laboratory services, and x-rays in one
building. It may be entirely impractical for a group practice to house
the equipment and staff for such diverse services in one location. We
believe the Congress meant to allow groups to use this kind of
``central'' or dedicated location in situations in which the facility
is convenient to some of the different offices, but as a result may not
be physically attached to any one of them. Thus, the facility is
``central'' to multiple offices, rather than attached to just one.
Comment: Several commenters sought clarification that a group
practice with a single office location for the delivery of services
that are not DHS can have a separate, centralized building for the
delivery of DHS.
Response: While we believe that the ``centralized building''
provision--which allows group practices to have ``off-site'' DHS
locations--was intended to accommodate the concerns of group practices
with multiple office locations that wanted to consolidate DHS
operations for cost containment purposes, we can discern nothing in the
statute or legislative history that would prevent a group practice with
only one office location from using a centralized building for the
provision of DHS.
However, we are concerned that allowing single and multi-office
group practices to have multiple off-site locations for DHS would
effectively gut the in-office ancillary services exception without
additional controls. Accordingly, we are modifying the ``centralized
building'' standard to ensure that DHS referrals protected by the in-
office ancillary services exception are truly part of the group
practice's medical practice. First, we are requiring that the
centralized office space (whether an entire building, subpart of a
building, or mobile unit) used for the provision of the group
practice's clinical laboratory services or DHS qualifies for the
exception only if it is used exclusively by the group practice or group
practice physicians, that is, it is wholly owned by the group practice
(other than a security interest held by an unrelated lender or
mortgagor) or is leased or subleased by the group practice on a full-
time basis (that is, 24 hours per day, 7 days per week, for at least 6
months). This rule precludes group practice shared facilities in off-
site buildings. Second, part-time ``centralized'' DHS arrangements are
precluded. For example, a group practice may not rent an MRI facility
one day per week and treat that facility as a ``centralized'' building.
Third, a mobile facility (for example, an x-ray van) owned and used
exclusively by the group practice will be considered a ``centralized
building.''
Notwithstanding, group practices may lease or sublease DHS facility
space (including mobile units) to or from other group practices or solo
practitioners on a part-time basis. However, DHS provided to patients
of part-time lessee or sublessee group practices will not fit in the
in-office ancillary services exception, unless the ``same building''
requirements are met. Finally, referrals for ancillary services to a
group practice from physicians not in the group practice or other group
practices do not implicate section 1877 of the Act, provided there are
no impermissible financial relationships between the parties. A
referral for a designated health service does not create a financial
relationship.
Comment: Many commenters urged us to establish a separate exception
for shared facilities. Several commenters argued that shared facilities
pose no greater risk of overutilization than DHS furnished by solo
practices or group practices. Moreover, commenters believe that shared
facilities overseen by referring physicians are likely to be more
convenient, efficient, and accountable than other facilities. A number
of commenters suggested that failure to protect shared facilities would
disrupt existing arrangements that are widespread in the industry (as
one commenter stated, shared facilities are the ``reality of what's
going on''), leaving many solo practitioners with only two options:
merge with others to form group practices or disband their shared
facilities. One physician commenter believes that if his shared
radiology and clinical laboratory facilities are not permitted, the
result would be a shift of income to commercial laboratory ventures,
pathologists, and radiologists, further ``dichotomizing'' the incomes
of primary care physicians and specialists. The physician claimed that
his income would drop by 25 percent and that he would have to fire
employees and default on a lease. Commenters representing the interests
of solo practitioners asserted that there is no meaningful distinction
between DHS facilities shared by solo practitioners and group practice-
owned DHS facilities.
A physician-oriented trade association and other commenters urged
us to add a new exception to allow the legitimate use of shared office
facilities by physicians modeled on language included in BBA 1997, but
never enacted. Other commenters offered different formulations,
including allowing shared facilities if they are in the same building
or complex of
[[Page 893]]
buildings as the solo practitioners' office practices.
Response: In the August 1995 final rule and the preamble to the
January 1998 proposed regulation, we observed that the in-office
ancillary services exception would allow certain shared facility
arrangements among solo practitioners who do not wish to become a group
practice. For example, we noted that two solo practitioners who share
an office and jointly own a laboratory can continue to refer to that
laboratory, as long as each physician (1) furnishes physician services
unrelated to the furnishing of DHS in the office (that is, the
arrangement meets the ``same building'' requirements), (2) directly
supervises the laboratory services for his or her own Medicare or
Medicaid patients while they are being furnished, and (3) bills for the
services. We further noted that if only one of the solo practitioners
owns the laboratory in a shared office, the nonowning physician can
refer to the laboratory as long as he or she is not receiving
compensation from the owner in exchange for referrals. We solicited
comments on the effects of section 1877 of the Act on other shared
facility arrangements.
After careful review of the public comments, we are persuaded that
our original approach in the January 1998 proposed regulations is most
consistent with the purposes of section 1877 of the Act. Under that
approach, shared facilities are permitted if they comply with the
supervision, location, and billing requirements of the in-office
ancillary services exception. With respect to the location of the
shared facility, Phase I of this rulemaking permits shared facilities
that meet the ``same building'' requirements. (However, shared
facilities do not qualify under the ``centralized building'' standard
because they will not meet the exclusively used requirement). Thus, as
noted above, two solo practitioners who share an office and jointly own
a laboratory can continue to refer to that laboratory, as long as each
physician furnishes substantial physician services unrelated to the
furnishing of DHS in the building where the laboratory is located,
provides (directly or through an independent contractor if permitted
under applicable payment and coverage rules) the appropriate level of
supervision for DHS for his or her own Medicare or Medicaid patients,
and bills for the services. We believe the relaxation of the direct
supervision requirement under these regulations will enable additional
shared facilities to come within the exception. Additionally, if only
one of the solo practitioners owns the laboratory in a shared facility
arrangement, the nonowning physician can refer to the laboratory as
long as he or she is not compensated by the owner in exchange for
referrals.
We are not persuaded, however, that a separate exception for shared
facilities is warranted. The BBA 1997 language that several commenters
proffered would apply to services that are furnished--
Personally by the referring physician who is a shared
facility physician or personally by an individual directly employed or
under the general supervision of such a physician;
By a shared facility in a building in which the referring
physician furnishes substantially all of the services of the physician
that are unrelated to the furnishing of shared facility services;
To a patient of a shared facility physician; and
That are billed by the referring physician or a group
practice of which the physician is a member.
Given that we are revising the supervision standards under the in-
office ancillary services exception, we believe that the in-office
ancillary services exception will cover most, if not all, of the
nonabusive shared facility arrangements that would have been protected
by this commenter's proposed additional exception.
Comment: A commenter questioned the application of the proposed
regulations if physicians who share a building, but for legal or
personal reasons are not formally organized into a professional
structure (that is, a ``single legal entity''), form a joint venture to
establish a clinical laboratory or other ancillary service provider.
Response: As explained above, solo practitioners may own and
operate shared DHS facilities so long as they fit in the in-office
ancillary services exception. If the practitioners form a separate
joint venture to provide the services, they may run into problems
complying with the billing requirements of the in-office ancillary
services exception, if the joint venture does the billing (that is, the
joint venture will not qualify as a wholly owned entity and, therefore,
will not fit into any of the in-office ancillary billing requirements
under section 1877(b)(2)(B) of the Act or Sec. 411.355(b)).
4. The Billing Requirement
The Existing Law: To qualify for the in-office ancillary services
exception under the statute, the DHS must be billed by one of the
following:
The physician performing or supervising the service;
The group practice of which such physician is a member,
under that group practice's billing number; or
An entity that is wholly owned by the referring or
supervising physician or the referring or supervising physician's group
practice.
The Proposed Rule: In the proposed regulation, we interpreted the
billing requirements to allow a single group to bill under more than
one billing number assigned to the group and to allow an agent to bill
for the group in the group's name, using the group's number, provided
the billing arrangement meets the requirements in Sec. 424.80(b)(6). We
further interpreted the ``wholly owned'' entity provision to mean that
a physician or group practice can establish a wholly owned provider of
DHS that can bill Medicare or Medicaid on its own behalf, under its own
billing number that is not a group billing number.
The Final Rule: As with the other requirements in this exception,
the billing requirements serve to tie the ancillary services for which
self-referrals will be permitted to the physician's routine medical
practice. Phase I of this rulemaking incorporates the OBRA 1993
amendment clarifying that in-office ancillary services that are billed
by a group practice of which the referring or supervising physician is
a member must be billed under a billing number assigned to the group
practice. However, group practices may have, and bill under, multiple
group practice billing numbers, subject to any applicable Medicare or
Medicaid program restrictions. Wholly owned entities that qualify to do
the billing under the rule may use their own billing numbers and need
not use a number assigned to the physician or group practice that owns
them. The entities must be wholly owned either by the physician
performing or supervising the services or by the group practice; joint
ventures between group practices and individual group practice
physicians or that include other providers or investors do not qualify
as wholly owned entities.
Billing may be done by independent third party billing companies if
they are acting as agents of a solo practitioner, group practice, or
entity, but the billing must be done under billing numbers assigned to
the solo practitioner, group practice, or entity, and the services may
not be separately billed under a billing company's number. The billing
arrangements must meet the requirements of Sec. 424.80(b)(6).
The express billing requirements of section 1877(b)(2)(B) of the
Act contain
[[Page 894]]
no billing method applicable to supervising independent contractor
physicians who are ``physician in the group'' under section
1877(b)(2)(A)(i) of the Act and Sec. 411.351, but who are not members
of the group under Sec. 411.351 (these physicians cannot bill
themselves as the supervising physician because they are required to
reassign their billing rights to the group in order to qualify as
``physicians in the group''). We believe the Congress intended the
billing requirements of section 1877(b)(2)(B) of the Act to correspond
with the supervision requirements of section 1877(b)(2)(a)(i) of the
Act and that this omission was simply a legislative drafting oversight.
Accordingly, we are interpreting the billing requirements to be
consistent with the supervision requirements, which permit supervision
by a ``physician in the group.'' Therefore, the billing conditions will
be satisfied if the DHS are billed by the group practice when the
supervising physician is a ``physician in the group.''
In summary, under the regulations in Phase I of this rulemaking, to
qualify for the in-office ancillary services exception, DHS must be
billed by one of the following:
The physician performing or supervising the service.
The group practice of which such physician is a member,
under that group practice's billing number.
The group practice if the physician is a ``physician in
the group practice,'' under that group practice's billing number.
An entity that is wholly owned by the referring or
supervising physician or the referring or supervising physician's group
practice.
Comment: One commenter objected to our interpretation of the
``wholly owned'' entity provision as unsupported by the statute. The
commenter believes that allowing separate and distinct entities to
provide services and bill on their own behalf would frustrate efforts
to detect fraud and abuse, because the provider numbers of the
physician making the referral and the entity providing the DHS would
not be clearly linked on a claim form. The commenter believes that the
Congress likely intended to exempt only wholly owned entities that
primarily provide administrative and billing services.
Response: We find nothing in the statutory language that would
limit wholly owned entities under section 1877(b)(2)(B) of the Act to
entities that provide only administrative and billing services. Rather,
we believe the wholly owned entity provision can be read reasonably to
permit group practices to provide DHS and bill through these entities.
A narrower interpretation would seem to imply that the group practices
could only bill using third party billing companies if these companies
were wholly owned by the group. We believe it unlikely that the
Congress intended such an interpretation.
Comment: A commenter suggested that the billing provisions in the
in-office ancillary services exception be changed to include billing by
a hospital for physician services furnished under arrangements. This
change would allow physician services for hospital patients to come
within the in-office ancillary services exception.
Response: The in-office ancillary services exception is designed to
exempt from the referral prohibition certain DHS that are provided
within a group practice. As discussed in section VIII of this preamble,
DHS provided under arrangements with a hospital are inpatient or
outpatient hospital services for purposes of the statute. We believe
the Congress did not intend to protect inpatient and outpatient
hospital services under the in-office ancillary services exception. In
fact, in describing the in-office ancillary services exception in H.
Rep. No. 111, 103d Congress, 1st Sess. 546 (1993), the Congress pointed
out that services provided by a hospital or other provider ``under
arrangement'' with a group practice are not protected under the general
exception for in-office ancillary services. ``Under arrangements''
issues are further discussed in section VIII.M of this preamble.
C. Group Practice Definition (Section 1877(h)(4) of the Act)
The Existing Law: As defined in section 1877(h)(4) of the Act, a
``group practice'' is a group of two or more physicians legally
organized as a partnership, professional corporation, foundation, not-
for-profit corporation, faculty practice plan, or similar association,
that meets certain conditions. Section 1877(h)(4) of the Act was
promulgated as part of the original section 1877 law and later amended
by OBRA 1993. The current law contains the following conditions
applicable to ``group practices'' for purposes of section 1877 (those
conditions added by OBRA 1993 are so noted):
Each physician member of the group furnishes substantially
the full range of services that the physician routinely furnishes,
including medical care, consultation, diagnosis, or treatment, through
the joint use of shared office space, facilities, equipment, and
personnel (the ``full range of services'' test).
Substantially all of the services of the physician members
of the group are furnished through the group, are billed under a
billing number assigned to the group, and amounts so received are
treated as receipts of the group (the ``substantially all test'')
(revised by OBRA 1993).
The overhead expenses of and the income from the practice
are distributed in accordance with methods previously determined
(modified by OBRA 1993).
No physician member of the group directly or indirectly
receives compensation based on the volume or value of referrals by the
physician, with the exception of certain profits and productivity
bonuses (added by OBRA 1993).
Members of the group personally conduct at least 75
percent of the physician-patient encounters of the group practice (the
``75 percent physician-patient encounters test'') (added by OBRA 1993).
The group practice complies with all other standards
established by the Secretary in regulations.
In addition, section 1877(h)(4)(B) of the Act establishes two
``Special Rules''--
A physician in a group practice may be paid a share of the
overall profits of the group, or a productivity bonus based on services
personally performed or services incident to the personally performed
services, so long as the share or bonus is not determined in any manner
that is directly related to the volume or value of referrals by the
physician (added by OBRA 1993); and
In the case of a faculty practice plan associated with a
hospital, institution of higher education, or medical school with an
approved medical residency training program in which physician members
may furnish a variety of different specialty services and furnish
professional services both within and outside the group, as well as
perform other tasks such as research, the conditions contained in the
definition of ``group practice'' apply only with respect to the
services furnished within the faculty practice plan.
Our August 1995 final rule covering clinical laboratory services
referrals defined ``group practice'' at Sec. 411.351 based on the
statute as it read effective January 1, 1992. At that time, we
interpreted the ``substantially all test'' to mean that at least 75
percent of the patient care services (defined as services addressing
the medical needs of specific patients) of the group practice members
must be furnished through the group. We interpreted members of the
group to
[[Page 895]]
include owners, employees, and independent contractors. We required
that the group practice be ``a single legal entity.'' Finally, we
stated that the ``substantially all test'' would not apply to any group
practice that is located solely in a health professional shortage area
(HPSA). For group practices located outside of a HPSA, the rule
provided that any time spent by group practice members providing
services in a HPSA would not be used to calculate whether the group
practice located outside the HPSA had met the ``substantially all
test.''
The Proposed Rule: We proposed several changes to the definition of
``group practice'' in Sec. 411.351 to incorporate OBRA 1993 changes. We
also proposed several other significant changes. First, we proposed a
``unified business test''--targeted at sham group practices--that would
require group practices to exhibit ``centralized decision making, a
pooling of expenses and revenues, and a distribution system that is not
based on each satellite office operating as if it were a separate
enterprise.'' Second, we proposed excluding independent contractors as
members of the group to ease compliance with the ``substantially all
test.'' Third, we proposed expanding our definition of ``patient care
services'' to include any of a physician's tasks that address the
medical needs of specific patients or patients in general or that
benefit the group practice.
Final Rule: As with the in-office ancillary services exception, we
have been guided in developing the final definition of ``group
practice'' by twin goals: (1) To minimize the regulatory intrusiveness
of the definition while giving meaning to the statutory language and
intent; and (2) to provide clear guidance as to what constitutes a
``group practice'' for purposes of section 1877 of the Act. We
understand the importance of group practice status to physicians:
simply stated, it allows group members to refer patients to one another
(or to the group itself) for DHS payable by Medicare or Medicaid, and
it allows group members to share in profits derived from such DHS.
Section 1877 of the Act recognizes that referrals within groups are
commonplace and may be appropriate adjuncts to a group's core medical
practice.
As an initial matter, the definition of ``group practice''
promulgated in the statute and these regulations applies only for
purposes of section 1877 of the Act and may have little or no bearing
for purposes of other Medicare or Medicaid provisions. For example, the
definition of a ``physician group'' under the physician incentive plan
rules is broader than the definition of ``group practice'' under
section 1877 of the Act.
A common complaint about our January 1998 proposed regulation was
that it would exclude many bona fide group practices, intrude too far
into the business and financial operations of physician practices, and
chill group practice integration that is crucial in an increasingly
managed care environment. We have been mindful of these concerns in
developing Phase I of this rulemaking. It is not our intent to micro-
manage group practices or dictate their organization or operation;
rather, our intent is to define ``group practice'' so as to create,
consistent with our understanding of the statutory intent, a meaningful
exception to the general referral prohibition under section 1877 of the
Act, an exception that permits certain traditional and commonplace
referral patterns within group practices, without permitting the
exception to swallow the rule. In general, Phase I of this rulemaking
is more expansive than our January 1998 proposed rule and affords
physicians substantial flexibility in designing and managing their
medical practices (subject, of course, to any other legal impediments
imposed by Federal or State law).
We believe the group practice definition set forth in section
1877(h)(4) of the Act is premised on two assumptions. First, internal
group practice referrals should only be protected under the physician
services or in-office ancillary services exceptions (both of which
apply in specific ways to group practices) if the group practice is a
bona fide group practice and not a loose confederation of individual
physicians bound together primarily to profit from DHS referrals. We
believe the Congress intended a true group practice to consist of
physicians whose practices are fully integrated, medically and
economically. In short, the physicians practice medicine together in a
single group, not separately, and their financial prospects are
interdependent. Thus, the Congress imposed certain tests that
demonstrate the requisite integration and gave the Secretary regulatory
authority to impose additional tests. If true integration is present,
we do not believe the Congress otherwise intended to regulate the
formal structure and operation of the group. Second, the financial
incentives for group practice physicians to generate referrals of
Medicare or Medicaid payable DHS for the group should be attenuated.
Thus, the group practice definition provides that group practice
physicians may not be paid directly or indirectly based on the volume
or value of DHS referrals, unless the compensation is a profit share or
productivity bonus that is only indirectly related to those referrals.
With these precepts in mind, Phase I of this rulemaking
incorporates the following significant revisions:
Broadening of the types of arrangements that qualify as a
``single legal entity'' to include, among other things, multi-entity
legal structures and structures owned by a single physician.
Adoption of our proposal to exclude independent
contractors from the definition of a ``member of the group.'' However,
independent contractors who meet the conditions set forth at
Sec. 411.351 may qualify as ``physicians in the group practice'' who
may receive profit shares and productivity bonuses under section
1877(h)(4)(B)(i) of the Act.
Adoption of our proposed expanded definition of ``patient
care services'' so that patient care services include all services a
physician performs that address the medical needs of specific patients
or patients in general or benefit the group practice (for example,
administrative services for the group).
Expansion of our 1998 proposal to gauge compliance with
the ``substantially all test'' by measuring a physician's actual time
spent on patient care services by permitting groups to adopt other
reasonable methods for determining compliance.
Creation of a substantially more flexible definition of a
``unified business'' that will permit group practices to use cost- and
location-based accounting with respect to services that are not DHS,
and, in some cases, with respect to services that are DHS if the
compensation method is not directly related to the volume or value of
the physician's referrals and other conditions are satisfied.
Revision of the productivity bonus rules so that group
practices may pay member physicians and independent contractors who
qualify as ``physicians in the group'' productivity bonuses based
directly on the physician's personal productivity (including services
incident to such personally performed services that meet the
requirements of section 1861(s)(2)(A) of the Act and section 2050 of
the Medicare Carriers Manual, Part 3), but may not pay such physicians
any bonus based directly on their referrals of DHS that are performed
by someone else.
Promulgation of specific methods for ensuring that
compensation for DHS is only indirectly related to referral income. In
addition, parties may use other methods that are reasonable and
documented.
[[Page 896]]
Elimination of the group practice attestation requirement.
These revisions and others are discussed in the comments and
responses that follow. Each comment and response section begins with an
overview of the relevant provision in the group practice definition and
a summary of the final rule relating to that provision. The sections
are divided as follows: General comments, the single legal entity
requirement, members of the group, the ``full range of services'' test,
the ``substantially all'' test, and the ``75% physician-patient
encounters'' test.
1. General Comments
Comment: Many commenters, including a group practice trade
association, criticized the proposed regulations for group practices as
overly intrusive into the internal operations of physician practices,
unnecessarily complex, and incapable of implementation in a fair and
reasonable manner. The association and other commenters believe that
the Congress intended the group practice provisions in the law
predominately to regulate the external ownership, compensation, and
referral arrangements of physicians and not the inner workings of group
practices themselves. The association and other commenters protested
that the rules create arbitrary distinctions among different types of
physicians. These commenters contended that no tenable reason exists to
treat group practices, pathologists, radiologists, and radiation
oncologists--all of whom are permitted under the statute or various
exceptions to make referrals to entities with which they have financial
relationships under certain circumstances--differently than other
physicians, since they have an equal incentive to self-refer.
Response: As indicated above, in preparing Phase I of this
rulemaking, we have been mindful of the commenters' concerns about the
intrusiveness of the proposed rule, and have sought to minimize the
regulatory impact of the group practice definition and to provide clear
guidance as to what constitutes a ``group practice'' for purposes of
section 1877 of the Act. We do not intend to use these regulations to
micro-manage group practices or to dictate their organization or
operation, except as is necessary to give effect to the statutory
intent of the Congress to create a limited exception to the general
referral prohibition for DHS referrals by physicians within their own
group practices. In general, Phase I of this rulemaking is broader than
the January 1998 proposed rule and affords physicians substantial
flexibility in designing and managing their medical practices.
While we have endeavored to apply these rules as equally as
possible to solo and group practitioners and among various types of
practitioners, some differences in regulation and outcomes are
unavoidable, and in some cases desired, given the wide array of
arrangements to which the statute applies and the distinctions inherent
in the statutory scheme. For example, the Congress included a specific
exception for referrals by consulting pathologists, diagnostic
radiologists, and radiation oncologists that does not apply in the case
of other consulting physicians. The Congress intended disparate
treatment of these consulting physicians, reasonably, we believe,
because of the limited ability of pathologists, diagnostic
radiologists, and radiation oncologists to generate patient referrals
of services they either perform or supervise. Similarly, the Congress
judged referrals within group practices (and solo practices) deserving
of special consideration based, we believe, on a recognition of
physicians' traditional practice of delivering DHS in their own offices
to their own patients.
Comment: A commenter sought clarification as to whether a group
practice was exempt from section 1877 of the Act. Several commenters
observed that group practice status does not, by itself, protect
against the risk of overutilization of ancillary services provided by
the group.
Response: A group practice is not exempt from section 1877 of the
Act by virtue of being a ``group practice'' under the definition in
section 1877(h)(4) of the Act and Sec. 411.352 of these regulations. A
relevant exception, such as the in-office ancillary services or the
physician services exceptions, must still apply.
Comment: Several commenters suggested that section 1877 of the Act
and the regulations should focus on referrals of medically unnecessary
tests to entities with which physicians have prohibited financial
relationships. Some commenters suggested that we use our utilization
data to develop norms for each physician specialty that could be the
basis for measuring appropriate utilization and preventing
inappropriate referrals.
Response: We disagree that section 1877 of the Act should apply
only to referrals of unnecessary items and services. While
overutilization is a principal concern of the statute, and a primary
focus of this rule, nothing in the statute suggests that the Congress
intended to limit the statute's reach to referrals of medically
unnecessary tests or procedures. Rather, the statute applies to all
referrals of DHS to entities with which a referring physician has a
prohibited financial relationship. The statute is designed to create a
bright line that prohibits a high risk category of financial
relationships and relieves the government from having to ``look
behind'' every physician referral.
2. Single Legal Entity Requirement
The Existing Law: Under the statute, a group practice must consist
of ``two or more physicians who are legally organized as a partnership,
professional corporation (PC), foundation, not-for-profit corporation,
faculty practice plan, or similar association.'' The August 1995 final
rule took the position that a group practice could consist of only one
legal entity and that any individual or entity could organize, operate,
or control a group practice, as long as two or more physicians had a
role in providing services and the group met all of the other specific
requirements for being a group practice under section 1877 of the Act.
Thus, for example, a hospital could ``own or operate'' a group
practice, provided no State law prohibited it.
The Proposed Rule: The January 1998 proposed regulations retained
the interpretation of the single legal entity requirement from the
August 1995 rule, requiring the legally organized group practice to
consist of a ``single legal entity'', that is, one legal entity
identified as the group practice that meets all of the group practice
definitional tests. In addition, the January 1998 proposed regulations
proposed allowing individual physicians who are incorporated as
individual professional corporations to form a group practice, subject
to meeting the remaining conditions of the group practice definition.
The Final Rule: We are retaining and incorporating into the
regulations text the ``bright line'' rule that a group practice must be
a single legal entity. The single legal entity can assume any form
recognized by the State in which the entity achieves its legal status,
including, but not limited to, a corporation (for-profit, professional,
or nonprofit), partnership, foundation, faculty practice plan, or
limited liability company. The single legal entity can be legally
organized by any party or parties, including, but not limited to,
physicians, health care facilities, or other persons or entities. The
single legal entity must be formed primarily for the purpose of being a
physician group practice. Hence, for example, a hospital that employs
physicians is not a ``group practice'' for purposes of
[[Page 897]]
section 1877 of the Act, although the hospital can form or acquire a
group practice that is a separate single legal entity. The following
structures are among those that may qualify under Phase I of this
rulemaking, assuming all other requirements of the group practice
definition are satisfied:
A partnership between two or more physicians.
A partnership between one physician and another party,
provided that the partnership employs at least one other physician.
(Similarly, a partnership between two nonphysician parties can qualify
if it employs at least two physicians).
A corporation or limited liability company with one or
more physician shareholders or members, provided that a corporation or
limited liability company with only one physician shareholder or member
employs at least one other physician.
A corporation or limited liability company owned by
nonphysicians, provided it employs at least two physicians.
A single legal entity owned by two or more physicians
through their individual professional corporations.
A solo practitioner who is organized as a legal entity
(for example, a professional corporation) and employs at least one
other full-time physician.
A single legal entity (whether a corporation, limited
liability company, or other form) owned by one or more other legal
entities (that is, a multi-entity arrangement) that involves two or
more physicians through employment or indirect ownership, provided that
the ``investing'' or ``owner'' entities are not themselves functioning
group practices. (In other words, existing groups may not band together
to form a group practice primarily to share in-office ancillary
referrals.) It is our understanding that the prevalent practice in
these kinds of arrangements is for the physicians who own the investing
entities to become employees of the new group practice, and for the
investing entities themselves to cease functioning as group practices.
This list is illustrative only, and other variations are possible.
What is essential is that there must be one identifiable legal entity
that is a bona fide group practice of two or more physicians. The
definition of group practice does not include a loose confederation of
physicians, a substantial purpose of which is to share profits from
referrals (sometimes referred to as a ``group practice without
walls''), or separate group practices under common ownership or control
through a physician practice management company, hospital, or health
care system, or other entity or organization.
We have responded to public comments regarding problems faced by
faculty practice plans under section 1877 of the Act by using our
regulatory authority under section 1877(b)(4) of the Act to create a
new exception applicable to faculty practice plans. This new exception
is discussed in section VII.A of this preamble.
While several commenters requested accommodation in the group
practice definition for bifurcated foundation-model group practices
(that is, arrangements between a nonprofit entity that provides health
care services and a physician group, typically used in States that
restrict the corporate practice of medicine), we have determined that
those arrangements are better addressed by the personal service
arrangements exception. As noted elsewhere in this preamble, we intend
to apply our uniform interpretation of the volume or value standard to
all exceptions in which it appears. (See the discussion in section V of
this preamble.)
Comment: Many commenters concurred with our position that a group
practice can be organized by any individual or entity, but took issue
with other aspects of our group practice organizational tests. As a
threshold matter, a number of commenters maintained that the statute
does not require a ``single legal entity.'' These commenters generally
fell into three categories: (1) Commenters seeking protection for
foundation model ``groups'' in States that follow the corporate
practice of medicine doctrine, (2) commenters seeking protection for
physician ``groups'' practicing in academic medical settings, and (3)
commenters seeking protection for ``groups'' that are under common
ownership or control, but that are not bound together in a single legal
entity. Comments on the first two issues-- foundation models and
academic medical settings--are summarized and addressed elsewhere in
this section and in section VII.A of this preamble.
As to the third category--common ownership and control--commenters
generally requested that we recognize organizations under common
control as a single unit or group practice, as we do in our definition
of ``hospital'' in Sec. 411.351 (Definitions) of the regulations.
(Section 411.351 reads as follows: ``Hospital * * * refers to any
separate legally-organized operating entity plus any subsidiary,
related entity, or other entities that perform services for the
hospital's patients and for which the hospital bills.'') Specifically,
the commenters suggested we interpret this portion of the group
practice definition as covering a single legal entity that includes any
separate, legally-organized operating entity plus any subsidiary,
related entity, or other entities that perform services for the group
practice's patients and for which the group practice bills. Some
commenters noted that the ability to have subsidiaries is important for
groups for valid, nonabusive business reasons, such as to operate in
more than one State when States have different corporate requirements,
to organize components of the continuum of care such as home health or
skilled nursing care, and to operate as multi-entity integrated
delivery systems. Some commenters indicated that some State laws
require physicians to practice in a different entity when working in a
bordering State. Also noted was that complex corporate structures are
sometimes required for a variety of other legitimate business reasons,
such as allowing groups to meet State licensing requirements, to
allocate the risk of liability, to comply with inconsistent State
regulations, or to meet corporate practice of medicine requirements.
Similarly, these commenters maintained that an aggregation of groups
managed by the same physician practice management company or multiple
groups owned by the same hospital should be considered a ``group
practice'' for purposes of section 1877 of the Act.
Response: Having considered the comments, we iterate our view that
a group practice must be a ``single legal entity.'' A standard that
would allow entities under common ownership or control to be a group
practice under section 1877(h)(4) of the Act does not sufficiently
protect against sham group practice arrangements or loose
confederations of physicians operating as a group practice
substantially for purposes of profiting from DHS referrals. We find
nothing in the statute that suggests that the Congress intended for a
``group practice'' to be so broadly construed as to include multiple
group practices that happen to use the services of the same management
company or that happen to be affiliated with the same health system.
Single legal entities owned by multiple entities are permitted, as
discussed in the response to the next comment. We address the special
needs of foundation-based practices and faculty practice plans in this
section and in section VII.A of this preamble, respectively.
Comment: Many commenters considered our proposed parameters for the
composition of the ``single legal entity'' too restrictive, taking
issue, in particular, with our statement that ``the
[[Page 898]]
statute specifically requires that a partnership consist of two or more
physicians who are partners and that a PC consist of two or more
physicians who are incorporated together.'' While several commenters
commended our proposal to allow group practices to include individual
professional corporations that employ their own shareholders,
commenters generally espoused expanding the group practice definition
to include any physician group (regardless of its ownership) that is
organized as a distinct legal entity and that employs more than one
physician, provided that all of the other group practice definitional
tests are met.
In these commenters' view, prohibiting a sole practitioner from
owning a group practice that employs multiple physicians is unfair,
inconsistent, anticompetitive, and not supported by the statutory
language. The commenters pointed out that, under our January 1998
proposed rule, a hospital could own a group practice, but an individual
physician could not. Commenters believe that the other requirements for
meeting the group practice definition prevent any sham practice
arrangements and that an interpretation requiring direct ownership by
two physicians does not further Federal fraud and abuse policy.
A number of commenters asked that we clarify that a group practice
may be owned by any legal corporate structure or arrangement including,
but not limited to, limited liability companies, multi-member
professional corporations, sole physician shareholder companies that
employ at least one physician, hospitals that employ physicians,
entities owned jointly by physicians and a hospital (for example, a
physician hospital organization (PHO)), or general corporations that
employ two physicians without any physician ownership. This
interpretation is consistent with the August 1995 final rule. In
particular, several commenters observed that group practices commonly
are formed through the merger of existing group practices. The merging
practices typically contribute assets and transfer physicians and other
employees to the new group practice entity, which bills for the
physician services under a group billing number and treats amounts
received as receipts of the new group practice, and which meets the
other group practice definitional requirements. The commenter urged
that the new group practice entity should qualify for group practice
status, without having to dissolve the merging shareholder entities,
which are often maintained for tax or other purposes unrelated to
Medicare or the fraud and abuse laws.
To prevent sham group practices, one commenter suggested that, in
the case of a new group practice formed by the merger of existing group
practices or professional corporations, we should require the new group
practice to employ its members rather than allowing the multiple
professional corporations (PCs) that formed the new group to continue
employing practice members (except in the case of an individual
professional corporation that employs a physician and owns a stake in a
group practice). Similarly, another commenter recommended requiring all
group practices (regardless of layers of composition) to be fully
integrated into a single operating medical business at the top or
``group'' level. A group practice would be deemed fully integrated if
it met the group practice definitional tests and presented itself as a
single medical business whose equity holders operate as a single
business by sharing such things as contracts, liability, facilities,
equipment, support personnel, management, and a pension plan. A fully-
integrated group would be required to employ or contract with all
physicians at the group level so that physician compensation and
accounts receivable of all members of the group would be ``at risk'' in
the event of losses due to poor management of the group or in the event
of a malpractice claim against any member of the group.
Response: We generally agree with the commenters. We have
reconsidered the statutory language and believe that the provision
requiring ``a group of 2 or more physicians legally organized as a
partnership, professional corporation, foundation, not-for-profit
corporation, faculty practice plan, or similar association--'' can be
interpreted in several ways. It can reasonably be read to mean that a
group must consist of some kind of legally organized entity, owned by
virtually any combination of individuals or other entities, provided
that there are at least two physicians providing services to patients
as group practitioners. We have amended the definition of a group
practice accordingly in Sec. 411.351. We believe this interpretation
allows us to treat all practices, regardless of who owns or operates
them, more uniformly. The introduction to this section provides an
illustrative list of possible group practice organizational structures.
We are adopting the commenters' suggestion that no entity that owns
all or part of a group practice (that is, no equity holder in the
group) may itself function or qualify as a group practice (whether a
group practice under section 1877(h)(4) of the Act or otherwise). Thus,
for example, in the case of a new group practice formed through the
merger of existing group practices, the merging or defunct group
practices may not themselves operate as medical group practices (that
is, they may not furnish or bill for health care services); however,
the defunct practices are not required to dissolve. The merging group
practices should transfer all medical assets to the new group practice,
and the new group practice should employ the physicians and bill for
their services, treating receipts as receipts of the new group
practice.
We also generally agree that a group practice should consist of a
single medical business whose equity holders operate as a single
business by sharing such things as contracts, liability, facilities,
equipment, support personnel, management, and a pension plan. This
aspect of a group practice is addressed by the unified business test in
Sec. 411.352 of the regulations. (See section VI.C.7 of this preamble
for additional information).
Comment: Commenters questioned whether a hospital could qualify as
the ``single legal entity'' needed to establish group practice status.
In the August 1995 regulations, we stated that ``* * * if a clinic (or
other facility) is legally organized to include two or more physicians
and provides the services of physicians, it is a group practice, even
if it is established, operated, and controlled by a nonphysician group
or corporation. This would be so regardless of who employs the
physicians (in the scenario presented by the commenter, the clinic
physicians were employed by the hospital that established the
clinic).'' (60 FR 41937) One commenter interpreted this language to
mean that a hospital, which is itself a legal entity, could employ
physicians and, therefore, qualify as a group practice if the other
requirements of the group practice definition were met. Thus, the
hospital would not need to establish a separate legal entity for its
employed physicians to be considered a group practice. A related
concern was whether a single hospital could encompass multiple group
practices. According to the commenter, the ability of hospitals to
establish multiple groups is especially important for a hospital entity
that may operate several campuses in different cities as unincorporated
divisions, a situation likely to increase as providers consolidate into
regional networks.
Response: We believe the commenter's interpretation would stretch
the meaning of a ``group practice'' too far. We do not believe that a
hospital can reasonably be construed
[[Page 899]]
as a ``group practice.'' We find no basis to conclude that the Congress
thought otherwise. The statement from the August 1995 regulations was
made in response to a comment regarding an arrangement in which a tax-
exempt hospital had affiliated group practices and established a
separate tax-exempt physician-directed clinic as the group practice's
operating entity, but employed the physicians in the affiliated groups
directly. In responding to the comment, we attempted to make two
points: (1) That a group practice need not be legally organized by
physicians; and (2) that a physician-directed clinic could qualify as a
group practice.
We iterate that a group practice may be legally organized by a
hospital or other nonphysician person or entity; however, neither the
hospital itself nor any other facility the primary purpose of which is
something other than to operate a physician group medical practice, can
be a group practice. A hospital may establish multiple group practices
through subsidiaries or affiliated entities that are separate legal
entities. Each entity may be a group practice for purposes of section
1877 of the Act, although the aggregation of groups will not be.
Exceptions, such as the in-office ancillary services exception, would
only apply to referrals within one of those groups and not across
multiple groups within the same hospital entity.
Comment: A commenter noted that the August 1998 proposed rule
clearly states that a hospital may own and operate a group practice
(assuming there is no State law impediment to such ownership) and that
physicians may own a group indirectly through individual professional
corporations. In light of these statements, the commenter sought
clarification on three points: (1) Whether a single legal entity owned
jointly by physicians and the parent company of a hospital could
qualify as a group practice, provided all of the other conditions in
the definition were satisfied; (2) whether the ``single legal entity''
test could be met by a limited liability company; and (3) whether
several physicians organized as a limited liability company could, in
turn, own another entity (for example, a second limited liability
company) that could qualify as a group practice.
Response: In responding to the commenter's questions, we apply the
principles described above. First, a single legal entity owned jointly
by physicians and the parent company of a hospital could qualify as a
group practice, provided all of the other conditions in the definition
were satisfied. Second, a limited liability company duly organized
under applicable State law could qualify as a ``single legal entity.''
Third, several physicians organized as a limited liability company
could, in turn, own another entity that could qualify as a group
practice provided that the first limited liability company is not, and
does not operate as, a group practice. In this last case, the physician
members of the first limited liability company would be considered
members of the group by virtue of their indirect ownership interest in
the second entity.
Comment: Commenters note that health systems, management companies,
hospitals, and other nonprofit and for-profit corporations must comply
with State laws governing the corporate practice of medicine. In some
States, these laws restrict or prohibit a corporation from directly
employing physicians. In some cases, the corporations form a
``captive'' or ``friendly'' professional corporation with one physician
owner who holds the ownership rights to the professional corporation in
trust for the corporation. The friendly professional corporation
directly employs physicians who then form the group practice. The
corporation manages the business of the group practice, with the sole
physician shareholder acting primarily as a ``figurehead.'' The
arrangement ensures that the corporation only indirectly employs the
physicians and does not violate the corporate practice of medicine
rules. Commenters noted that typically only one physician is a
shareholder in the friendly professional corporation so that day-to-day
transactions are less cumbersome.
Response: Since we have amended the group practice definition to
cover groups that consist of one physician owner and one or more
physician employees, we believe that the types of ``captive'' or
``friendly'' professional corporations described in the comment can
both meet our definition and comply with corporate practice of medicine
requirements. Groups must continue to meet all of the other criteria in
the group practice definition in section 1877(h)(4) of the Act and
Sec. 411.351.
Comment: Several commenters asked that we clarify whether the
``single legal entity'' requirement precludes a group practice from
having subsidiary entities that, for example, own real estate or
equipment, provide billing services, or operate ancillary services.
Response: As we noted in the August 1995 final regulations, we
believe that the statute does not preclude a single group practice from
owning other legal entities for the purposes of providing services to
the group practice. Thus, to cite the example in the August 1995 final
regulation at 60 FR 41936, a group practice could wholly own and
separately incorporate a laboratory facility that provides laboratory
services to a group practice or other patients. The physicians could
qualify for the in-office ancillary services exception provided they
meet the requirements for supervision, location, and billing. The
billing requirement in section 1877(b)(2)(B) of the Act allows services
to be billed by the referring or supervising physician, the group
practice, or an entity wholly owned by the group practice. The
exception appears to anticipate that a group practice may wholly own
separate legal entities for billing or for providing ancillary
services. Parties should be aware, however, that the group practice
safe harbor under the anti-kickback statute (Sec. 1001.952(p) of this
title), does not protect group practice ownership of ancillary
services; for purposes of the anti-kickback statute, these arrangements
are evaluated on a case-by-case basis.
3. Members of the Group
The Existing Law: Under the August 1995 final regulations, owners,
employees, and independent contractors were all considered ``members of
a group'' practice for purposes of the group practice definitional
tests.
The Proposed Rule: The proposed regulations proposed modifying the
definition of the term ``members of the group'' to include only
physician partners, shareholders, and full-time and part-time physician
employees. Independent contractors would no longer be considered
members of the group. This change was proposed to aid group practices
attempting to comply with the 75 percent ``substantially all test.''
Physicians would be considered members of the group during the time
that they furnish patient care services to the group.
The Final Rule: We are adopting our January 1998 proposal to define
a member of a group practice as any physician who owns, or is employed
by, the group practice. In the case of a group practice owned by
professional corporations or defunct group practices, the physicians
who own those entities will be considered members of the group
practice. Also, those physicians who own all or part of the group
practice through their own professional corporations and who are
employed by their own professional corporations (which contract with
the group practice to provide physician services) will be
[[Page 900]]
considered members of the group. Physicians are members of the group
during the time they furnish ``patient care services'' (as defined at
Sec. 411.351) to patients of the group or for the benefit of the group,
even if those services cannot be billed by the group (for example,
certain administrative services, pro bono services).
Independent contractors and leased employees will not be considered
members of the group. The exclusion of independent contractors is
intended to aid many group practices in complying with the
``substantially all test'' described below. Although not group practice
members, under certain circumstances, independent contractors may
provide the required supervision for the in-office ancillary services
exception, as described in section VI.B.2 of this preamble.
While nonphysicians, such as nurse practitioners and physicians
assistants, may be group practice ``members'' for general purposes
under section 1877 of the Act, their membership will have no practical
effect, since they are not ``physicians'' for purposes of the three
group practice ``tests'' (the ``full range of services,''
``substantially all,'' and ``75 percent physician-patient encounters''
test), nor for purposes of the profits and productivity bonuses
provisions. While referrals by nurse practitioners and physician
assistants generally do not trigger section 1877 of the Act, which
applies only to physicians (as defined at section 1861(r) of the Act),
referrals made by nonphysician health care professionals may implicate
the statute if those referrals are directed or controlled by a
physician. In other words, a physician or group practice cannot channel
referrals through a nurse practitioner, physician assistant, or other
nonphysician health care professional in order to circumvent the
prohibition under section 1877, and any channeled referrals would be
imputed to the responsible physician.
Comment: Many commenters supported our proposal to count owners and
employees as members of the group, but not independent contractors.
This change would facilitate compliance with the group practice
definition by group practices that use part-time independent contractor
physicians to supplement and expand the range of services the group
offers to patients. Some commenters recommended that independent
contractors be excluded only for purposes of the ``substantially all
test,'' but not for other purposes, including the direct supervision
requirement of the in-office ancillary services exception and the 75
percent physician-patient encounters test. Some commenters objected to
excluding independent contractors from the definition of ``members of
the group'' because they perceived that such exclusion would prevent
group practices from paying independent contractors productivity
bonuses for the work they personally perform under section
1877(h)(4)(B)(i) of the Act.
Response: We are retaining our proposal to exclude independent
contractors from the definition of ``members of the group practice.''
On balance, we believe this change will benefit many group practices
that wish to qualify for group practice status. As to the other
concerns raised by commenters, we believe those concerns have largely
been addressed by other changes in these regulations. We have
liberalized the direct supervision standard in the in-office ancillary
services exception to permit supervision by independent contractors who
meet certain conditions that establish that the independent contractors
are ``physicians in the group practice.'' (See discussion in section
VI.B.2 of this preamble). As discussed below, in greater detail, we are
permitting group practices to pay productivity bonuses to independent
contractors who are ``physicians in the group practice.'' (See
discussion in section VI.C.8 of this preamble).
Comment: A number of commenters advocated a flexible approach to
the definition of ``member of the group,'' urging that groups be
permitted to elect whether to include independent contractors as
members on an annual or other basis. These elections would apply
uniformly for purposes of qualifying under all of the group practice
definitional tests and the in-office ancillary services exception, and
would be reported to us.
Response: The election process described by the commenters strikes
us as unnecessary given the significant changes in this final rule with
respect to the treatment of independent contractors under the in-office
ancillary services exception and the group practice productivity bonus
provisions. In our view, an election process would impose an additional
administrative burden on groups and the government, with minimal
offsetting benefit.
Comment: To accommodate multi-entity group arrangements, a
commenter suggested that ``members of a group'' should include owners
of the group, employees of the group, and owners of any sole or
multiple shareholder professional corporation that has an ownership
interest in the group (that is, indirect owners).
Response: For purposes of the definition of ``members of the
group,'' we are including any physician owners of a sole or multiple
shareholder PC or other entity that has an ownership interest in the
group. In essence, we intend to ``look through'' any corporate or
entity owners to the ultimate physician owners. Thus, members of the
group include physicians who are owners (directly or indirectly) and
bona fide employees of the group.
Comment: Several commenters suggested that independent contractors
be permitted to qualify as group practice members on a locum tenens
basis. Thus, for example, a group would be allowed to use independent
contractors to provide coverage when a member of the group is ill and
unable to practice medicine temporarily. Other reasons to use locum
tenens physicians could include death or disability of a physician,
resignation of a physician, accommodating seasonal increases in patient
loads, and ``trial runs'' of physicians being recruited to join a
practice. According to commenters, locum tenens providers are typically
paid on a fee-for-time basis by the staffing organizations with which
they are affiliated. Thus, they typically have no direct financial
relationships with any of the health care entities to which they are
assigned. The health care entities retain all patient receipts and,
when possible, Medicare payments are reassigned to the health care
entity.
Response: Nothing in section 1877 of the Act or these regulations
prevents the use of locum tenens physicians in situations like those
described in the comments. The issue raised, however, is how these
physicians should be treated for purposes of a group practice's
compliance with the group practice definition and how referrals by such
physicians should be treated under the general prohibition under
section 1877. As to the first issue, we believe an appropriate use of
locum tenens physicians in exigent situations should not prevent a
group practice that otherwise complies with the definition at section
1877(h)(4) and Sec. 411.352 of these regulations from qualifying for
group practice status. We are applying the rules at section 3060
``Reassignment,'' of the Medicare Carrier's Manual (HCFA Pub. 14-3),
Part 3--Claims Process (the reassignment provisions) as the test for
whether a physician is a locum tenens physician. A locum tenens
physician will be considered as ``standing in the shoes'' of the
regular physician (as defined in section 3060.7) if he or she replaces
the regular physician in accordance with section 3060.7. We note that
section 3060.7 does not treat a physician hired
[[Page 901]]
on a ``trial run'' basis as a locum tenens physician.
Comment: One commenter sought clarification that on-call physicians
who are independent contractors would be exempted from the group member
and group practice requirements but would be able to provide and
supervise care on behalf of a group member. On-call physicians for one
group may be members of other group practices. They may or may not be
compensated for their services or bill under the group practice billing
number of the group for which they are serving in an on-call capacity.
According to the commenter, on-call arrangements are commonplace,
especially among groups that do not have sufficient numbers of
specialists to cover for each other. The commenter requested a specific
exemption under the statute so that on-call physicians do not impede
groups from meeting the group practice definition and are not precluded
from ordering DHS when they are serving in an on-call capacity. The
commenter suggested an on-call physician be treated as ``standing in
the shoes'' of the member while providing on-call services for purposes
of the ``substantially all test,'' the 75 percent physician-patient
encounters test, and the supervision requirement of the in-office
ancillary services exception.
Response: We agree that it is appropriate to treat on-call
physicians as ``standing in the shoes'' of the member while providing
on-call services for purposes of the ``substantially all test,'' the 75
percent physician-patient encounters test, and the supervision
requirement of the in-office ancillary services exception, provided
that the services are billed by the practice for which the physician is
serving on an on-call basis.
Comment: Several commenters questioned whether nurse practitioners,
physician assistants, or other nonphysician providers could be group
members, and if so, whether their services would count in the
calculation of the 75 percent physician-patient encounters test.
Response: We perceive nothing in the statute that would prevent
group practices from admitting nurse practitioners, physician
assistants, or others as members of the group for purposes other than
section 1877 of the Act. However, the definition of a ``group
practice'' in section 1877(h)(4) of the Act contains several
requirements that apply specifically to physician members of the group.
Provisions of the in-office ancillary services exception and the
physician services exception also refer specifically to physician
members or physicians in the same group practice. The term
``physician'' is specifically defined under the Medicare statute at
section 1861(r) of the Act and does not include nurse practitioners or
physician assistants. Any services that these individuals provide are
not counted under the ``substantially all test'' or under any other
part of the group practice requirements or exceptions that apply to
physician members.
The referral prohibition in section 1877 of the Act applies only to
referrals that are made by a physician to an entity with which that
physician, or an immediate family member, has a financial relationship.
If a nonphysician practitioner is referring a physician's patients at
the physician's suggestion or in lieu of the treating physician, we
would impute the referrals to the physician. Simply stated, physicians
may not delegate their own referrals to avoid the referral prohibition.
On the other hand, we would not impute the referrals if the nurse
practitioner or the physician assistant is independently treating the
patients and initiates the referrals on his or her own. We think the
determination will depend on the specific facts and circumstances.
Comment: One commenter asked that we exclude from the definition of
members of the group any employees who provide interpretation or
supervision services only and are not otherwise involved in patient
care.
Response: Given the revisions we have made in Phase I of this
rulemaking to the in-office ancillary services exception and the group
practice definition, we see no need for a special exclusion for
physicians who provide interpretation or supervision services only. We
recognize that these physicians may affect, among other things, a group
practice's ability to comply with the 75 percent physician-patient
encounters test because they generally do not see patients. But to
exclude physicians who generally do not see patients would undermine
the purpose of the test, which is to ensure that group practices are
first, and foremost, joint medical practices for the provision of
physician services to patients and not primarily designated health care
services enterprises. The Congress addressed the special circumstances
of pathologists, diagnostic radiologists, and radiation oncologists in
a separate provision. (See discussion of section 1877(h)(5)(C) in
section III.B of this preamble).
Comment: A commenter sought clarification that physicians who are
employees of their own individual professional corporations instead of
the group practice are considered ``group members.'' The definition of
a group member in Sec. 411.351 already includes physicians whose
ownership interest in the group is held through an individual
professional corporation. Many physicians wish to not only hold
ownership interests in an individual professional corporation, but to
be employees of these corporations for pension and tax reasons. To
avoid potential abuse, the commenter suggested that we add the
following parenthetical to the definition of ``member of group'' in
Sec. 411.351: ``(including physicians who are employed by an individual
professional corporation, as long as the group has legal authority over
the terms of the physician's employment and is legally responsible for
services provided by the physician on the group's behalf).''
Response: We agree with the commenter that these physicians are
``members'' of the group. If a physician already qualifies as an
``owner'' of the group through his or her individual professional
corporation, then his or her status as an employee or contractor is
irrelevant for purposes of qualifying for group practice status. The
amendatory language proposed by the commenter is not necessary,
although we are revising the regulations text to clarify that a
physician who is employed by an individual professional corporation
that has an ownership interest in the group practice is a ``member of
the group.'' Physicians who are employed by their own individual
professional corporations and who have no ownership interest in the
group (directly or through an individual professional corporation), but
provide services to the group, are independent contractors and
therefore not members of the group.
Comment: A commenter suggested that a physician who opts out of,
and is not receiving any payments from, the Medicare program should not
be bound by the limitations in section 1877 of the Act, and, thus,
should be able to refer to entities with which he or she has a
financial relationship. The commenter also asked that we clarify
whether a physician who opts out of the Medicare program pursuant to
the private contracting authority in the BBA 1997, but continues to
practice with a particular group of physicians, is a group ``member''
for purposes of the physician self-referral law. The commenter reported
that we have elsewhere stated that a group physician's opting out does
not affect the ability of the rest of the group members to provide and
bill for services they furnish to Medicare beneficiaries. The commenter
stated that physicians who reassign benefits to organizations that
participate in Medicare may not opt
[[Page 902]]
out, and that consequently physicians who belong to groups that
participate in Medicare and who opt out may not bill and accept
payments from Medicare beneficiaries through the group practice unless
the entire group practice opts out. Thus, a physician who opts out
would have to bill under his or her own name instead of through the
group.
The commenter also questioned whether a physician's time spent
treating Medicare beneficiaries that is billed through the physician's
own name must be counted against the amount of time the physician has
spent treating other patients of the group practice. (We assume this
means that, for the ``substantially all test,'' the commenter wishes to
know whether the physician's private billing constitutes ``patient care
services'' provided outside the group context that would affect whether
the physician provides substantially all of his or her services through
the group and bills substantially all of his or her services under a
billing number assigned to the group.)
The commenter urged that we consider physicians who have opted out
as ``members'' of the group practice only for those services furnished
through the group, but not count the physician services in calculating
whether the group has met the ``substantially all test.''
Response: We agree with the commenter that a physician who opts out
of the Medicare program and is not receiving any payments from the
Medicare program is not bound by the limitations in section 1877 of the
Act and, therefore, can refer to entities with which he or she has a
financial relationship. Section 1877 prohibits only referrals for
services ``for which payment otherwise may be made under Medicare,''
and Medicare would not otherwise pay for services under a private
contract. The commenter also is correct in stating that when a group
physician has opted out, it does not affect the ability of the rest of
the group members to furnish and bill for services they furnish to
Medicare beneficiaries.
The commenter is not correct, however, that when a group physician
has opted out, the group may not bill in its own name for services
provided by the opt-out physician under a private contract. The
Medicare statute does not prevent an opt-out physician's group--
regardless of whether the group has a participation agreement with
Medicare--from billing payers other than Medicare for services
furnished under a private contract. Of course, neither the physician
nor the group is allowed to bill Medicare for services furnished under
a private contract. Thus, a physician who opts out can remain a group
member during the time he or she provides services to group patients,
provided the services are billed through the group practice to payers
other than Medicare. We believe the requirements in the group practice
definition are meant to demonstrate that the physicians involved in the
group are actually practicing medicine together. A physician can
demonstrate a significant level of participation by treating either
program or nonprogram patients, as long as they are group patients.
We also believe that any services the physician bills in his or her
own name are not group services and, therefore, should be factored into
the ``substantially all test'' as outside patient care services.
Comment: Several commenters were concerned about the proposed
rule's effects on nonprofit medical foundations, particularly in light
of our statement that a group practice can consist of only one legal
entity. One commenter was specifically concerned about medical
foundations in California, where such entities are established so that
practices can comply with the corporate practice of medicine
prohibition. One of the key exceptions to the prohibition allows
nonphysician (``lay'') participation in arranging for the delivery of
physician services if the nonphysician is a qualified medical
foundation. (These entities are nonprofit and exempt from Federal
income taxation under section 501(c)(3) of the Internal Revenue Code).
In California, for example, these foundations provide patient care
through a separate, contracted medical group that is comprised of at
least 40 physicians who collectively practice in at least 10 specialty
areas. A chief concern was that our proposed rules would prevent the
nonprofit foundation-model group practice from furnishing DHS under the
in-office ancillary services exception because it has no employed
physicians or physician owners who can qualify as ``members of the
group'' for purposes of the group practices definitional tests.
The commenter considers the California nonprofit medical foundation
to be, in essence, one bifurcated medical services provider that should
be treated as a ``single legal entity'' for purposes of section 1877 of
the Act. That is, under California law, the medical foundation is
itself a health care provider; yet this can only work if the medical
foundation encompasses the physicians who contract to provide the
professional services. The IRS currently regards the physician-
foundation relationship as comprising an integrated whole and grants
tax-exempt status to those truly integrated foundations as providers of
professional medical care. The foundation operates and owns all
elements of the practice, but cannot provide the physician services,
and the physicians have agreed to furnish all patient care services
through the foundation model; it is the foundation, and not the
physicians, who own the medical practice.
The commenter stated that entities such as management service
organizations do not merit tax-exempt status because they support the
provision of services, but do not actually provide services, while the
foundations actually provide services. The IRS scrutinizes the entire
foundation relationship to assure that its interdependent functions and
operations comply with the fundamental requirements for tax exemption.
Response: As an initial matter, that an arrangement is subject to
IRS regulation is not determinative under section 1877 of the Act. The
IRS's goals in regulating business structures do not necessarily take
into account preventing fraud and abuse in the Medicare and Medicaid
programs. As to foundation-model practices in corporate practice of
medicine States, we recognize that they present special problems under
section 1877 of the Act. On the one hand, section 1877(h)(4)(A) clearly
authorizes group practices that are ``foundations.'' On the other hand,
in the typical foundation-model arrangement, the physicians are not
legally organized as a ``foundation.''
In reviewing the statute and legislative history, we have reached
the following conclusions. First, the Congress used the term
``foundation'' in the group practice definition in a generic sense to
cover any situations in which the single legal entity, that is, the
group practice, consists of a foundation; the reference was not
necessarily intended to encompass bifurcated foundation-model
arrangements. Second, the Congress intended for foundation-model
arrangements to be excepted under the personal service arrangements
exception. The OBRA 1993 Conference Report states that the ``conferees
intend that this exception [personal service arrangements] would apply
to payments made by a nonprofit Medical Foundation under a contract
with physicians to provide health care services and which conducts
medical research.'' H. Rep. No. 213, 103d Cong., 1st Sess. 814 (1993).
The personal service arrangements exception should provide
foundation-model arrangements with additional
[[Page 903]]
flexibility in structuring their arrangements and that most foundation-
model arrangements will be able to fit in the exception, in accordance
with the congressional intent. The ``volume or value of referrals'' and
``other business generated'' standards will apply uniformly to all
exceptions in which they are included. (See the discussion in section V
of this preamble and the regulations at Sec. 411.354(d).)
Comment: Several commenters noted that another arrangement commonly
used in corporate practice of medicine States is the use of
``friendly'' or ``captive'' PCs to create hospital-affiliated group
practices in States that prohibit hospitals from employing physicians
directly. For example, a commenter explained that in Ohio, a single
physician may own stock in a PC, but hold the stock in trust for a
hospital or other nonprofit corporation. The PC itself employs
physicians who operate as a group practice and would fulfill all of the
other group practice requirements. The commenter suggested that this
arrangement would satisfy section 1877 of the Act if the rule were
changed to permit groups to be owned by a single physician owner.
Response: As noted in section VI.C.2 of this preamble, we have made
the change suggested by the commenter. Group practices may be owned by
a single physician provided that the group practice employs at least
one other physician. Therefore, we believe that ``friendly'' or
``captive'' PCs can qualify as group practices if they meet all of the
other conditions of the group practice definition.
Comment: Several commenters noted that the sole owner of the
``captive'' or ``friendly'' PC may be a hospital-based physician who
does not practice medicine as part of the group. These commenters
wondered whether a nonparticipating physician owner would be a member
of the group for purposes of the group practice definitional tests,
particularly the ``substantially all test.''
Response: We believe that a hospital-based physician, who does not
practice medicine as part of the group, is not a member of the group
practice for purposes of the definitional tests. However, that means
that the physician is not a member for any other purpose either. Thus,
for example, a captive or friendly PC owned by such a physician would
need to employ at least two physicians to qualify as a group practice.
In addition, the sole physician owner described in the comment would
not be eligible for sharing in overall profits or productivity bonuses
under section 1877(h)(4)(B)(i) of the Act and Sec. 411.352(i) of the
regulations.
Comment: Commenters generally supported our position in the
proposed regulations that a physician's financial relationship with an
entity under section 1877 of the Act would not be imputed to his or her
group practice. Thus, other members of the group practice could
continue to make referrals to the entity, provided that the members did
not have financial relationships with the entity and the physician with
the financial relationship was not in a position to control the
referrals of other group members. However, one commenter suggested that
we include as members (who could continue to make referrals) physicians
who are employed by their own PC (instead of the group) as long as the
group has legal authority over the terms of the physician's employment
and is legally responsible for services provided by the physician on
behalf of the group. This commenter noted that for tax and pension
reasons, many physicians prefer to be employed by their PCs rather than
the group practice entity.
Response: We are adopting the position we discussed in the proposed
regulations, that is, that a physician's financial relationship with an
entity under section 1877 of the Act will not be imputed to his or her
group practice. Thus, other members of the group practice can continue
to make referrals to the entity, provided that the members do not have
financial relationships with the entity and the physician with the
financial relationship is not in a position to control the referrals of
other group members. As we have indicated elsewhere in this preamble,
physicians who are employed by their own individual PCs are considered
members of the group if the PC has an ownership interest in the group.
If not, the physician would be considered an independent contractor who
is not a member of the group.
4. The ``Full Range of Services Test''
Existing Law: The definition of a group practice in section
1877(h)(4)(A)(i) of the Act provides that, among other requirements,
each physician who is a member of the group must provide substantially
the full range of services that the physician routinely provides,
including medical care, consultation, diagnosis, or treatment, through
the joint use of shared office space, facilities, equipment, and
personnel. In the August 1995 final rule covering referrals for
clinical lab services, we required physician members to furnish the
full range of ``patient care services,'' defined as services addressing
the medical needs of specific patients.
The Proposed Rule: In the January 1998 proposed rule, we proposed
expanding ``patient care services'' to include any physician's tasks
that address the medical needs of specific patients or patients in
general or that benefit the practice. These activities could include,
for example, time spent training group staff members, arranging for
equipment, or performing administrative or management tasks, as long as
these activities benefit the operation of the group practice. Services
wholly outside the group's medical practice, such as teaching, do not
count as patient care services. This proposed test was designed to
ensure that a physician is actually practicing medicine as he or she
ordinarily would as part of the group and has not simply joined the
group in name only. It further ensures that physicians are practicing
as part of the group and not simply using the group to profit from DHS
referrals.
The Final Rule: We are promulgating the test as proposed in the
January 1998 proposed rule.
Comment: Commenters generally favored our proposal to revise the
definition of ``patient care services'' to include any physician task
that addresses the medical needs of specific patients or patients in
general, or that benefits the group practice. However, commenters
requested clarification whether activities that are conducted outside
the group practice, such as teaching, overseeing residents, or
conducting medical research, but that nonetheless benefit patients in
general, are covered within the definition. Other similar activities
might include administrative positions within hospital systems or
independent physicians' associations that involve oversight of patients
beyond those of the group practice.
Response: It does not appear to us that the activities listed by
the commenter would particularly benefit group practice patients,
except possibly in a very attenuated way. (The answer might change if
the group itself was contracted to perform these ``outside'' tasks.)
Therefore, we would generally not regard them as patient care services
performed for the group. Instead, they might qualify as patient care
services provided outside of the group. For example, the physician
could be supervising residents in a hospital while the residents treat
patients, the volunteer activities might involve treating indigent
patients, or the administrative work could involve
[[Page 904]]
overseeing the efficient delivery of care to patients.
If the physician furnishes patient care services exclusively within
the group, then whatever services he or she furnishes should constitute
the full range of that physician's routine patient care services. If
the physician furnishes patient care services both inside and outside
of the group, then the services for the group's patients should be
comparable in scope to those provided outside of the group setting. Any
of a physician's services that do not involve caring for patients
should not affect this test. For example, if a physician teaches
medicine outside of the practice, but does not oversee patient care, we
would not expect that the physician would also be performing teaching
services as part of his or her group services.
5. The ``Substantially All Test''
The Existing Law: Under the definition of a ``group practice'' in
section 1877(h)(4)(A)(ii) of the Act, substantially all of the services
of the physician members must be provided through the group and billed
under a billing number assigned to the group, and amounts so received
must be treated as receipts of the group. In Sec. 411.351, we
interpreted ``substantially all'' to mean at least 75 percent of the
total patient care services of the group practice's members. We
promulgated special rules for group practices located solely in HPSAs
and for physician members' time spent providing services in HPSAs.
The Proposed Rule: We proposed measuring patient care services
(using the same definition of ``patient care services'' applied in the
full range of services test described above) by the ``total patient
care time'' each member spends on these services. We concluded that
patient care time was the most straightforward and least burdensome
method for measuring a physician's patient care services, but we
solicited comments on other viable methodologies. Again, this test
ensures that physicians who are members of the group practice are
economically bound to the group for other than DHS referrals and are
not just members of the group for purposes of profiting from DHS
referrals.
The Final Rule: We are promulgating this test as proposed in our
January 1998 proposed rule, except as discussed in this preamble. As
proposed in our January 1998 proposed rule, the ``substantially all
test'' could be measured based on the member physician's actual time
spent performing patient care services, whether performed inside or
outside the group practice. Having reviewed the comments regarding
alternative methods for meeting the test, we are amending the
``substantially all test'' to allow group practices greater
flexibility. While ``actual time spent'' remains the default standard,
group practices may adopt alternative measures, provided those measures
are reasonable, fixed in advance of the performance of the services
being measured (that is, no ex post facto methods), uniformly applied
over time, verifiable, and documented. Independent contractors and
leased employees are not defined under the final rule as members of the
group; therefore, their services need not be counted for purposes of
complying with the ``substantially all test.''
Comment: Many commenters appreciated our expansion of the
definition of patient care services to include services that benefit
group patients in general or the group practice itself, but suggested
that group practices be allowed to adopt alternative methods for
measuring compliance with the 75 percent ``substantially all test,''
depending on the particular circumstances of the group and the most
reasonable manner available for the group. These commenters pointed out
that many physicians do not maintain time records and to do so would
create an unnecessary administrative burden. Additionally, some
commenters believe that it would be difficult or misleading to
calculate the exact number of patient care hours as we suggested in the
proposed regulations because many full-time physicians tend to work
more than 40 hours per week. (Data submitted by a major physician trade
association reflected that the ``average'' physician works 57.9 hours a
week, with 53.2 hours spent on patient care activities). For example,
one physician in a practice may work a full-time schedule of 40 hours
per week for the group and another 60 hours per week; it would be
inconsistent to count both as furnishing the same 100 percent of their
time to the practice. Alternatively, a physician may work a full 40-
hour week at his or her practice and then an additional 20 hours at a
hospital or clinic. To count this physician as working only two-thirds
time for the group, based on a straight calculation of hours, would be
unreasonable. One commenter thought that the regulations should
establish a presumption that 40 hours per week of patient care time for
physicians equals 100 percent of such time for purposes of calculating
the 75 percent ``substantially all test''; any hours spent beyond 40
hours on professional patient care time would fall outside of the 75
percent ``substantially all test.'' Some groups expressed a preference
for using relative value units (RVUs) to measure patient care services,
while others preferred a revenue based calculation or a test based on
patient encounters furnished and billed through the group. One
commenter thought that the ``patient care time'' standard was ambiguous
and not objectively verifiable, since physician timekeeping often does
not account for time spent on activities not involving direct patient
care.
Response: We are persuaded that it would be appropriate to permit
group practices additional flexibility in measuring compliance with the
``substantially all test'' based on their unique circumstances. The
``actual time spent'' standard described in the preamble of the January
1998 proposed rule remains the default standard. Group practices that
employ that standard can be assured that they are appropriately
measuring ``patient care services.'' As we noted in the January 1998
proposed rule, we are not requiring that physicians use detailed time
sheets or time cards; in most cases, appointment calendars, personal
schedules, billing records, or other existing sources will be
sufficient to establish the time spent on patient care services. Group
practices may adopt alternative means of satisfying the ``substantially
all test,'' provided the means used are (1) reasonable, (2) fixed in
advance of the performance of the services being measured (that is, no
ex post facto methods), (3) uniformly applied over time, and (4)
verifiable. The data used to calculate compliance with the
``substantially all test'' and supporting documentation must be made
available to the Secretary upon request.
Comment: Several commenters sought clarification whether the 75
percent ``substantially all test'' for patient care services is
measured based on total patient services across all specialities in a
group or whether it is measured on a specialty-by-specialty basis.
Response: Section 1877(h)(4)(A)(ii) of the Act provides that a
group practice is a legally organized entity ``for which substantially
all of the services of the physicians who are members * * * are
provided through the group * * * .'' In Sec. 411.351, we interpreted
``substantially all'' to mean at least 75 percent of the total patient
care services of each of the group practice's members. It is our view
that a group practice should aggregate all of the patient care services
that each of its members provides, both inside and outside of the
practice, including all varieties of patient care services, to
determine whether 75 percent of those
[[Page 905]]
services are furnished through the group. However, any services that
are provided by a group through independent contractors would not be
figured into the test. The test is designed to demonstrate that the
activities of each member are conducted through the group. Services
performed by independent contractors would have no bearing on this
measure.
Comment: One commenter sought clarification in applying the 75
percent rule to new group practices that may be owned by, or employ,
part-time physicians who are practicing elsewhere during the group's
initial 12-month start-up period. In some cases, these groups will not
meet the group practice definition during the start-up period.
Response: We agree with the commenter that some accommodation
should be made for new group practices. Nothing in the statutory
language precludes such accommodation. Accordingly, the final
regulations provide that during the ``start up'' period for a new group
practice (not to exceed 12 months), a group practice must make a
reasonable, good faith effort to ensure that the group practice
complies with the ``substantially all test'' as soon as practicable,
but no later than 12 months from the date of the initial formation of
the group practice. This ``start up'' provision does not apply when an
existing group practice admits a new member or when an existing group
practice reorganizes.
Comment: A commenter related the following scenario: A specialist
provides professional services for a hospital outpatient under a
contract with the hospital that allows a hospital employee to perform
the technical component of the service. The specialist reassigns his or
her payments for the professional services to the hospital. The
hospital then bills Medicare for a global payment that includes the
professional and technical components. Under this arrangement, the
hospital pays the specialist a contractual amount for the professional
component. The commenter requested that we explicitly permit the
professional component of these types of services to be counted as part
of the 75 percent requirement for purposes of the ``substantially all
test,'' even though the hospital and not the group practice bills
Medicare for the specialist's services. Alternatively, commenters
recommended that we change the two compensation exceptions that deal
with hospitals (located in regulations in Secs. 411.357(g) and (h)) to
exclude compensation paid to a physician for professional services.
Response: We agree that a group practice should be able to count
the professional component of services provided by a member physician
under a global payment when calculating the ``75 percent of patient
care services requirement'' for purposes of the ``substantially all
test,'' even though the hospital actually bills Medicare directly for
the physician services. We regard the ``substantially all test'' as
designed to guarantee that a physician is providing a substantial
amount of his or her own services through the group practice. If the
group's business includes providing professional services to another
entity, which, in turn, pays the group for those services, it is our
view that these are services that should count as services a physician
provides through the group. We are, therefore, interpreting the
requirement that substantially all of a physician's services be
provided through the group and be billed ``under a billing number
assigned to the group'' and amounts so received treated as receipts of
the group to include any physicians' professional services billed by a
group under any group billing number regardless of the payer of the
services, provided the receipts are treated as receipts of the group.
In other words, the phrase ``billed under a billing number assigned to
the group'' in section 1877(h)(4)(A)(ii) of the Act does not refer
exclusively to Medicare or Medicaid billing numbers.
Comment: Several commenters objected to the proposed regulation
because they believe it would require groups to bill under a group
billing number and would force physicians in a group to bill
individually when a patient has been seen in the hospital.
Response: While we are somewhat unclear as to the commenters'
concern, we see nothing in these regulations that affects how group
practice physicians bill for services provided to their own patients
seen in a hospital.
6. The ``Seventy-Five Percent Physician-Patient Encounters Test''
The Existing Law: Under section 1877(h)(4)(A)(v) of the Act,
physician members of a group practice must personally conduct at least
75 percent of the group practice's patient encounters (measured per
capita, not by time). The test ensures that the group practice is a
legitimate medical practice and not primarily a business for the
provision of lucrative ancillary services.
The Proposed Rule: The proposed rule would exclude independent
contractors or leased employees from the test because they would not be
considered members of the group.
The Final Rule: We are promulgating this test as proposed in our
January 1998 proposed rule.
Comment: A commenter requested confirmation that bona fide employed
physicians count for purposes of the 75 percent physician-patient
encounters test.
Response: As discussed in section VI.C.3 of this preamble, members
of a group practice include employed physicians. Thus, patient
encounters by bona fide employed physicians count for purposes of the
75 percent physician-patient encounters test.
7. Unified Business Test
The Existing Law: For purposes of the group practice definition,
section 1877(h)(4)(A)(iii) of the Act requires that ``the overhead
expenses of and the income from the group practice are distributed in
accordance with methods previously determined.''
The Proposed Rule: In our January 1998 proposed rule, we proposed
exercising our discretion under section 1877(h)(4)(vi) of the Act to
impose an additional standard under the definition of group practice
that would require groups to be a ``unified business.'' Our purpose was
to ensure that group practices are substantially integrated business
operations and that their allocation of group expenses and income to
members reflect this. Absent a unified business test, we are concerned
about the development of sham groups that are formed primarily for the
purpose of profiting from self-referrals, but not for other, bona fide
purposes. Thus, in the proposed regulations, we interpreted section
1877(h)(4)(A)(iii) of the Act as requiring that the group's overhead
expenses and income be distributed according to methods that are--
Determined prior to the time period during which the group
has earned the income or incurred the costs, and
Distributed according to methods indicating that the group
practice is a unified business.
We indicated that the methods must reflect ``centralized decision
making, a pooling of expenses and revenues, and a distribution system
that is not based on each satellite office operating as if it were a
separate enterprise.''
The Final Rule: The statute requires that the overhead expenses of,
and income from, the group practice be distributed in accordance with
methods ``previously determined.'' Unlike the January 1998 proposed
rule, which interpreted ``previously determined'' as meaning before the
group earned the income or incurred the cost, the final rule treats a
distribution methodology as ``previously determined'' if it is
determined prior to receipt of payment for the services giving rise to
the
[[Page 906]]
overhead expense or producing the income. Apart from this limitation,
the rule does not prevent group practices from adjusting their
compensation methodologies prospectively as frequently as they desire
(subject to the restrictions on the distribution of DHS revenues in
section 1877(h)(4)(B)(i) of the Act).
Commenters were nearly uniform in their criticism of the proposed
unified business test, claiming that it invalidated many bona fide and
common group practice compensation structures and discouraged
beneficial integration of group practices. Reflecting these comments,
Phase I of this rulemaking retains the general unified business test,
but offers groups considerable additional flexibility in satisfying the
requirement. Importantly, Phase I of this rulemaking permits many forms
of cost center and location-based accounting, provided that
compensation formulae with respect to DHS revenues otherwise meet the
requirements of the law. To meet the unified business test, a group
practice must be organized and operated on a bona fide basis as a
single integrated business enterprise with legal and organizational
integration. Essential elements are: (1) Centralized decision making by
a body representative of the practice that maintains effective control
over the group's assets and liabilities (including budgets,
compensation, and salaries); (2) consolidated billing, accounting, and
financial reporting; and (3) centralized utilization review (for
example, utilization review conducted on a group-wide basis). We
designed the rule to preclude group practice status for loose
confederations of physicians that are group practices in name, but not
operation. As adopted in Phase I of this rulemaking, the unified
business test sets general parameters indicative of integration, but
does not dictate specific compensation practices. Compensation, with
respect to DHS, is subject to separate limitations described in these
regulations.
Comment: Many commenters objected to our proposal to interpret the
phrase ``previously determined'' to mean that the methodology for
setting group members'' compensation must be fixed before the group has
earned the income or incurred the costs of providing the designated
health care services. One commenter stated that this proposed
interpretation would overly restrict a group practice's ability to
adjust physician compensation periodically to reflect a physician's
contribution to the group practice or to pay discretionary bonuses.
Some commenters observed that groups have traditionally used ad hoc
compensation systems that allow groups to ``wait and see how the year
goes.'' These systems afford groups flexibility to deal with business
realities as they occur without, in the commenters' view, increasing
the risk of self-referral compensation. In lieu of our proposed ``prior
to incurrence'' rule, a number of commenters favored a ``prior to
distribution'' rule. One commenter recommended coupling a ``prior to
distribution'' rule with a requirement that distributions not relate to
the volume or value of Medicare or Medicaid DHS referrals and that
distributions not be retroactively adjusted in a manner that
establishes a relationship between compensation and referrals. Another
commenter suggested that ``previously determined'' be interpreted to
mean that the compensation formula must be reported at the same time
groups report their financial relationships to us.
Response: It is a statutory requirement that a group's compensation
methodology be determined in advance. Unrestricted ad hoc compensation
systems would allow groups to compensate physicians directly based on
the number of designated health care services referrals they generate--
the very conduct the statute is intended to prohibit. A ``prior to
distribution'' rule would be circular, since any distribution scheme
would be determined prior to the distribution. We agree, however, that
groups should have some flexibility in designing and implementing
compensation systems that are responsive to changing circumstances. It
is our understanding that most groups operate on a cash basis. In the
final rule, we are requiring that group practices determine the
methodology for distributing overhead expenses of, and income from, the
provision of designated health care services prior to the receipt of
payment for those services. The methodology may be determined at any
time until payment has been received, even if the income has been
earned or costs incurred. This rule permits groups to adjust their
methodologies prospectively as often as they deem appropriate. We
believe Phase I of this rulemaking provides groups with sufficient
flexibility to respond to business realities, while complying with the
statutory requirement that the distribution system be ``previously
determined.''
Section 1877(h)(4)(A)(iv) of the Act prohibits a physician member
of the group from being compensated in a manner that takes into account
the volume or value of DHS referrals, except as provided in section
1877(h)(4)(B)(i) of the Act. Thus, a compensation method that directly
relates to the volume or value of Medicare referrals or is
retroactively adjusted would violate section 1877(h)(4)(A)(iv) of the
Act.
Comment: A commenter asked whether a group practice can distribute
unexpected income which, by its nature, was not ``previously'' part of
the group's distribution methodology. The commenter cited as an example
a group practice opening a new site without specifically determining in
advance how revenues or profits would be distributed to group members.
Response: We are unclear as to the circumstances under which a
group practice would open a new office without considering distribution
of the revenues or profits from that new office. We see no reason to
deviate from the ``prior to payment'' rule established in these
regulations for ``unexpected income.''
Comment: Although many commenters generally recognized the
appropriateness of precluding group practice status for groups that are
merely confederations of independent, unintegrated medical groups, many
commenters expressed concerns about the unified business requirement
promulgated in the proposed regulations. First, commenters questioned
our legal authority to graft this new condition onto the statutory
group practice definition. Second, commenters expressed the view that
the unified business standard as proposed would have a chilling effect
on legitimate group practices and discourage beneficial integration. Of
particular concern was the perception that the regulations would
completely prohibit or unduly complicate the group practices' use of
profit and cost center or location-based accounting and distribution of
expenses and income. In this regard, many commenters argued that site-
specific or specialty-specific accountability encourages efficient
management of expenses and practice patterns and eliminates a ``free
rider'' problem that impedes cost effective integration, which groups
find increasingly important with the growth of managed care. One
commenter, representing a physician practice management company, noted
that one reason groups prefer cost center accounting is that many
physicians in newly-acquired group practices want to minimize changes
in income levels they have historically realized; cost center
accounting facilitates more absolute integration over time.
Instead of barring cost center or location-based accounting and
distribution of expenses and income, commenters encouraged us to rely
on
[[Page 907]]
other indicators of integration. One commenter suggested that we could
address our concern about loose confederations of groups by revising
the rule to require that a group practice be organized and operated on
a bona fide basis as a single business enterprise integrated legally
and operationally. According to the commenters, while many legitimately
integrated medical practices allow their satellite offices to make day-
to-day, local practice decisions, almost all significant decisions,
such as hiring and firing physicians and approval of annual operating
budgets, are made by the entire practice's governing body. Moreover,
the costs of central business activities such as billing, collections,
managed care contracting, and purchasing of some products and services
are, in most cases, shared by all practice sites, either per capita or
based on a generally applied formula. Commenters offered numerous
suggestions as to relevant criteria for ascertaining that a group
practice is a unified business.
Response: Our statutory authority to impose a unified business test
resides in section 1877(h)(4)(A)(vi) of the Act, which vests in the
Secretary the ability to impose additional standards on group practices
by regulation. Upon further consideration, we agree with the commenters
that our proposed unified business test was too restrictive. The
unified business test was designed to ensure that group practices are
substantially integrated business operations and that their
distribution of group expenses and income to members reflects this. The
unified business test guards against the development of sham groups
formed primarily for the purpose of profiting from self-referrals.
Phase I of this rulemaking, described in detail above, retains the
general unified business test, but offers groups considerable
flexibility in satisfying the requirement. Importantly, many forms of
cost center and location-based accounting are permitted, provided that
compensation formulae with respect to the distribution of DHS revenues
otherwise meet the requirements of the law.
Comment: A physician trade association asked whether groups that
compensate their physicians under more than one methodology can qualify
as a ``unified business.'' This issue is especially significant for
larger groups that have expanded through the acquisition of other
existing group practices, each of which may have negotiated different
compensation arrangements. Typically, the methodology for compensating
each new physician who joins the group is set in advance, based on the
negotiations between the parties and approved by the governing body of
the acquiring group (or an authorized committee of the governing body).
Response: We see no impediment in the revised unified business test
to groups like those described in the comment from qualifying as a
unified business. In order to qualify for group practice status, the
group would have to meet all of the other group practice tests,
including the limitations on compensation based directly or indirectly
on the volume or value of referrals and the restrictions on profit
sharing and productivity bonuses. (See the discussion in section VI.C.8
of this preamble.)
Comment: One commenter expressed concern that the proposed unified
business standard could be interpreted to prevent integrated medical
practices from compensating their physicians on an individual
collections minus expenses basis. A commenter urged that groups be
allowed to compensate physicians based on their own productivity
(excluding any revenue or expense related to the group's DHS), and that
it be permissible to calculate the physician's compensation by
allocating to the physician all of the physician's direct medical
expenses of practice (including, but not limited to, for example,
malpractice insurance, continuing medical education, space cost,
supplies) and his or her pro rata share of general overhead not based
on any volume or value of his or her referrals (for example,
administrative and management costs). Similarly, another commenter
stated that it is common practice for groups to compensate their
members according to formulae that take into account ``office
profits,'' described as collected revenues attributable to a
physician's medical services performed by that physician or personnel
under his supervision, not including revenues for DHS or direct or
indirect expenses of that physician.
Response: Distribution of group practice revenues derived from DHS
is subject to the compensation rules set forth at Sec. 411.352. With
respect to income derived from other sources, groups are free to divide
it in any manner they choose, provided they can demonstrate that they
are a unified business under the three principles discussed in section
VI.C.7 of this preamble. Depending on individual circumstances, we
believe that most of the compensation methodologies described in the
comment can be accommodated within the parameters of the revised
unified business test.
Comment: One commenter questioned whether a total contingent
revenue pool, distributed on an aggregate basis (after subtracting
expenses that include allocated central practice or ``home office''
expenses) to the practitioners in a given branch or satellite office of
a larger statewide PC according to a predetermined formula, would meet
the requirements of the unified business test.
Response: Whether the described scheme fits in the exception would
depend on whether the three factors described above are present. The
scheme would also have to meet the requirements of sections
1877(h)(4)(A)(iv) (compensation for group members) and (h)(4)(B)(i)
(profits and productivity bonuses) of the Act with respect to DHS. In
particular, under the overall profit shares rule as set forth in Phase
I of this rulemaking, as discussed in section VI.C.8, overall profit
shares must be derived from aggregations of the entire practice or a
component of the practice consisting of at least five physicians.
Comment: A commenter sought clarification as to whether the
financial allocation requirements under the unified business standard
apply solely to the DHS furnished by the group or whether they extend
more broadly to all health care services furnished by the group. The
commenter viewed the latter approach as beyond the statutory authority,
which applies only to furnishing DHS, and as contrary to our own
statements in the preamble to the proposed regulations that
compensation arrangements for services that are not DHS are outside the
scope of the statute and regulations.
Response: The Congress specifically conferred on the Secretary in
section 1877(h)(4)(A)(vi) of the Act authority to impose additional
standards in the definition of a group practice. For the limited
purposes of establishing that a group practice is a unified business,
we believe it is appropriate to consider the group practice's methods
of distributing revenues derived from all sources, not just DHS. Group
practices can distribute the revenues from services that are not
Medicare-DHS in any manner they wish. However, if the payment methods
do not indicate a unified business (or indicate a business that is
unified solely with respect to the provision of DHS), the group may not
qualify as a group practice under section 1877(h)(4) of the Act and
Sec. 411.352. Compensation paid to a physician creates a compensation
arrangement within the meaning of Sec. 411.354, even if the
compensation relates only to services that are not DHS. Absent an
applicable exception (for
[[Page 908]]
example, the in-office ancillary services or employee exceptions), this
compensation arrangement triggers the self-referral prohibition as to
any of the physician's referrals of DHS.
8. Profit Shares and Productivity Bonuses
The Existing Law: In general, the statute provides that a physician
who is a member of the group may not be compensated directly or
indirectly based on the volume or value of his or her referrals of DHS.
In addition, the statute provides that a ``physician in a group
practice'' may receive shares of overall profits of the group or a
productivity bonus based on services personally performed or incident
to such personally performed services, provided the share or bonus is
not determined in a manner that is directly related to the volume or
value of referrals by such physician. In other words, group practice
compensation formulae that are only indirectly related to the volume or
value of referrals of DHS are permissible.
The Proposed Rule: We proposed to interpret the statute to mean
that productivity bonuses could only relate to work personally
performed by the physician that results from referrals from other
physicians in the group, and could not relate (directly or indirectly)
to work that results from self-referrals or DHS referrals to other
physicians and other office personnel. Thus, we said that a physician
could only receive compensation for his or her own DHS referrals
through the aggregation that occurs as part of the overall sharing of
group profits. As to the overall sharing of profits, we indicated that
profits must be aggregated at the group level and not at a component
level.
The Final Rule: In section IV of this preamble, we provide an
overview of the physician compensation provisions of section 1877 of
the Act. In general, a group practice can segregate its DHS revenues
from its other revenues for purposes of compensating physicians;
section 1877 of the Act applies only to a practice's DHS revenues.
Generally, this income is likely to comprise a relatively small portion
of the total revenues of most practices.
Under Phase I of this rulemaking, group practices may pay member
physicians and independent contractors who qualify as ``physicians in
the group'' productivity bonuses based directly on the physician's
personal productivity (including services incident to such personally
performed services that meet the requirements of section 1861(s)(2)(A)
of the Act and section 2050 of the Medicare Carriers Manual, Part 3),
but may not pay these physicians any bonus based directly on their
referrals of DHS that are performed by someone else. The statute also
permits group practice members (and independent contractors who qualify
as ``physicians in the group'') to receive shares of the overall
profits of the group, so long as those shares do not directly correlate
to the volume or value of DHS referrals generated by the physician that
are provided by someone else. We are defining ``share of overall
profits'' as meaning a share of the entire profits of the entire group
or any component of the group that consists of at least 5 physicians
derived from DHS.
Under the statutory scheme, revenues generated by DHS may be
distributed to group practice members and physicians in the group in
accordance with methods that indirectly take into account DHS
referrals. In general, we believe a compensation structure does not
directly take into account the volume or value of referrals if there is
no direct correlation between the total amount of a physician's
compensation and the volume or value of the physician's DHS referrals
(regardless of whether the services are personally performed). Phase I
of this rulemaking contains specific methodologies that describe
compensation methods that are deemed to be indirect. In addition, Phase
I of this rulemaking contains additional provisions that allow group
practices to devise other reasonable indirect compensation
methodologies.
The distribution methods for overall profit shares are as follows:
1. A per capita (that is, per physician) division of the overall
profits.
2. A distribution of DHS revenues based on the distribution of the
group practice's revenues attributable to services that are not DHS
payable by Federal or private payers.
3. Any distribution of DHS revenues if the group practice's DHS
revenues are less than 5 percent of the group practice's total revenues
and no physician's allocated portion of those revenues is more than 5
percent of the physician's total compensation from the group practice.
The methods for productivity bonuses are as follows:
1. A productivity bonus based on the physician's total patient
encounters or RVUs.
2. A productivity bonus based on the allocation of the physician's
compensation that is attributable to services that are not DHS payable
by Federal or private payers.
3. Any productivity bonus that includes DHS revenues if the group
practice's DHS revenues are less than 5 percent of the group practice's
total revenues and no physician's allocated portion of those revenues
is more than 5 percent of the physician's total compensation from the
group.
Comment: Many commenters objected to our proposed interpretation of
the statute to mean that productivity bonuses can relate only to work
personally performed that results from referrals from other physicians
in the group, and cannot relate (directly or indirectly) to work that
results from self-referrals. Commenters protested that this
interpretation barred any compensation based on a physician's personal
productivity for self-referred DHS and was, therefore, contrary to
clear statutory intent. Several commenters explained that our
interpretation would produce anomalous results in some circumstances.
For example, an internist refers a patient with a gastrointestinal
complaint to a gastrointestinal specialist, and the specialist
evaluates the patient at an initial visit. The specialist subsequently
performs an endoscopy on the patient. Under the proposed January 1998
regulations, the endoscopy would be a self-referral by the specialist,
and the specialist could not receive a productivity bonus for
performing the endoscopy. However, if the specialist referred the
patient to another physician in the same group practice for the
endoscopy, the specialist could receive compensation indirectly based
on that endoscopy. Thus, in the commenter's view, the rule creates a
disincentive to perform services and an incentive to refer (which may
be contrary to good patient care and not cost effective). The commenter
further noted that specialists who perform substantial amounts of DHS
are disadvantaged by the proposed interpretation because they cannot be
rewarded for personal productivity, while their counterparts, for whom
the performance of DHS is a less significant part of their practices,
can.
Commenters suggested an interpretation that would permit
productivity bonuses for DHS personally performed by the referring
physician, but not for DHS referred to others. The commenters generally
requested that the final rule allow group practices to compensate
members of the group based upon the volume or value of DHS, so long as
the services are personally performed by the physician or are incident
to the physician's personally performed services. One commenter noted
that ancillary services (including ``incident to'' services) performed
for one's own patients are more ``personal'' to the ordering or
[[Page 909]]
supervising physician than are services he or she performs on
colleagues' patients. Commenters also complained that our proposed
interpretation would lead to disparate treatment of solo and group
practitioners, since solo practitioners could receive the profits from
personally performed DHS that they self-refer, whereas group
practitioners could not. One commenter thought that this discrepancy
would make solo practitioners reluctant to join group practices,
thereby discouraging beneficial market integration.
Finally, some commenters noted that many group practices have
insufficient information technology systems to track whether a service
performed by a physician resulted from a self-referral or a referral
from another physician. Commenters asserted that our proposed
interpretation would impose a significant additional administrative
burden on those groups.
Response: In light of the comments, the changes we have made to our
interpretation of the definition of a ``referral'' and the volume or
value standard, and our further review of the statutory language, we
are persuaded that our proposed interpretation of the scope of
productivity bonuses was unnecessarily restrictive. Accordingly, we
have revised the regulation to make clear that group practices may pay
member physicians (and independent contractors who qualify as
``physicians in the group'') productivity bonuses based directly on the
physician's personal productivity (including services ``incident to''
such personally performed services that meet the requirements of
section 1861(s)(2)(A) of the Act and section 2050, ``Services and
Supplies,'' of the Medicare Carrier's Manual (HCFA Pub. 14-3), Part 3--
Claims Process), but may not pay these physicians any bonus based
directly on their referrals of DHS that are performed by someone else.
Comment: Commenters sought clarification about the treatment of
productivity bonuses for ``incident to'' services. One commenter
observed that according to long-standing regulatory policies,
``incident to'' services are services that are an incidental although
integral part of a physician's personal, professional service to a
patient. Thus, in the commenter's view, there cannot be a referral for
``incident to'' services in any ordinary sense, since what the
ancillary service provider does is part of the physician's service
itself. Several commenters expressed their belief that one purpose of
the productivity bonus provision was to allow physicians to receive
``credit'' for ``incident to'' services in their compensation. One
commenter pointed out that it would be hard to exclude ``incident to''
services in the calculation of productivity bonuses since claim forms
typically do not indicate who performed the ``incident to'' service
(that is, whether the service was performed by the supervising
physician or someone else). Other commenters interpreted the statutory
reference as equating ``incident to'' services with ``in-office
ancillary'' services. Under this view, commenters asserted that the
statutory language plainly allows productivity bonuses based indirectly
on the volume or value of the physician's in-office ancillary services
and opposed our proposed interpretation that prohibited any
compensation based on referrals for in-office ancillary services.
Response: We agree with the essence of these comments with respect
to group practices. Under the final regulation, group practice
physicians can receive compensation directly related to the physician's
personal productivity and to services incident to the physician's
personally performed services, provided the ``incident to'' services
comply with the requirements of section 1861(s)(2)(A) of the Act and
section 2050, ``Services and Supplies,'' of the Medicare Carrier's
Manual (HCFA Pub. 14-3), Part 3--Claims Process, and any subsequent or
additional HHS rules or regulations affecting ``incident to'' billing.
This means that the ``incident to'' services must be directly
supervised by the physician. In other words, the physician (or another
clinic physician in the case of a physician-directed clinic) must be
present in the office suite and immediately available to provide
assistance and direction. Moreover, the person performing the
``incident to'' services must be an employee of the physician (or the
physician-directed clinic). We believe that the heightened supervision
requirement imposed by the ``incident to'' rules provides some
assurance that the ``incident to'' DHS will not be the primary
incentive for the self-referral. However, we may revisit the issue of
compensation tied to ``incident to'' services if we find that abuses
are occurring, especially in the area of physician-directed clinics.
Comment: We received a number of comments seeking clarification
related to the methods of paying compensation that are not directly
based on the volume or value of referrals. First, commenters urged that
we allow pooling of revenues that are not DHS revenues, because such
revenues are not governed by the statute. Second, a number of
commenters objected to our position in the proposed regulations that
overall profits are not profits that ``belong only to a particular
specialty or subspecialty group'' (even if the group is located in
several States or has several locations in one State) because ``the
narrower the pooling, the more likely it will be that a physician will
receive compensation for his or her own referrals.'' Commenters urged
that pooling at practice sites with more than a few physicians should
not result in any individual's compensation being directly related to
the volume or value of his or her referrals, even if DHS revenues are
included in the pool. Commenters generally advocated that we allow
pooling if at least three physicians are included in the pool and the
distribution formula is not related to DHS referrals. Third, commenters
offered a variety of suggestions about how to calculate ``indirect''
compensation. For example, one commenter suggested that compensation be
considered ``indirect'' if the referrals have no mathematical effect on
compensation. Others suggested that compensation be considered
``indirect'' if it is based on per capita calculations, RVUs, patient
encounters, hours worked, ownership shares in the practice, or
seniority.
Response: First, we are persuaded that we should permit some
additional flexibility related to the distribution of shares of overall
profits by group practices. Thus, we are defining a ``share of overall
profits'' to mean a share of the entire profits derived from DHS of the
entire group practice or any component of the group that consists of at
least five physicians. We believe a threshold of at least five
physicians is likely to be broad enough to attenuate the ties between
compensation and referrals. We are rejecting the suggestion to use a
threshold of three physicians because we believe that the lesser
threshold would result in pooling that would be too narrow and,
therefore, potentially too closely related to DHS referrals. Second, we
recognize the need for clear guidance as to appropriate indirect
compensation methodologies. For that reason, we are including in Phase
I of this rulemaking methodologies that describe compensation
distribution systems that we deem to be indirect. In other words, if a
group practice wants absolute assurance that its productivity bonuses
or profit shares are not directly related to referrals, the group
practice may employ one of the regulatory methodologies set forth in
Sec. 411.352 of the regulations. Group practices are not required,
however, to use these methods. The regulations clarify that
[[Page 910]]
other methods (including distributions based on ownership interests or
seniority) are acceptable so long as they are reasonable, objectively
verifiable, and indirectly related to referrals. These compensation
methods should be adequately documented and supporting information must
be made available to the Secretary upon request. Under this latter
``catch-all'' provision, the group practice essentially bears the risk
of noncompliance.
Comment: Several commenters sought clarification as to whether an
independent contractor could be compensated under the productivity
bonus provision of the group practice definition as a ``physician in
the group'', even though independent contractors are not members of the
group.
Response: Independent contractors who qualify as ``physicians in
the group'' under the provisions of Sec. 411.351 can receive
productivity bonuses under section 1877(h)(4)(B)(i) of the Act.
Comment: One commenter sought clarification as to how providers
should treat capitation payments that cover more than one service for
purposes of allocating profit shares and productivity bonuses.
Response: In general, we believe that capitation payments are not
likely to lead to increased utilization. Parties may use any reasonable
allocation method with respect to such payments.
Comment: On page 1691 of the preamble to the January 1998 proposed
regulations, we explained our view that ``profits should not be pooled
and divided between group members so that they relate directly to the
number of designated health services for Medicare or Medicaid patients
physicians referred to themselves or the value of those self-referrals
(such as a value based on complexity of the service).'' A commenter
objected to the parenthetical statement, asserting that barring
consideration of the complexity of the service is contrary to other
Medicare payment provisions, which take into consideration the level of
training necessary to perform, and difficulty of, certain procedures.
Response: Given our revised interpretation, we believe the
parenthetical statement (``such as value based on complexity of the
service'') is no longer relevant to these regulations. Group practice
members can be compensated directly based on their personal
productivity (that is, the fruits of their own labors), but not on
their productivity in generating referrals. They may only be
compensated based indirectly on DHS referrals to other physicians or
providers. So long as the compensation is only indirectly related to
the volume or value of DHS referrals, we believe it makes little
difference if the value of the DHS referrals reflects the complexity of
the services.
Comment: A commenter sought clarification that when a physician is
a member of a group practice and is also an employee of the group
practice, his or her compensation may be determined under the group
practice's rules without regard to the employee exception.
Response: We agree that when a physician is a member of a group
practice, his or her compensation need only comply with the group
practice rules. Meeting the group practice definition allows physicians
in the group to refer within the group under the in-office ancillary
services exception or the physicians' services exception. However,
nothing prevents a physician and group practice from using the employee
exception instead. It is important to remember that referrals of DHS
are only permitted if an exception, such as the in-office ancillary
services exception or employee exception, applies.
Comment: Several commenters were confused by our use of the terms
``revenues'' and ``profits'' throughout the preamble to the January
1998 proposed regulations. For example, on page 1691 we stated that
``the referring physician can receive a portion of the group's overall
pooled revenues from these services as long as the group does not share
these profits in a manner that relates directly to who made the
referrals for them.'' Similarly, on the same page we stated that we
``regard `over-all profits of the group' to mean all of the profits or
revenues a group can distribute in any form to group members * * *.''
These commenters requested that the terms ``profits'' and ``revenues''
be used in a manner that is consistent with their generally accepted
meanings or that definitions of the terms be provided in the
regulations.
Response: We agree that the terms ``revenues'' and ``profits'' were
used inconsistently in the January 1998 proposed regulation. In Phase I
of this rulemaking, we have endeavored to use those terms consistent
with their generally accepted meanings.
9. Group Practice Attestations
The Existing Law: In Sec. 411.360 of the August 1995 final rule
covering referrals for clinical laboratory services, we included the
requirement that group practices provide their carriers with a written
statement annually to attest that, during the most recent 12-month
period, 75 percent of the total patient care services of group members
was furnished through the group. Any group that intended to meet the
definition of a group practice in order to qualify for one of the
exceptions provided in the regulations was required to submit the
required attestation to its carrier by December 12, 1995. On December
11, 1995, we published in the Federal Register, at 60 FR 63438, a final
rule that delays the date by which a group of physicians must file an
attestation statement. The December final rule amended Sec. 411.360 to
require that a group that intends to meet the definition of a group
practice must submit an attestation statement to its carrier no later
than 60 days after the group receives attestation instructions from its
carrier. The preamble to the December rule points out that a group
could regard itself as a group practice in the interim period before it
receives attestation instructions, provided the group believes that it
meets the definition of a group practice under Sec. 411.351.
The Proposed Rule: The proposed rule retained Sec. 411.360, as
amended by the December 1995 final rule, with several minor changes.
The Final Rule: We have eliminated the attestation requirement.
Comment: One commenter suggested that group practice attestations
not be required until 1 year after final regulations are published,
while another recommended 1\1/2\ years after publication of the final
rule. Otherwise, the commenter stated, a group practice would have to
attest to membership requirements for the previous 12 months, without
benefit of having had the membership requirements published in advance
and an opportunity to comply with them.
One commenter also questioned whether we will actually use the
information gained from group practice attestations. The commenter
believes that imposing a civil money penalty for failing to submit an
attestation is overly harsh when compared to the minimal benefit that
may be derived from the attestations. The commenter recommended that we
remove the requirement for attestations or, at least, reduce the
related penalties.
Response: We agree with the commenters. After reviewing the
attestation requirement, we have concluded that it would impose an
unwarranted burden on group practices. We intend instead to allow
groups to treat the information they need to establish that they are a
group practice in the same manner as any information a furnishing
entity must provide to us under the reporting requirements in
Sec. 411.361. In order to make reporting requirements more manageable,
we
[[Page 911]]
intend to develop a streamlined ``reporting'' system that does not
require entities to retain and submit large quantities of data. We
believe instead that entities should retain enough records to
demonstrate, in the event of an audit, that particular relationships
are excepted under the law. In the case of the in-office ancillary
services exception and physician services exceptions in section
1877(b)(1) and (b)(2), an entity may need to establish that the
services it provided were referred by members of a genuine group
practice. Thus, a group should retain records that demonstrate that it
meets the requirements in section 1877(h)(4) of the Act and
Sec. 411.351.
D. Prepaid Plans (Section 1877(b)(3) of the Act)
The Existing Law: In the August 1995 final rule, we interpreted the
prepaid plan exception, section 1877(b)(3) of the Act, as creating an
exception to the general prohibition on referrals for services
furnished by certain prepaid health plans to their enrollees, including
Federally qualified health maintenance organizations (HMOs) or prepaid
health care organizations with a contract or agreement under sections
1876 or 1833(a)(1)(A) of the Act, or organizations participating in
demonstration projects under section 402(a) of the Social Security
Amendments of 1967 or section 222(a) of the Social Security Amendments
of 1972. The August 1995 final rule incorporated section 1877(b)(3)
into the regulations in Sec. 411.355(c), concerning clinical laboratory
services furnished by an organization (or its contractors or
subcontractors) to enrollees of these prepaid health plans (not
including services provided to enrollees in any other plan or line of
business offered or administered by the same organization).
The Proposed Rule: The January 1998 proposed rule proposed an
additional exception for services provided by organizations
participating in the Medicaid program that are analogous to those cited
in section 1877(b)(3) of the Act, including managed care organizations
(MCOs) that contract with Medicaid under section 1903(m) of the Act,
entities operating under a demonstration project under section 1115(a)
of the Act, prepaid health plans contracting with a State, and health
insuring organizations furnishing services as managed care contractors.
(Although we proposed including demonstration projects under section
1115(a) of the Act in the preamble of the January 1998 proposed rule at
63 FR 1697, they were not listed in proposed Sec. 435.1012 as the
result of a drafting error. We will include a technical correction for
this section in Phase II of this rulemaking.) In addition, the rule
proposed to extend the protection of section 1877(b)(3) of the Act to
providers, suppliers, and other entities that provided services to
enrollees of the protected organizations under contracts with these
organizations, either directly or indirectly.
The January 1998 proposed rule also took a number of other
positions that directly affected physicians' financial relationships
with managed care entities and plans other than Medicare and Medicaid
managed care plans. Most importantly, we proposed that MCOs would be
deemed to be entities ``furnishing'' DHS provided by other entities if
the MCOs billed Medicare for DHS provided to Medicare patients by
providers and suppliers pursuant to a contractual arrangement with the
MCOs (other than services under a plan protected under section
1877(b)(3) of the Act or other protected arrangement).
The preamble of the January 1998 proposed rule also discussed
whether an MCO network physician could refer private fee-for-service
patients to other physicians and providers that were participating in
an MCO network. According to the preamble, a physician who had a
contractual relationship with an MCO could refer a nonenrolled Medicare
fee-for-service patient for a designated health service to another
physician who also had a contract with the MCO provided that the
physician to whom he or she referred the patient was not otherwise
affiliated with the MCO. However, if the same physician referred the
same patient to a laboratory owned by the MCO, the general prohibition
would apply and the financial arrangement between the MCO and the
physician would have to qualify for an exception. In other words, the
referring physician would not have a financial relationship with the
second physician, but he would have one with the laboratory. Of course,
the arrangement could still be protected under the personal service
arrangements exception.
The M+C interim final rule (63 FR 35066) amended Sec. 411.355(c) of
the regulations covering referrals for clinical laboratory services to
include a new paragraph (5). This paragraph added to the list of
prepaid plans coordinated care plans (within the meaning of section
1851(a)(2)(A) of the Act) offered by an organization in accordance with
a contract with us under section 1857 of the Act. Section 1877(b)(3) of
the Act was also amended by section 524(a) of the Balanced Budget
Refinement Act of 1999 (BBRA) (Pub. L. 106-113, enacted on November 29,
1999), which added a new paragraph (E). Paragraph (E) includes in the
prepaid plans exception services referred by a physician to an
organization that is an M+C organization under Part C that is offering
a coordinated care plan described in section 1851 of the Act [42 U.S.C.
1395w-21(a)(2)(A)] to an individual enrolled with the organization.
The Final Rule: Virtually all commenters agreed with our decision
to interpret the prepaid plan exception to protect any referrals by
physicians for DHS covered by the listed Medicare managed care plans to
an MCO that has a Medicare managed care contract or any entity,
provider, or supplier furnishing these services under a contract or
subcontract with the MCO, directly or indirectly (``downstream
providers''). Several commenters asked that we amend the regulations
text to reflect the interpretation. We are amending the text of
Sec. 411.355(c) to make clear that downstream providers are protected.
We are not finalizing at this time the proposed new Sec. 435.1012
(Limitation on FFP related to prohibited referrals), paragraph (b)
(Exception for services furnished to enrollees on a predetermined,
capitated basis), which would have extended the protection to certain
prepaid plans under Medicaid. A number of commenters agreed with our
proposed exception for services provided by organizations analogous to
those cited in section 1877(b)(3) of the Act. These and other
commenters suggested that a number of other Medicare or Medicaid
arrangements be included in the exception, including M+C coordinated
care plans, Medicaid managed care plans under the BBA 1997, Medicaid
managed care entities operating under a waiver pursuant to section 1115
of the Act, any demonstration project approved by us, including primary
care case management programs (PCCMs) and managed long term care
programs (MLTCs), programs of all-inclusive care for the elderly
(PACE), capitated Medicare demonstration programs (including social
health maintenance organizations (SHMOs), the Medicare subvention
demonstration, and the Medicare prepaid competitive pricing
demonstration). The commenters pointed out that although the preamble
to the January 1998 proposed rule had proposed to include some of the
above programs in the new exception, they had not been referenced in
the regulations text. We agree with the commenters on adding the
Medicaid organizations that are analogous to those
[[Page 912]]
in section 1877(b)(3) of the Act as described in the January 1998
proposed rule and on some of the other listed areas; however, we will
address Medicaid managed care, and potentially other suggestions
related to Medicaid managed care raised by the commenters, in Phase II
of this rulemaking.
We are also revising in Phase I of this rulemaking the proposed
regulations in response to comments expressing concerns about the
impact of the January 1998 proposed rule on commercial and employer-
provided managed care arrangements. First, we are creating a new
compensation exception for remuneration pursuant to a bona fide ``risk-
sharing arrangement'' between a physician and a health plan for the
provision of items or services to enrollees of the health plan, even
when such an arrangement does not fall within existing statutory
exceptions. (We note that the new risk-sharing arrangement exception
differs from the shared risk exception to the anti-kickback statute at
Secs. 1001.952(t) and (u); for example, unlike the anti-kickback
exception, the new exception under section 1877 of the Act contains no
conditions related to the volume of Medicare beneficiaries enrolled in
the health plan or the quantification of the financial risk.)
Physicians generally are compensated for services to managed care
enrollees in one of three ways, the first two of which do not vary
based on the volume or value of referrals: (1) A salary in the case of
a physician who is an employee, (2) a ``fee-for-service'' contractual
arrangement under which the physician assumes no risk, or (3) a risk-
sharing arrangement, under which the physician assumes risk for the
costs of services, either through a capitation arrangement, or through
a withhold, bonus, or risk-corridor approach. The first two
compensation arrangements are eligible for the statutory exceptions for
bona fide employment relationships and personal service arrangements,
while the third is potentially eligible for the new risk-sharing
arrangement exception we are creating in this final rule in
Sec. 411.357(n).
Second, we are revising the definition of ``entity'' in
Sec. 411.351 to permit physician ownership of network-type HMOs, MCOs,
provider-sponsored organizations (``PSOs'') and independent practice
associations (``IPAs''). Specifically, we are clarifying the definition
of entity furnishing DHS, to provide that a person or entity is
considered to be furnishing DHS if it is the person or entity to which
we make payment for the DHS, directly or upon assignment on the
patient's behalf, except that if the person or entity has reassigned
its right to payment to (i) an employer pursuant to Sec. 424.80(b)(1),
(ii) a facility pursuant to Sec. 424.80(b)(2), or (iii) a health care
delivery system, including clinics, pursuant to Sec. 424.80(b)(3)
(other than a health care delivery system that is a health plan (as
defined in Sec. 1000.952(l)), and other than any MCO, PSO, or IPA with
which a health plan contracts for services provided to plan enrollees),
the person or entity furnishing DHS is the person or entity to which
payment has been reassigned. We are providing further that a health
plan, MCO, PSO, or IPA that employs a supplier or operates a facility
that could accept reassignment from a supplier pursuant to
Secs. 424.80(b)(1) and (b)(2) is the entity furnishing DHS for any
services provided by such supplier.
We believe these changes address the comments we received from the
commercial and employer-sponsored managed care plans.
Comment: While commenters uniformly welcomed the broad protection
given in the January 1998 proposed rule to referrals for services
covered by Medicare prepaid health plans, several commenters stated
that we interpreted several provisions of the statute in a manner that,
taken together, would severely limit MCOs' use of physician incentive
plans, whether under commercial or Medicare contracts. The commenters
strongly objected to our statement that the prohibition on DHS
referrals applies to referrals to entities that arrange for the
furnishing of the DHS to Medicare or Medicaid patients by contracting
with other providers, whenever the arranging entity also bills Medicare
or Medicaid for the services. (See 63 FR 1706.) The commenters
explained that this view, when joined with our interpretation of
section 1877(e)(3)(B) of the Act (the physician incentive plan
provision in the personal service arrangements exception), could
effectively preclude the use of risk-sharing arrangements with
physicians in any health plan, including commercial plans. The
commenters explained the problem as follows:
Physicians that participate in a managed care network will
have a compensation arrangement with the MCO for payment for services
to the MCO's enrollees. That payment arrangement will create a
financial relationship for purposes of section 1877 of the Act. (Even
participation in the network of an organization eligible for the
Medicare prepaid plans exception would not entirely avoid this result,
since the prepaid plans exception only protects referrals for DHS
furnished to beneficiaries enrolled under the Medicare contract). Many
of these compensation arrangements use withholds, capitation, bonuses,
or other methodologies that take into account, directly or indirectly,
the volume or value of referrals or other business generated by the
referring physician.
Most, if not all, commercial or employer-provided group
health plans offered by MCOs include some enrollees who are Medicare
beneficiaries. Typically, these enrollees either are retired employees
who have expanded benefits under an employer-provided plan (in which
case Medicare is the primary insurer and the employer plan secondary)
or are beneficiaries who have group health plan coverage based on
current employment status (in which case the employer plan is the
primary insurer and Medicare secondary). Even the MCOs that have
Medicare managed care lines of business that are protected by the
prepaid plans exception commonly have commercial lines of business that
include some Medicare beneficiaries who are not enrolled under the
organization's Medicare contract (that is, Medicare's payment is made
on a fee-for-service basis under the traditional Medicare program).
When a Medicare beneficiary is enrolled in a commercial or
employer-provided group health plan, Medicare often pays for services
provided by the plan to the beneficiary/enrollee on a fee-for-service
basis. In such a case, if Medicare is the primary insurer, it will
reimburse the provider according to the same provisions as any fee-for-
service provider; if Medicare is the secondary insurer, it will pay
based on a formula prescribed by law.
Generally, if an enrollee of a commercial or employer-
provided health plan has primary coverage under Medicare, the network
physician or supplier (not the MCO) will submit the claim to Medicare
directly, since Medicare is the primary insurance. However, many, if
not all, such MCOs will occasionally bill Medicare for services
provided by network providers to these Medicare beneficiaries. Most
often, the purpose of the billing is to coordinate with Medicare when
Medicare is the secondary payer. Occasionally, the MCOs may bill
Medicare as the primary payer; for example, when there has been a
recent change in beneficiary status, such as when a beneficiary's group
health plan coverage ceases being based on current employment status
because the beneficiary retires and Medicare becomes the primary
insurer. Of course, MCOs may bill and be paid by Medicare only where
the MCO meets the criteria
[[Page 913]]
for direct payment, assignment of benefits or reassignment of benefits.
(See Secs. 424.73 and 424.80 of these regulations.)
Accordingly, under the interpretation in the January 1998
proposed rule, a physician in the MCO network will be deemed to make a
referral to the MCO for the provision of a DHS whenever the physician
refers an enrollee of the MCO's commercial plan who also happens to be
a Medicare beneficiary to another network provider for DHS. (Referrals
of enrollees in any of the excepted prepaid plans would not be affected
since they are not referrals of DHS by virtue of the prepaid plans
exception.)
As a result, unless all of the MCO's payment arrangements
with network physicians, regardless of the line of business, fit in an
exception under section 1877 of the Act, the referral of any enrollee
with primary or secondary coverage under Medicare for a designated
health service would be prohibited.
The only kinds of physician compensation arrangements that
are protected by the personal service arrangements exception in the
proposed rule are (1) fixed per-service payments based on fair market
value (for example, discounted fee-for-service arrangements) or (2)
payment arrangements that incorporate risk-sharing elements, such as
bonuses or withholds, provided they qualify as a physician incentive
plan under section 1877(e)(3)(B) of the Act.
However, many payment arrangements in commercial or
employer-provided health plans contain risk-sharing elements that take
into account a physician's referrals or the volume of services provided
but that do not currently comply with the physician incentive plan
regulations. These arrangements would have to be restructured.
Moreover, even if restructured, the physician incentive plan
regulations contain a number of requirements that would require
revision if they are to be implemented with respect to non-M+C plans.
Lastly, in the preamble to our January 1998 proposed rule,
we stated that section 1877(e)(3)(B) of the Act only applied to
compensation arrangements directly between the ``entity'' (that is, the
MCO) and the physician; any compensation arrangements between a
physician and party other than the MCO, such as an IPA or other
subcontractor, would not qualify as a physician incentive plan.
The commenters asserted that the net effect of our interpretation
in the January 1998 proposed rule of when an entity was furnishing DHS
provided by another entity would be the total disruption of commercial
and employer-provided health plans. The only way an MCO could assure
that its physician compensation arrangements were in compliance with
section 1877 of the Act would be to restructure all its payment
arrangements to pay all physicians for all lines of business on a
discounted fee-for-service basis. Moreover, since the MCOs and, in many
instances, subcontractors such as IPAs would also be entities
furnishing DHS, any physician ownership of such entities would be a
prohibited investment interest unless an appropriate exception applied.
Response: Nothing in the legislative history suggests that section
1877 of the Act was intended by the Congress to require the wholesale
restructuring of commercial managed care arrangements with physicians.
Accordingly, we are making two major changes to the January 1998
proposed rule that we believe will address the commenters' concerns.
First, as noted above, we are creating a new compensation exception for
bona fide risk-sharing arrangements between a health plan and providers
for services provided to plan enrollees that do not otherwise qualify
for an existing statutory exception. This exception will address
concerns related to the prohibition on compensation arrangements in
section 1877 of the Act. Second, we are revising our definition of
``entity'' to clarify that a person or entity is considered to be
furnishing DHS if it is the person or entity to which we make payment
for the DHS, directly or upon assignment on the patient's behalf,
except that if the person or entity has reassigned its right to payment
to (i) an employer pursuant to Sec. 424.80(b)(1), (ii) a facility
pursuant to Sec. 424.80(b)(2), or (iii) a health care delivery system,
including clinics, pursuant to Sec. 424.80(b)(3) (other than a health
care delivery system that is a health plan (as defined in
Sec. 1000.952(l)), and other than any MCO, PSO, or IPA with which a
health plan contracts for services provided to plan enrollees), the
person or entity furnishing DHS is the person or entity to which
payment has been reassigned. We are providing further that a health
plan, MCO, PSO, or IPA that employs a supplier or operates a facility
that could accept reassignment from a supplier pursuant to
Secs. 424.80(b)(1) and (b)(2) is the entity furnishing DHS for any
services provided by such supplier. We believe this change should
address the possible adverse impact on physician ownership of MCOs and
IPAs.
With respect to the first change, we are creating in
Sec. 411.357(n) a new exception under section 1877(b)(4) of the Act for
bona fide risk-sharing compensation arrangements between an MCO and a
physician (either directly or indirectly through a subcontractor) for
services to enrollees of a health plan. (For purposes of the new
exception, we are incorporating the definitions of ``health plan'' and
``enrollees'' found in Sec. 1001.952(l).) The vast majority of Medicare
and Medicaid beneficiaries in managed care plans are either in M+C
plans or Medicaid managed care plans, both of which are already
required to comply with the physician incentive plan regulations. As to
the relatively small number of Medicare beneficiaries in commercial or
employer-sponsored plans that do not necessarily satisfy physician
incentive plan requirements, or otherwise qualify for an existing
exception under section 1877 of the Act, we are not currently aware of
any fraud or abuse involving the Medicare program or Medicare
beneficiaries arising from physician risk-sharing arrangements in these
commercial or employer-provided health plans. Given the potential for
the unintended disruption of these arrangements described by the
commenters and the administrative need for ``bright line'' rules, we
believe the new physician risk-sharing arrangements exception to
section 1877 of the Act is needed. We will continue to monitor these
arrangements for possible abuse and, if necessary, may revisit the
issue in the future.
With respect to the second change, the potential impact of the
January 1998 proposed rule on physician ownership of MCOs and IPAs was
attributable to our interpretation that an MCO or IPA was an entity
furnishing DHS provided by another entity whenever it billed for the
services provided by another entity pursuant to a contract with the MCO
or IPA. As noted above, in response to the above comment, we are
amending the definition of ``entity'' in Sec. 411.351 to clarify that a
health plan, or an MCO, PSO, or IPA with which the plan contracts
directly or indirectly for services to plan enrollees, will only be
considered to be furnishing DHS when the health plan, MCO, PSO, or IPA
furnishes the services directly (that is, through an employee), or
otherwise is the entity to which we make payment for the DHS, either
directly or upon assignment on the patient's behalf, or pursuant to a
valid reassignment under the Medicare rules and regulations to (i) an
employer pursuant to Sec. 424.80(b)(1), (ii) a facility pursuant to
Sec. 424.80(b)(2), or (iii) a health care delivery system, including
clinics, pursuant to
[[Page 914]]
Sec. 424.80(b)(3) (other than a health care delivery system that is a
health plan (as defined in Sec. 1000.952(l)), and other than any MCO,
PSO, or IPA with which a health plan contracts for services provided to
plan enrollees). We are providing further that a health plan, MCO, PSO,
or IPA that employs a supplier or operates a facility that could accept
reassignment from a supplier pursuant to Secs. 424.80(b)(1) and (b)(2)
is the entity furnishing DHS for any services provided by such
supplier.
We believe this change should allow for physician ownership of most
types of network IPAs and MCOs. Ownership or investment interests in
entities, including MCOs and IPAs, that provide DHS directly would
still be prohibited (absent an applicable exception). Moreover, any
indirect financial arrangements between physicians and the entities
directly providing DHS would need to be analyzed to ensure there are no
prohibited indirect financial relationships. For example, an MCO may
have an investment interest in a lab, and a physician that contracts
with that MCO may refer a Medicare beneficiary to that lab for DHS, for
which Medicare is billed on a fee-for-service basis. While the MCO
would not be considered to be furnishing the DHS for purposes of
section 1877 of the Act, the lab in which the MCO has an investment
interest would be furnishing DHS. Since the physician has a financial
relationship with the MCO, and the MCO has an investment interest in
the lab, there may be an indirect financial relationship that would
then have to fit in an exception, most likely the indirect compensation
arrangement exception or the risk-sharing arrangement exception. (See
discussion in section III.A of this preamble.)
Finally, in Phase II of this rulemaking, we expect to amend the
January 1998 proposed regulations for the personal service arrangements
exception to reflect that risk-sharing compensation arrangements
between entities downstream of a Medicare MCO can qualify as physician
incentive plans within the meaning of section 1877(e)(3)(B) of the Act;
this interpretation is consistent with our interpretation in the
Medicare physician incentive plan regulations in Secs. 422.208 and
422.210.
We believe these provisions will address the commenters' concerns.
Comment: One commenter stated that even if the MCO itself directly
provided DHS pursuant to a physician referral, the MCO's compensation
arrangement with the referring physician should not be deemed to take
into account the volume or value of referrals for DHS unless the risk-
sharing arrangement was based in part on the utilization or cost of the
DHS provided directly by the MCO.
Response: For purposes of the personal service arrangements
exception, the compensation from the MCO does not take into account
``the volume or value of referrals or other business generated between
the parties'' unless the compensation varies based on the volume or
value of the MCO's business that is generated by the physician. (See
the discussion of ``volume or value'' and ``other business generated''
in section V of this preamble.) We have addressed the issue of
physician risk-sharing arrangements (including, but not limited to,
capitation payments, bonuses, and withholds) with commercial and
employer-sponsored managed care plans by creating a new exception under
section 1877(b)(4) of the Act for bona fide risk-sharing compensation
arrangements between an MCO and a physician (either directly or
indirectly through a subcontractor) for services to enrollees of a
health plan.
Comment: Several commenters were unclear whether physicians who
participate in a managed care network would be prohibited from
referring Medicare fee-for-service patients who are not enrollees of a
managed care plan for DHS to other providers in the managed care
network simply because both providers had contractual relationships
with the same MCO.
Response: Physicians who participate in a managed care network
would not be prohibited from referring Federal fee-for-service patients
who are not enrollees of a managed care plan for DHS to other providers
with contractual relationships with the same MCO solely on the basis of
the parallel contractual arrangement with the MCO. In other words, two
physicians who contract with an MCO do not have a financial
relationship with each other for purposes of section 1877 of the Act on
that basis alone. However, they may have other financial relationships
(including indirect financial relationships) that would bar their
referrals (in the absence of an applicable exception).
Comment: Several commenters asked that we create an exception for
nongovernment plans that include any significant cost-sharing elements.
This exception would be similar to the exception in the Federal anti-
kickback statute for risk-sharing arrangements.
Response: As discussed earlier, we have created a new exception for
bona fide risk-sharing compensation arrangements between health plans
and physicians. The exception we are creating is substantially broader
than the shared risk exception in the Federal anti-kickback statute.
Comment: Another commenter asked that we create an exception to
permit public hospitals to enter into incentive arrangements with
physician groups for the treatment of the public hospital's patients.
One commenter also suggested that we create an exception for commercial
managed care product lines that serve fewer than 20 percent Medicare
patients as part of the group and that are not marketed directly to
Medicare patients.
Response: As described above, we have created a risk-sharing
arrangements exception in Sec. 411.357(n) that should address the
commenter's concern regarding commercial managed care arrangements.
With respect to the request to create an exemption for public hospital
patients, the commenter provided no explanation of the types of
arrangements proposed to be excepted, and we see no reason why these
arrangements could not be subject to abuse.
Comment: Two commenters asked us to clarify that the prepaid plan
exception protects any DHS provided to any enrollee of any plan
(including commercial or employer-sponsored plans) offered by an entity
that either is a Federally-qualified HMO or has a contract under one of
the programs cited in section 1877(b)(3) of the Act. One of the
commenters asked us to clarify that services to persons covered under
an employer self-funded health plan that is administered by an entity
with a qualified contract under section 1877(b)(3) of the Act and uses
the MCO's network of providers would also be exempt under the prepaid
plan exception.
Response: We believe that the Congress intended that the exception
in section 1877(b)(3) of the Act protect only the financial
arrangements for services to enrollees of the prepaid plans identified
in section 1877(b)(3). We see no basis for concluding that because an
entity has one contract covering a specific population, there is any
protection against abusive relationships in other product lines.
Accordingly, we are clarifying the regulation to state that the
protection extends only to financial arrangements for the services to
enrollees of the plans specifically identified in the regulation and
does not protect enrollees in any other plan or line of business
furnished by the MCO or to which the MCO provides administrative
services.
Comment: One commenter suggested that we use the definition of
health plan and enrollee set forth in the managed
[[Page 915]]
care safe harbor regulations to the Federal anti-kickback statute,
Sec. 1001.952 (Exceptions), paragraph (l) (Increased coverage, reduced
cost-sharing amounts, or reduced premium amounts offered by health
plans). The commenter stated that it was unclear from the preamble of
the January 1998 proposed rule whether employees covered by an employer
self-funded plan that utilized a commercial insurer to administer the
plan would be considered ``enrollees'' of the commercial insurer for
purposes of the prepaid plan exception and for application of the
physician incentive plan provision of the personal service arrangements
exception.
Response: We agree that employer self-funded plans should be able
to qualify for protection of their physician compensation arrangements.
We believe the new risk-sharing compensation exception will address the
commenters' concerns. For purposes of the new exception, we are
incorporating the definitions of ``health plan'' and ``enrollee'' from
the safe harbor regulations for certain health plans set forth in
Sec. 1001.952(l)(2). This definition would result in equal treatment
for self-funded plans and insured plans.
Comment: One commenter requested that we interpret section 1877 of
the Act to ``grandfather'' any pre-existing managed care arrangements.
The same commenter asked that we broaden the exception for personal
service arrangements to protect quality-related incentive plans that
take into account the volume or value of DHS referrals.
Response: The statutory provisions clearly envision their
application to managed care plans. Accordingly, a blanket
``grandfather'' provision for these plans is inappropriate. With
respect to the request for protection of quality-related incentive
plans, the commenter did not provide any details as to the kind of
incentives being described. We do not perceive any impediment in the
regulation that would preclude basing compensation on quality measures
unrelated to the value or volume of DHS referrals or other business
generated by the physician. However, absent further clarification, we
are not inclined to protect any arrangement that takes into account
referrals or business generated by the physician.
Comment: One commenter requested that we create a new exception for
payer-directed services. According to the commenter, in managed care
arrangements, the payer is the party that directs the referrals for DHS
and not the physician who is contractually obligated to refer in the
network. Another commenter stated that, in the managed care
environment, our proposed presumption in the January 1998 proposed rule
that a physician has referred a patient to an entity with which he or
she has a financial relationship if the patient, in fact, procures the
services from this entity--even if there is no order or written plan of
care--should not be applied.
Response: We believe the changes we have made to accommodate
various financial relationships between managed care organizations and
physicians should address the referral issues in the managed care
environment.
Comment: Several commenters asked that the provision in the group
practice definition permitting employees to receive productivity
bonuses be expanded to permit remuneration based on volume or value of
DHS referrals if the arrangement complies with the physician incentive
plan regulations as permitted in the personal service arrangements
exception. The commenters noted that in some arrangements, the employed
physicians have separate contracts with the MCO, while in others the
contract is between the MCO and the group, making it important to
permit the group to incentivize its employed physicians. According to
the commenters, employers should have at least as much latitude in
structuring their compensation arrangements with employees as with
independent contractors. The commenters suggested that the group
practice definition already expressly permits productivity bonuses
indirectly tied to referrals--a greater concern since overutilization
is the primary concern of section 1877 of the Act. In light of that
provision, one commenter believes it is incongruous to prohibit
physician incentive plan arrangements that discourage utilization if
they comply with the physician incentive plan regulations.
Response: We agree that, at least in the managed care environment,
there is little reason to impose a more restrictive requirement on
compensation arrangements between a group and its employees than on
arrangements between the group and its independent contractors.
However, this concern is only one aspect of the broader relationship
between the group practice, personal service arrangement, and bona fide
employment relationship exceptions that is discussed in sections IV and
VI.C.8 of this preamble.
Comment: Several commenters asked that we clarify the reporting
obligations of plans that are not technically subject to the physician
incentive plan regulations, since they are not Medicare or Medicaid
managed care plans (or M+C plans), but that are complying with the
regulations to qualify their financial arrangements with physicians for
the personal service arrangements exception in section 1877 of the Act.
Response: The various reporting requirements associated with, or
triggered by, the regulation will be addressed in Phase II of this
rulemaking.
VII. New Regulatory Exceptions
This section describes new regulatory exceptions that are not in
the statute, but which appeared in the January 1998 proposed rule or
that we have created in response to comments and pursuant to statutory
authority conferred on the Secretary. The new exceptions discussed here
include: Academic medical centers, fair market value, and non-monetary
compensation up to $300 (and medical staff benefits). Other new
exceptions described elsewhere in this preamble include: Implants in an
ASC (Sec. 411.355(e); section VIII.J of this preamble); EPO and other
dialysis-related drugs (Sec. 411.355(f); section VIII.L of this
preamble); preventive screening tests, immunizations, and vaccines
(Sec. 411.355(h); section VIII.L of this preamble); risk-sharing
arrangements (Sec. 411.357(n); section VI.D of this preamble);
compliance training programs (Sec. 411.357(o); section VII.C of this
preamble); eyeglasses and contact lenses (Sec. 411.355(i); section
VIII.J of this preamble); and indirect compensation arrangements
(Sec. 411.354(c)(3); section III.A of this preamble).
A. Academic Medical Centers
The Existing Law: Section 1877(h)(4) of the Act contains a special
rule for faculty practice plans. The rule provides that ``in the case
of a faculty practice plan associated with a hospital, institution of
higher education, or medical school with an approved medical residency
training program in which physician members may provide a variety of
different specialty services and provide professional services both
within and outside the group, as well as perform other tasks such as
research, subparagraph (A) [the definition of ``group practice''] shall
be applied only with respect to the services provided within the
faculty practice plan.''
Several commenters to the August 1995 final rule suggested that we
create a separate exception for faculty practice plans, since these
plans are typically involved in complex organizational arrangements
that do not fit comfortably--or at all--in the group practice
definition. At the time of the August 1995 final rule, we rejected the
suggestion for a new exception based on
[[Page 916]]
our view that the personal service arrangements exception and the
employment exception would provide physicians in academic medical
settings with appropriate protection under section 1877 of the Act.
The Proposed Rule: We proposed no changes.
The Final Rule: We have revisited our prior position. The comments
have persuaded us that academic medical practices raise numerous
questions under section 1877 of the Act that are not adequately
addressed by existing exceptions.
Though the relevant provision in the group practice definition is
somewhat obscure, we believe it demonstrates congressional intent to
address the circumstances of physicians practicing in academic medical
settings. We do not believe, however, that the core problem of how to
treat academic medical practices under section 1877 of the Act is
amenable to resolution under the group practice definition; the problem
lies elsewhere.
Academic medical settings often involve multiple affiliated
entities that jointly deliver health care services to patients (for
example, a faculty practice plan, medical school, teaching hospital,
outpatient clinics). There are frequent referrals and monetary
transfers between these various entities, and these relationships raise
the possibility of indirect remuneration for referrals. The exceptions
under section 1877 of the Act do not easily apply. For example, faculty
practice plan physicians refer patients for ancillary services to
entities that are outside of (and not wholly owned by) the single legal
entity in which they conduct their medical practices (that is, the
``group practice''), but with which they may have direct or indirect
compensation relationships (for example, part of the physician's
compensation may come from an affiliated medical school or teaching
hospital). These referrals typically will not qualify under the in-
office ancillary services exception, and it may be difficult to
structure compensation relationships for faculty practice plan
physicians that securely fit in the personal service arrangements
exception because the physician's compensation often comes directly or
indirectly from several separate sources.
Having reviewed the comment letters addressing the problems facing
faculty practice plans under section 1877 of the Act, we believe the
fundamental need of faculty practice plans is for a separate
compensation exception for payments to faculty of academic medical
centers that takes into account the unique circumstances of a faculty
practice, including the symbiotic relationship among faculty, medical
centers, and teaching institutions, and the educational and research
roles of faculty in these settings. Therefore, we are using our
regulatory authority under section 1877(b)(4) of the Act to create a
separate compensation exception for payments to faculty of academic
medical centers that meet certain conditions that ensure that the
arrangement poses essentially no risk of fraud or abuse. This exception
is in addition to other exceptions that may apply in particular
circumstances; an arrangement need only fit in one available exception.
The conditions applicable under the new exception in
Sec. 411.355(e)(1)(i) are that the referring physician is a bona fide
employee of a component of an academic medical center on a full-time or
substantial part-time basis, is licensed to practice medicine in the
State, has a bona fide faculty appointment at the affiliated medical
school, and provides either substantial academic or substantial
clinical teaching services for which the faculty member receives
compensation as part of his or her employment relationship with the
academic medical center. The purpose of this condition is to ensure
that protected physicians are truly engaged in an academic medical
practice. The exception does not apply to payments to physicians who
provide only occasional academic or clinical teaching services or who
are principally community rather than academic medical center
practitioners.
Under the new exception in Sec. 411.355(e)(1)(i)(A), a
``component'' of an academic medical center means an affiliated medical
school, faculty practice plan, hospital, teaching facility, institution
of higher education, or departmental professional corporation. For
purposes of this exception, an academic medical center may have some,
but need not have all, of these components. As indicated in the
preceding provision, however, the minimum requirements are a medical
school, a faculty practice plan, and a hospital.
Under the new exception in Sec. 411.355(e)(1)(ii), the total
compensation paid for the previous 12-month period (or fiscal year or
calendar year) from all academic medical center components to the
referring physician is set in advance and, in the aggregate, does not
exceed fair market value for the services provided, and is not
determined in a manner that takes into account the volume or value of
any referrals or other business generated within the academic medical
center. As with the corresponding provisions in the personal service
arrangements, employee, and fair market value exceptions, this
provision requires that remuneration to physicians be for bona fide
services provided by the physicians and not for referrals. In
determining fair market value for services in an academic medical
practice, we believe the relevant comparison is aggregate compensation
paid to physicians practicing in similar academic settings located in
similar environments. Relevant factors include geographic location,
size of the academic institutions, scope of clinical and academic
programs offered, and the nature of the local health care marketplace.
Nothing in this regulation is intended to preclude productivity bonuses
paid to academic medical center physicians on the basis of services
they personally perform.
Under the new exception in Sec. 411.355(e)(2), the ``academic
medical center'' for purposes of this section shall consist of--(1) an
accredited medical school (including a university, when appropriate);
(2) an affiliated faculty practice plan that is a nonprofit, tax-exempt
organization under section 501(c)(3) or (c)(4) of the Internal Revenue
Code (or is a part of such an organization under an umbrella
designation); and (3) one or more affiliated hospital(s) in which a
majority of the hospital medical staff consists of physicians who are
faculty members, and where a majority of all hospital admissions are
made by physicians who are faculty members. This provision ensures that
the exception only protects physician compensation in genuine academic
medical settings. This new exception reflects our view that the
predominant purpose of an academic medical center is to teach new
physicians and to run medical practices that support the teaching
mission.
To fit within the new exception in Sec. 411.355(e)(3), the academic
medical center must meet the following conditions:
All transfers of money between components of the academic
medical center must directly or indirectly support the missions of
teaching, indigent care, research, or community service. This provision
ensures that the academic medical center is bona fide and that
transfers of funds are not inappropriate payments of indirect
compensation for referrals. We believe that patient care is integral to
an academic medical center's community service mission.
The relationship of the components of the academic medical
center must be set forth in a written agreement that has
[[Page 917]]
been adopted by the governing body of each component. This provision
requires a bona fide affiliation between the medical center components.
All money paid to a referring physician for research must
be used solely to support bona fide research. We are concerned that
research funding could be used to disguise additional payments for
referrals. We are including this provision to ensure that money
earmarked (intended or designated) for research is used solely for
research purposes.
Under the new exception in Sec. 411.355(e)(4), the referring
physician's compensation arrangement must not violate the anti-kickback
statute (section 1128B(b) of the Act) and billing and claims submission
must be proper. As with all exceptions created under section 1877(b)(4)
of the Act, this provision is necessary to ensure that the arrangement
poses no risk of fraud or abuse.
Comment: As noted above, commenters pointed out that the structure
of faculty practice plans can be very complicated; for example,
physicians in a faculty practice plan may be compensated by one entity,
but conduct their medical practice through a separate entity and order
laboratory and other ancillary services from additional related
entities (for example, the teaching hospital, the university's research
laboratory for highly specialized testing, in-office laboratories
within the faculty departments that may or may not be incorporated as
professional corporations). As a result, arrangements between and among
the various sub-entities of such faculty practice plans can raise a
number of issues under section 1877 of the Act. In particular, the
question arises whether each separate legal entity and relationship
among legal entities must meet an exception under section 1877 of the
Act.
Commenters appealed for a separate exception for faculty practice
plans, insisting that faculty practice plans pose a minimal risk of
abuse under section 1877 of the Act. First, they asserted that
physicians in faculty practice plans are less likely to make abusive
referrals than their more entrepreneurial counterparts in private
practice because they practice in a setting that focuses on academic
pursuits and patient care at affiliated teaching hospitals and clinics.
Second, they stated that many faculty practice plans include not-for-
profit organizations that are regulated under IRS rules that forbid
private inurement and private benefit.
Response: As explained in the introduction to this section of the
preamble, we have revisited the issue of academic medical practices and
are persuaded that academic medical practices present unique concerns
under section 1877 of the Act that warrant a separate exception. Our
new exception is described in the introduction. We believe that faculty
practice plans will pose little risk of fraud or abuse under the
conditions set forth in the new exception. We are not persuaded that
physicians in faculty practice plans are necessarily less economically-
motivated than their private practice counterparts or that regulation
under IRS rules, though beneficial, is sufficient to prevent fraud or
abuse.
Comment: A commenter suggested that the group practice definition
and the requirements of the in-office ancillary services exception or
personal service arrangements exception should be applied only at the
level of the ``umbrella'' organization (that is, the organization that
encompasses all the physicians within the faculty practice plan) for
the entire faculty practice, thus obviating the need for each legal
entity within the same academic setting to meet the provisions of
section 1877 of the Act.
Response: In light of the new exception, we see no need to create
new rules under existing exceptions for faculty practice plans. Parties
may use the new exception or existing exceptions, depending on their
individual circumstances.
Comment: As an alternative to a separate exception for faculty
practice plans, one commenter urged that faculty practice plans be
permitted to have independent contractors as ``members'' during the
time they are providing services to the group. The commenter expressed
the view that this solution would be preferable to requiring the
faculty practice plan to employ such individuals.
Response: In light of the new compensation exception for physicians
in faculty practice plans, we see no need to alter the definition of
``member of the group'' for academic medical practices. The definition
of a ``group practice'' expressly includes a ``faculty practice plan,''
and any faculty practice plan that fits in the definition is a ``group
practice'' for purposes of section 1877 of the Act.
Comment: A commenter observed that under section 1877(b)(4)(B)(ii)
of the Act a faculty practice plan qualifies as a group practice based
solely on the services provided and revenue generated by the
participating physicians within the faculty practice plan, regardless
of the outside activities of those physicians. The commenter sought
clarification that the converse would also be true, that time and
revenue allocable to a physician's faculty practice would not count
against the ``group practice'' status of his outside medical group.
Response: The outside medical group must qualify for group practice
status under the tests described in section 1877(h)(4) of the Act
(Sec. 411.352 of the regulations) and in this preamble at VI.C. Time
and revenue allocable to a physician's faculty practice would be
treated as all other outside time and revenue for purposes of those
tests. In other words, such time and revenue would be treated no
differently than time group practice physicians who are not in faculty
practice plans spend supervising residents or conducting research.
B. Fair Market Value (Sec. 411.357(l))
The Proposed Rule. This proposed rule created an exception for
compensation relationships that are based upon fair market value and
meet certain other criteria. This exception is available for
compensation arrangements between an entity and either a physician (or
immediate family member) or any group of physicians (even if the group
does not meet the definition of group practice set forth in
Sec. 411.351), as long as the compensation arrangement--
Is in writing, is signed by the parties, and covers only
identifiable items or services, all of which are specified in the
agreement;
Covers all of the items and services to be provided by the
physician (or immediate family member) to the entity or, alternatively,
cross refers to any other agreements for items or services between
these parties;
Specifies the time frame for the arrangement, which can be
for any period of time and contain a termination clause, provided the
parties enter into only one arrangement covering the same items or
services during the course of a year. An arrangement made for less than
1 year may be renewed any number of times if the terms of the
arrangement and the compensation for the same items or services do not
change;
Specifies the compensation that will be provided under the
arrangement, which has been set in advance. The compensation must be
consistent with fair market value and not be determined in a manner
that takes into account the volume or value of any referrals (as
defined in Sec. 411.351), payment for referrals for medical services
that are not covered under Medicare or Medicaid, or other business
generated between the parties;
[[Page 918]]
Involves a transaction that is commercially reasonable and
furthers the legitimate business purposes of the parties; and
Meets a safe harbor under the anti-kickback statute or
otherwise is in compliance with the anti-kickback provisions in section
1128B(b) of the Act.
The Final Rule: Except for the revisions described below, Phase I
of this rulemaking adopts the proposed regulation. The revisions
include:
Elimination of the requirement that the written document
cross-reference other agreements between the parties.
Revision of the ``set in advance'' language to conform the
exception to other exceptions in which that language appears. ``Set in
advance,'' as used in the fair market value exception, will have the
uniform meaning described in section V of this preamble and
Sec. 411.354(d) of the regulations.
Revision of Sec. 411.357(l)(3) to conform to our uniform
interpretation of the volume or value standard in Sec. 411.354(d)
(discussed at section V of this preamble).
Revision of the proposal in Sec. 411.357(l)(5) that
required ``compliance with'' the anti-kickback statute. Under the final
regulations, the compensation arrangement must--(1) not violate the
anti-kickback statute, (2) comply with a statutory or regulatory anti-
kickback safe harbor, or (3) have been approved by the OIG pursuant to
a favorable advisory opinion issued in accordance with part 1008
(Advisory Opinions of the OIG) of this chapter. In addition, billing
and claims submission must be proper.
Addition of a provision to mirror section
1877(e)(3)(A)(vi) of the Act, which clarifies that the services
performed under the agreement cannot involve the counseling or
promotion of a business arrangement or other activity that violates
Federal or State law. While we believe this condition is implied
throughout the statute, we are conforming the new fair market value
exception to the Congress's inclusion of this same standard in the
personal service arrangements exception.
Comment: Several commenters objected to the requirement that an
arrangement must meet a safe harbor under the anti-kickback statute or
otherwise be in compliance with the anti-kickback provisions in section
1128B(b) of the Act. First, commenters pointed out that the anti-
kickback statute is an intent-based statute that prohibits certain
knowing and willful conduct, whereas section 1877 of the Act is not
based upon intent. In addition, one commenter was concerned that a
violation of the anti-kickback statute by one party would preclude both
parties from using the fair market value exception. Thus, the innocent
party who might be unaware of the other party's violation of the anti-
kickback statute and relying on the fair market value exception could
unknowingly violate section 1877 of the Act. Second, several commenters
stated that few arrangements would meet the requirements necessary to
obtain safe harbor protection under the anti-kickback statute.
Therefore, such arrangements would be excepted from section 1877 of the
Act only if they met the standard of being ``in compliance with the
anti-kickback statute.'' These commenters were concerned that ``being
in compliance with the anti-kickback statute'' was a nebulous standard
that could only be accomplished with certainty by obtaining an OIG
advisory opinion.
Response: In response to the concerns of commenters, we have
revised Sec. 411.357(l)(5) of the regulations to make it clear that for
a compensation arrangement to qualify for the fair market value
exception, it must meet one of the following criteria:
It must not violate the anti-kickback statute.
It must comply with a statutory or regulatory anti-
kickback safe harbor.
It must have been approved by the OIG pursuant to a
favorable advisory opinion issued in accordance with part 1008 of this
title.
This revision is both a clarification of the text set forth in the
January 1998 proposed rule and an expansion of the types of
arrangements that may qualify for the fair market value exception. In
particular, we are changing the requirement from ``being in compliance
with'' the anti-kickback statute to requiring that the arrangement not
violate the anti-kickback statute. The revised language is more
appropriate with respect to a criminal statute, such as the anti-
kickback statute. In addition, since the broad statutory language of
the anti-kickback statute technically covers some relatively innocuous
commercial arrangements, and since the OIG has promulgated regulations
granting safe harbor protection for some of these arrangements
(Sec. 1001.952 of this title), we are revising the criteria to permit
compensation arrangements that comply fully with a regulatory safe
harbor. Arrangements that comply with the statutory exceptions at
section 1128B(b)(3) of the Act also satisfy the new criteria. Finally,
any compensation arrangement that has been approved by the OIG pursuant
to a favorable advisory opinion issued in accordance with part 1008 of
this title would meet the criteria of Sec. 411.357(l)(5). (We caution,
however, that only the requestor of an OIG advisory opinion may rely on
the opinion for any purposes, including, without limitation, the
fulfillment of this criteria. Therefore, all parties that intend to
rely on the advisory opinion should be included as requestors.)
Finally, we address the scenario where only one party has the
requisite intent (that is, acting knowingly and willfully) to violate
the anti-kickback statute. In such a case, only the party with the
requisite intent would have violated the anti-kickback statute.
However, if both parties relied on meeting the ``not in violation of
the anti-kickback statute'' standard to qualify for the fair market
value exception, the anti-kickback statute violation would preclude the
use of the fair market value exception to section 1877 of the Act and
both parties would have violated section 1877 of the Act. Although we
understand the dilemma, we believe that it would be unusual that only
one party to a compensation arrangement would have the requisite intent
for violation of the anti-kickback statute. If any one purpose of
remuneration is to induce or reward referrals of Federal health care
program business, the statute is violated. (See United States v. Kats,
871 F.2d 105 (9th Cir. 1989); United States v. Greber, 760 F.2d 68 (3d
Cir.), cert. denied, 474 U.S. 988 (1985).) Also, if the ``innocent''
party knows that the compensation arrangement would violate the anti-
kickback statute but for the lack of the requisite intent, that party
should be aware of the risk he or she is facing and take action to
ensure that prohibited payments are not made. In that situation, we
would advise structuring the arrangement to fit within a safe harbor,
if possible, or obtaining an OIG advisory opinion.
For a discussion on the differences between section 1877 of the Act
and the anti-kickback statute, together with an analysis of the impact
that the anti-kickback statute has on these regulatory exceptions, see
section II of this preamble.
Comment: Some commenters requested clarification regarding whether
services provided by an entity to a physician would fit within the fair
market value exception. One commenter was confused by the fact that the
preamble to the January 1998 proposed rule implied that the exception
would cover any compensation arrangements based upon fair market value,
but the rule itself implied that it only covered arrangements where the
physician (or
[[Page 919]]
immediate family member) provided items or services.
Response: This fair market value exception only covers items or
services provided by a physician or any immediate family member to an
entity. Depending on the facts, payments made by a physician to an
entity for items or services furnished by the entity might qualify for
the exception for payments by a physician which is set forth under
Sec. 411.357(i), provided that the compensation is consistent with fair
market value and the payments are not specifically excepted under
another provision in Secs. 411.355 through 411.357.
Comment: One commenter requested clarification regarding whether
this exception would be available if another exception could apply.
Response: In the preamble to the January 1998 proposed rule, we
stated that parties involved in a compensation arrangement should use
the fair market value exception if they have doubts about whether they
meet the requirements in the other exceptions listed in Sec. 411.357.
We have reconsidered our position. The parties may use the fair market
value exception even if another exception potentially applies. We
believe that the safeguards against overutilization included in the
fair market value exception are sufficient to cover various types of
compensation arrangements, including some arrangements that are covered
by other exceptions.
Comment: A couple of commenters expressed concern regarding the
application of the fair market value exception to legitimate physician
recruitment practices that do not otherwise qualify for exception under
the physician recruitment exception set forth at Sec. 411.357(e). One
commenter was concerned that in order to meet the ``commercially
reasonable'' and ``legitimate business purposes'' prerequisites,
hospitals would be forced to obtain costly experts' reports regarding
recruiting incentives provided in comparable situations. Another
commenter sought clarification regarding whether the ``commercially
reasonable'' prerequisite was based upon the specific business in which
the parties are involved or business in general. This commenter was
concerned that some arrangements (for example, loan forgiveness
programs) might be commercially reasonable in the context of hospital/
physician relationships, but might not be commercially reasonable from
a general business perspective.
Response: Physician recruitment arrangements might be covered by
this fair market value exception or the physician recruitment
exception, depending on the specific facts involved. However, we
recognize that many physician recruitment arrangements that offer
``extra'' payments to induce physicians to relocate will not be covered
by the fair market value exception, because compensation offered for
the physician's services exceeds the fair market value for such
services. We will consider the comments on the recruitment exception in
Phase II of this final rule.
With respect to determining what is ``commercially reasonable,''
any reasonable method of valuation is acceptable, and the determination
should be based upon the specific business in which the parties are
involved, not business in general. In addition, we strongly suggest
that the parties maintain good documentation supporting valuation.
Finally, with respect to difficult cases, the parties could seek an
advisory opinion under section 1877 of the Act. (See Sec. 411.370.)
However, we cannot express opinions on whether compensation represents
fair market value. (See Sec. 411.370(c)(1).) For further discussion of
``fair market value'', see section VIII.B.3 of this preamble.
Comment: One commenter thought that it would be burdensome to
require inclusion of all items and services provided by the physician
(or immediate family member) or a cross reference to other pertinent
agreements. First, the commenter noted that there may be no written
agreement for certain bona fide employment arrangements. Therefore, if
an immediate family member of a physician is employed by the entity and
there is no written employment agreement, the physician's compensation
arrangement with the entity could not satisfy this requirement of the
fair market value exception. Second, the commenter stated that
arrangements between an entity and a physician (or immediate family
member) may change from time to time as a result of new arrangements,
terminations, renewals, etc. Therefore, the list of other agreements
would become outdated quickly. Third, the commenter asserted that the
requirement duplicated the information that was already required under
the reporting requirements. To rectify the foregoing problems, the
commenter suggested that the exception should only require a reference
to a master list of contracts that could be updated periodically.
Finally, the commenter requested clarification regarding what contracts
must be cross-referenced when there is a compensation arrangement
between an entity and a member of a physician group practice. The
commenter questioned, with respect to a contract between an entity and
an immediate family member of a physician who is a member of a group
practice, whether the contract must cross-reference arrangements
between the entity and--(1) the group practice, (2) each member of that
group practice, and (3) any family member of a member of the group
practice.
Response: We agree that it is burdensome to require that the
written agreement either cover all items and services to be provided by
the physician or immediate family member to the entity, or cross refer
to any other agreements for items or services between any of these
parties. To alleviate this burden, we are eliminating the requirement
that the agreement cross refer to any other agreements. Nevertheless,
we note that cross-referencing other agreements and arrangements is a
good practice and will enable contracting entities, as well as
auditors, to review more efficiently the full scope of a physician's
relationship to the entity. In cases where a physician or an immediate
family member of a physician is employed by the entity and there is no
written employment agreement, the commenter's conclusion that the
physician's compensation arrangement with the entity could not satisfy
this requirement of the fair market value exception is correct. Another
exception, such as the employment exception, may apply, since it does
not require a written agreement.
Comment: Some commenters were concerned that by requiring that the
compensation not be related to the volume or value of program
referrals, non-program referrals, or other business generated between
the parties, we had undermined the usefulness of the fair market value
exception, as well as many other exceptions which are subject to the
same restriction. One commenter suggested that an arrangement should
not pose a risk of abuse as long as the compensation does not reflect
the volume or value of the physician's own referrals.
Response: For a discussion of the ``value or volume of referrals''
standard, refer to the discussion at section V of this preamble. We are
conforming the language of the new fair market value exception to our
uniform interpretation of the standard, which is discussed at section V
of this preamble.
[[Page 920]]
C. Non-Monetary Compensation up to $300 (and Medical Staff Benefits
(Secs. 411.357(k) and (m))
The Proposed Rule. Physicians and their immediate family members
are often given noncash items or services that have a relatively low
value and are not part of a formal, written agreement. For example, a
physician might receive free samples of certain drugs or chemicals from
a laboratory or free coffee mugs or note pads from a hospital. Although
these free or discounted items and services fall within the definition
of ``compensation arrangement,'' we believe that such compensation is
unlikely to cause overutilization, if held within reasonable limits.
Therefore, we proposed a new exception, titled De Minimis Compensation,
for compensation from an entity in the form of items or services that
would not exceed $50 per gift and an aggregate of $300 per year. In
addition, to qualify for the proposed exception, the entity providing
the compensation would have to make it available to all similarly
situated individuals, regardless of whether these individuals refer
patients to the entity for services, and the compensation could not be
determined in any way that would take into account the volume or value
of the physician's referrals to the entity.
The Final Rule. Except for the revisions discussed below, the
regulations in Phase I of this rulemaking are the same as the proposed
rule:
Changing the name of this exception from ``De Minimis
Compensation'' to ``Non-Monetary Compensation Up To $300'' to avoid any
unintentional implication that the dollar limits set forth in the
exception are minimal or inconsequential in all circumstances. That is,
although the $300 dollar limit may be relatively low when compared to
the average physician's annual income, we believe the amount could be
sufficient to induce referrals. However, we believe that the dollar
limit, together with the other conditions of the exception, are
sufficient to protect against abuse.
Elimination of the $50 per gift limit. Therefore, if the
other conditions of the exception are met, an entity can give a
physician one noncash gift per year valued up to $300 or two or more
noncash gifts per year, as long as the annual aggregate value of the
gifts does not exceed $300.
Addition of a provision that precludes protection for
gifts solicited by physicians to prevent physicians from making such
gifts a condition or expectation of doing business.
Elimination of the ``similarly situated'' standard. This
standard was designed to ensure that compensation was not paid
primarily to reward high referrers. To ensure the same end, we are
augmenting the standard that prohibits compensation that takes into
account the volume or value of referrals by also prohibiting
compensation that takes into account the volume or value of any other
business generated between the parties.
Addition of a new exception (Sec. 411.357(m)) to allow
certain incidental benefits of low value provided by hospitals to their
medical staffs.
Comment: Several commenters argued that section 1877 of the Act
does not apply to relationships between physicians and drug
manufacturers, because a drug manufacturer is not an ``entity'' that
furnishes health services to which a physician purchasing drugs makes a
``referral'' under section 1877 of the Act. Applying this
interpretation, commenters concluded that free drug samples, free
training, and other gifts (for example, pens, notepads, and other
items) provided to physicians by drug manufacturers are not prohibited
by section 1877 of the Act, and, therefore, do not need to qualify for
any of the exceptions. Also, many expressed concern that, if section
1877 of the Act is interpreted as applying to physicians' relationships
with drug manufacturers, then free drug samples and training provided
to physicians by pharmaceutical companies would be prohibited, because
they would exceed the proposed per gift and annual dollar limits of the
de minimis exception. They reasoned that free drug samples should be
exempt from section 1877 of the Act, because they are extensively
regulated by Federal law that restricts their use and prohibits their
sale, and, therefore, free drug samples pose little risk of abuse. They
also stressed that free training given in connection with free samples
should be exempt, because it is part of the sales effort which benefits
patients, as well as physicians.
Response: We agree that drug manufacturers typically are not
``entities'' that furnish health services to which physicians
purchasing drugs make ``referrals'' under section 1877 of the Act. (See
section VIII.B of this preamble.) Therefore, as a general rule, neither
free drugs, free training, nor gifts provided to physicians by drug
manufacturers are prohibited by section 1877 of the Act. We caution,
however, that free or discounted items or services provided by drug
manufacturers to physicians must be scrutinized to ensure compliance
with other applicable laws and regulations, including, without
limitation, the anti-kickback statute and the Federal laws restricting
the sale and distribution of drug samples, 21 U.S.C. Sec. 353(c)
through (d).
Comment: Many commenters expressed concern regarding the per gift
and annual dollar limits. In particular, they stated that the dollar
limits were so low that they precluded protection for many legitimate
compensation arrangements. For example, many commenters were concerned
that no protection would be provided for free or discounted benefits
provided by a hospital for its medical staff. Commenters believe that
free or discounted benefits (for example, free or discounted meals and
refreshments, free or discounted parking, free continuing medical
education or other training, free computer/Internet access, free
laboratory coats, free or discounted malpractice insurance, free
transcription of medical records, and free photocopying) would add up
and exceed the dollar limits quickly. Concern was also expressed about
the administrative burden of tracking the exact dollar amounts for
benefits provided to each medical staff physician.
Finally, one commenter questioned whether, with respect to group
practices, the dollar limit would apply to each individual member of
the group or to the group as a whole. Another commenter suggested that
the dollar limits should be indexed for inflation.
Response: First, we have added a new exception (Sec. 411.357(m))
for incidental benefits given to a hospital's medical staff members.
The question of incidental benefits given by a hospital to members of
its medical staff was addressed previously in the preamble to the
January 1998 proposed rule at 63 FR 1713-1714. In particular, we noted
that:
Entities, such as hospitals, often provide physicians with
certain incidental benefits, such as their malpractice insurance, or
with reduced or free parking, meals or other incidental benefits. We
believe the answer to this question hinges on the nature of any
other financial relationship the physician has with the entity. For
example, if a physician receives free ``extras'' such as malpractice
insurance, parking, or meals while he or she serves as the entity's
employee, then these extras might qualify as part of the
compensation that the physician receives under a bona fide
employment relationship, provided they are specified in the
employment agreement. If the physician or entity can demonstrate
that the extras constitute part of the payment that such entities
typically provide to physicians, regardless of whether they make
referrals to the entity, the extras constitute payment that
[[Page 921]]
is consistent with fair market value, and that furthers the entity's
legitimate business purposes. If an incidental benefit cannot meet
the requirements under a statutory exception or the new general
exception for compensation arrangements we have included in
Sec. 411.357(l), it might still meet the de minimis exception we
have included in Sec. 411.357(k) if it has limited value. We have
also been asked about parking spaces that a hospital provides to
physicians who have privileges to treat their patients in the
hospital. It is our view that, while a physician is making rounds,
the parking benefits both the hospital and its patients, rather than
providing the physician with any personal benefit. Thus, we do not
intend to regard parking for this purpose as remuneration furnished
by the hospital to the physician, but instead as part of the
physician's privileges. However, if a hospital provides parking to a
physician for periods of time that do not coincide with his or her
rounds, that parking could constitute remuneration.
We recognize that many of the incidental benefits that hospitals
provide to medical staff members do not qualify for the employment
exception because most members of a hospital's medical staff are not
hospital employees, and do not qualify for the fair market value
exception because, to the extent that the medical staff membership is
the only relationship between the hospital and certain physicians,
there is no written agreement between the parties to which these
incidental benefits could be added. While we still believe that medical
staff incidental benefits could be structured in a way that would
reward physicians for referrals and, thereby, lead to overutilization,
we also recognize that many medical staff incidental benefits are
customary industry practices that are intended to benefit the hospital
and its patients. For example, free computer/Internet access benefits
the hospital and its patients by facilitating the maintenance of up-to-
date, accurate medical records and the availability of cutting edge
medical information. Consequently, we have added a new exception
(Sec. 411.357(m)), which provides that medical staff incidental
benefits are excepted from section 1877 of the Act, if the benefits in
question are--
Offered by a hospital to all members of the medical staff
without regard to the volume or value of referrals or other business
generated between the parties;
Offered only during periods when the medical staff members
are making rounds or performing other duties that benefit the hospital
and its patients;
Provided by the hospital and used by the medical staff
members only on the hospital's campus;
Reasonably related to the provision of, or designed to
facilitate directly or indirectly the delivery of, medical services at
the hospital;
Consistent with the types of benefits offered to medical
staff members by other hospitals within the same local region or, if no
such hospitals exist, by comparable hospitals located in comparable
regions; and
Of low value (that is, less than $25) with respect to each
occurrence of the benefit (for example, each benefit must be of low
value).
Regardless of compliance with the foregoing, we caution that medical
staff incidental benefits should be reviewed to ensure compliance with
other applicable laws and regulations, including, without limitation,
the anti-kickback statute.
Medical staff incidental benefits that do not meet the foregoing
conditions could constitute prohibited remuneration and, therefore,
would be permitted under section 1877 of the Act only if an exception
applies. For example, malpractice insurance offered by a hospital only
to its emergency room physicians would not meet the foregoing
conditions. Therefore, to be exempt from section 1877 of the Act, it
would have to qualify for one of the exceptions. Malpractice insurance
would not qualify for the exception for non-monetary compensation up to
$300, because it would exceed the applicable dollar limits. Nor would
it qualify for the exception for remuneration unrelated to the
provision of DHS, because such payments would be related to the
provision of emergency services, which are included in the definition
of inpatient hospital services and, therefore, are DHS. Malpractice
insurance provided to emergency room physicians might qualify for the
employee exception if the physician is employed by the hospital and the
insurance is part of the employment agreement. Similarly, we do not
believe medical transcription services are an incidental benefit of
nominal value.
We are aware that some hospitals are offering compliance training
programs for physicians on their medical staffs or in their local
communities. Because we believe such programs are beneficial and do not
pose a risk of fraud or abuse, we are creating a new exception for such
compliance training programs.
We intentionally set the dollar limits in the proposed exception at
a low level to decrease the likelihood that the items or services would
influence utilization. However, in response to the comments, we have
eliminated the $50 per gift dollar limit. Therefore, under the final
rule, an entity could give a physician either one noncash gift per year
of up to $300 in value or two or more noncash gifts per year, as long
as the annual aggregate value of the gifts does not exceed $300. This
change permits larger one-time gifts. For example, a noncash gift
valued at $150 would have exceeded the per gift dollar limit of the
proposed rule, but would be permitted under the final rule, as long as
the annual aggregate does not exceed $300 and the other conditions of
the exception are met.
The exception for non-monetary compensation up to $300 only
protects gifts to individual physicians. Thus, gifts given to a group
practice would not qualify for this exception. Noncash gifts could,
however, be given to one member, several individual members, or each
member of a group practice, if each such gift meets all of the
conditions of the exception for non-monetary compensation up to $300.
We caution, however, that the exception will not apply to gifts, such
as holiday parties or office equipment or supplies, that are valued at
not more than $300 per physician in the group, but are, in effect,
given or used as a group gift. Notwithstanding the foregoing, we
recognize that the aggregate dollar amount could be substantial for
gifts to individual physician members of very large groups. For
example, if a group consists of 50 physicians, each physician of the
group could be given an aggregate of $300 in non-cash gifts within a
given year, equaling a total of $15,000 from one entity. Such a large
gift could provide an economic incentive for overutilization.
Therefore, to counter-balance the removal of the $50 per gift limit and
to further guard against abuse, we have added a provision that excludes
gifts solicited by the receiving physicians or their group practice.
This change also serves to clarify that our use of the term ``gift''
refers to the ordinary meaning of the term; that is, a gift must
involve a voluntary transfer made without consideration or compensation
expected or received in return. This new provision prevents members of
group practices, as well as solo practitioners, from making noncash
gifts a condition of doing business with a particular entity. We intend
to monitor the provision of gifts to group practice physicians under
this exception and may revisit our position if abuses occur. Such gifts
remain subject to the anti-kickback statute.
Finally, we have decided not to index the $300 annual aggregate
dollar limit for inflation. Removal of the per gift dollar limit gives
entities much greater
[[Page 922]]
flexibility with respect to the value of noncash gifts. That is, under
the proposed rule, a single gift could not exceed $50; whereas, under
the final rule, the value of a single gift could be up to $300, as long
as the other conditions are met. We believe that this revision
decreases the need for adjustment for inflation. In addition, we think
it would create confusion as to the actual limit in succeeding years if
we were to provide for an inflation adjuster. The rule as it stands
creates an easy-to-follow bright line. However, we will continue to
monitor the effect of the $300 limit and may revisit the limit in the
future.
Comment: One commenter asked for clarification regarding the
relationship between the de minimis exception and the statute's
exception for remuneration provided by a hospital to a physician ``if
such remuneration does not relate to the provision of designated health
services.'' (See section 1877(e)(4) of the Act.)
Response: The exception for non-monetary compensation up to $300
and the statutory exception for remuneration unrelated to the provision
of DHS are totally separate exceptions with different criteria. The
determination as to which of these exceptions, if any, is applicable
depends on the facts and circumstances of the case involved.
Comment: One commenter questioned whether the requirement that
compensation must be made available to all similarly situated
individuals would prohibit hospitals from hosting meals on a person-to-
person basis. Another commenter suggested that the similarly situated
requirement should be eliminated because the type of promotional items
that would be covered by the exception would probably be provided only
to referrers or potential referrers, and such minimal gifts were
unlikely to cause overutilization.
Response: We agree that, on balance, the ``similarly situated''
test does not add significantly to the protections of the exception.
Accordingly, we have eliminated the ``similarly situated'' standard.
This standard was designed to ensure that compensation was not paid
primarily to reward high referrers. To ensure the same end, we are
augmenting the standard that prohibits compensation that takes into
account the volume or value of referrals by also prohibiting
compensation that takes into account the volume or value of any other
business generated by the referring physician.
Comment: Two commenters questioned how professional courtesy
discounts (that is, free or discounted services provided to physicians)
would be handled under section 1877 of the Act. One of the commenters
suggested that professional courtesy discounts should not violate
section 1877 of the Act, because they fall within the non-monetary
compensation up to $300 exception or they do not constitute
``remuneration.''
Response: The term ``professional courtesy'' is used (or misused)
to describe a number of analytically different practices, including the
practice by a physician of waiving the entire fee for services provided
to the physician's office staff, other physicians, and/or their
families (the traditional meaning); the waiver of coinsurance
obligations or other out-of-pocket expenses for physicians or their
families (that is, insurance only billing); and similar payment
arrangements by hospitals or other institutions for services provided
to their medical staffs or employees. Therefore, we cannot generalize
about the application of section 1877 of the Act to such arrangements.
Some such arrangements may fit in an existing exception, depending on
the circumstances (for example, the non-monetary compensation up to
$300 exception if the value of the courtesy services is less than $300
and the other conditions of the exception are satisfied). However, some
such arrangements may not fit in an exception. We are considering
whether an exception could be developed for such arrangements and will
address the matter further in Phase II of this rulemaking. We are
soliciting comments about appropriate conditions for such an exception
and an appropriate definition of ``professional courtesy.'' In addition
to conducting an analysis of professional courtesy arrangements under
section 1877 of the Act, these arrangements must be analyzed with
respect to other fraud and abuse, as well as payment, authorities,
including the anti-kickback statute, the False Claims Act (31 U.S.C.
Sec. 3729 et seq.), and the prohibition of inducements to beneficiaries
(section 1128A(a)(5) of the Act).
VIII. Definitions of the Designated Health Services
A. General Principles
Basis for the Definitions
As we pointed out in the preamble to the January 1998 proposed rule
(63 FR 1673), section 1877(h)(6) of the Act lists the DHS, but does not
define them. Moreover, the list in section 1877(h)(6) of the Act does
not necessarily correspond to specific service categories as they are
defined under either Medicare or Medicaid. For example, section
1877(h)(6)(D) of the Act uses the phrase, ``[r]adiology services,
including magnetic resonance imaging, computerized axial tomography
scans, and ultrasound services,'' although ultrasound is not usually
considered a radiology service. In defining the DHS in Sec. 411.351 of
the January 1998 proposed rule, we stated that we chose, as much as
possible, to base the definitions in section 1877 of the Act on
existing definitions in the Medicare program. We also explained that in
situations in which it was not clear whether a service was included, we
would look to the intent of the statute. In general, we believe the
Congress meant to include specific services that are or could be
subject to abuse.
Because we had received a number of inquiries from individuals who
were confused about whether a particular service fell under one of the
DHS categories, we proposed defining the DHS whenever we could by
cross-referencing existing definitions in the Medicare statute,
regulations, or manuals or by including specific language whenever we
believed the definitions should deviate from standard Medicare
definitions.
Many of the comments we received on the proposed rule reflected
that commenters were still unclear about which services fall under the
DHS categories. Many commenters specifically requested that we
establish a ``bright line'' test for identifying these services, and
suggested that we base the services on an established list, such as the
Current Procedural Terminology (CPT) codes. We agree that more precise
definitions will make it much easier administratively for physicians
and entities to comply with the law.
Accordingly, we have determined that we will define certain DHS
(clinical laboratory services, physical therapy, occupational therapy,
radiology and certain other imaging services, and radiation therapy
services (sections 1877(h)(6)(A)through (h)(6)(E) of the Act) by
publishing specific lists of CPT and HCFA Common Procedure Coding
System (HCPCS) codes that physicians and providers most commonly
associate with a given designated health service. The lists of codes
will define the entire scope of the designated services category for
purposes of section 1877 of the Act. While the definitions section of
the regulations will contain a general explanation of the principles
used to select the codes, in all cases the published list of codes will
be controlling.
For services described in section 1877(h)(6) of the Act, paragraphs
(F)
[[Page 923]]
through (K), we will not be publishing a service-by-service list. The
codes for these services may be just one component used for identifying
the service; the codes may be all those that appear in a specific
``level,'' such as all HCPCS level 2 codes, for a service; or the
service is not defined using HCPCS codes at all. The definitions for
the services in paragraphs (F) through (K) are explained in detail
below under each service category.
The HCPCS is a collection of codes and descriptors that represent
procedures, supplies, products, and services that may be provided to
Medicare beneficiaries and to individuals enrolled in private health
insurance programs. We believe that these codes will already be
familiar to many in the health care industry. These codes must be used
when billing Medicare for Part B services and supplies. The codes are
divided into three levels, the first two of which are used in this
final rule and are described below; they are listed in HCPCS 2001:
Level I: Codes and descriptors copyrighted by the American Medical
Association in its Current Procedural Terminology, Fourth Edition (CPT-
4). These are 5-position numeric codes primarily representing physician
services.
Level II: These are 5-position alpha-numeric codes representing
primarily items and nonphysician services that are not represented in
the level I codes. Included are codes and descriptors copyrighted by
the American Dental Association's Current Dental Terminology, Second
Edition (CDT-2). These are 5-position alpha-numeric codes comprising
the ``D'' series. All other level II codes and descriptors are approved
and maintained jointly by the alpha-numeric editorial panel (consisting
of HCFA, the Health Insurance Association of America, and the Blue
Cross and Blue Shield Association).
Because these specific codes change and can quickly become out-of-
date, we are not including the lists of DHS codes in the regulations
text, but rather in an accompanying attachment. The definitions of
specific services in the regulations text will cross refer to a
comprehensive table that will appear initially in the Federal Register
along with Phase I of this rulemaking and thereafter in an addendum to
the annual final rule concerning payment policies under the physician
fee schedule rule. This list titled, ``List of CPT/HCPCS Codes Used to
Describe Certain Designated Health Services Under the Physician
Referral Provisions (Section 1877 of the Social Security Act),'' will
also be posted on the HCFA web site at http://www.hcfa.gov on the date
of Federal Register publication of this final rule. The table published
each year will be a comprehensive listing of all codes for DHS and not
merely a listing of changes to the prior year's table. The updates will
also be posted on the HCFA web site. The physician fee schedule rule is
generally published in late October or early November. We will consider
comments on each year's revised list if we receive them during the
applicable comment period for that rule. If any changes are made, we
will then publish a revised table and respond to any public comments
that we receive. This approach will provide an annual comprehensive
list of codes for those DHS noted above (sections 1877(h)(6)(A)through
(h)(6)(E) of the Act).
We are not providing lists of codes for the following categories of
DHS (sections 1877(h)(6)(F) through (h)(6)(K) of the Act): Durable
medical equipment and supplies; parenteral and enteral nutrients,
equipment, and supplies; prosthetics, orthotics, and prosthetic devices
and supplies; home health services; outpatient prescription drugs; or
inpatient and outpatient hospital services. We believe the definitions
in Phase I of this rulemaking for these DHS provide sufficiently clear
``bright line'' rules.
In the preamble to the January 1998 proposed rule, we had stated
that we believed the Congress intended to include specific services
that are or could be subject to abuse and that we would attempt to
define the services accordingly. In the January 1998 proposed rule
preamble and regulations text, we then attempted in some cases to
include or exclude services or types of services based on our view as
to their potential for abuse. Many commenters disagreed with our views
about particular services (for example, lithotripsy), and many more
argued that the particular service they provided should also be
excluded because it was not overutilized. In light of these comments
and upon further review of the statutory scheme, we have decided that
the Congress did not intend that we categorize DHS by determining the
potential for overutilization or abuse on a service-by-service basis.
Accordingly, in Phase I of this rulemaking, we are including all
services that we believe come within the general categories; we have
created limited exceptions for a few specific cases (that is, implants
in ambulatory surgical centers, legislatively mandated preventive
screening tests and immunizations subject to frequency limits,
eyeglasses and contact lenses subject to frequency limits, and
erythropoietin (EPO) provided by end-stage renal disease (ESRD)
facilities) for which we believe an exception poses a limited risk of
abuse and is necessary to avoid needless disruption of patient care.
However, even for those rare exceptions, we will continue to monitor
the services for abuse and, if necessary, revisit the exclusions.
We also stated in the preamble to the January 1998 proposed rule
(63 FR 1673) that we consider a service to be a designated health
service, even if it is billed as something else or is subsumed within
another service category by being bundled with other services for
billing purposes. We gave as an example skilled nursing facility (SNF)
services, which can encompass a variety of DHS, such as physical
therapy (PT), occupational therapy (OT), or laboratory services.
Commenters complained that this interpretation would result in an
expansion of the DHS beyond the services specifically listed in the
law. According to the commenters, when the Congress intended to cover
specific Medicare services (including composite rate services, such as
hospital or home health services), it did so expressly. Upon review, we
agree with the commenters. Under the final rule, services that would
otherwise constitute DHS, but that are paid by Medicare as part of a
composite payment for a group of services as a separate benefit (for
example, ambulatory surgical center (ASC) or SNF rate), are not DHS for
purposes of section 1877 of the Act. (As expressly provided in section
1877(h)(6) of the Act, hospital and home health services remain DHS
although they are paid through a composite rate.) We note, however,
that because of SNF consolidated billing, most, if not all, SNFs will
also be considered entities providing DHS (for example, PT or OT) under
Part B to SNF patients who have exhausted their Part A benefit or to
other nursing home residents (that is, patients for whom the services
are not covered as part of a composite rate). The consolidated billing
requirement places with the SNF the Medicare billing responsibility for
most of the services that a SNF resident receives (except for certain
practitioner services and a limited number of other services) under
Part A and under Part B. (Presently, consolidated billing is in effect
only for patients in a covered Part A stay, but will become effective
for Part B services in the near future.) Accordingly, a physician will
not be able to refer Medicare patients who will require DHS to a SNF in
which he or she has an
[[Page 924]]
ownership or investment interest, unless the interest is protected
under an exception to section 1877 of the Act.
In the August 1995 final rule relating to clinical laboratory
services, we created an exception for laboratory services furnished in
an ASC or ESRD facility or by a hospice if the services were included
in a composite rate or per diem hospice charge. (See Sec. 411.355(d)).
In the January 1998 proposed rule, we had proposed extending this
composite rate exception to include all DHS furnished in an ASC or ESRD
facility or by a hospice if payment is included in the ASC payment
rate, the ESRD composite payment rate, or as part of the hospice
payment rate. This proposal was intended to address problems faced by
ASCs, ESRD facilities, and hospices in the light of our proposed stance
on DHS subsumed by bundled payments. However, since under the final
rule DHS that are subsumed by a bundled payment do not implicate
section 1877 of the Act, we have not adopted our proposal to extend
Sec. 411.355(d) beyond clinical laboratory services. Moreover, given
our final interpretation, we are reconsidering the need for
Sec. 411.355(d) as applied to clinical laboratory services and intend
to address the matter further in Phase II of this rulemaking. We are
soliciting comments on this issue.
B. General Comment: Professional Services as Designated Health Services
Comment: Many commenters expressed the view that the professional
component of DHS (particularly clinical laboratory and radiology
services) should not implicate section 1877 of the Act. Commenters
asserted that the Congress did not intend for professional services to
come within the physician self-referral law prohibition and that we
exceeded our authority to promulgate regulations by including them.
Commenters also contended that limiting DHS under section 1877 of the
Act solely to the technical components of services would sufficiently
control the risk of program or patient abuse. Other commenters stated
that if we included professional components of some DHS, we should do
so for all DHS. The commenters pointed out that our proposed position
on productivity bonuses (that is, that they may not reflect the volume
or value of any DHS referrals) would require special bookkeeping to
segregate professional fees when calculating bonuses that will burden
practices, without serving a public policy purpose.
Response: We believe that it was not the intent of the statute to
exclude all professional services from the list of DHS. Many of the
DHS, such as radiology and radiation therapy, have substantial
physician service components. If the Congress intended to exclude them,
we would expect the statute to specifically do so. While some services
are not viewed as having a professional component that is paid
separately, Medicare still requires professional supervision of them to
qualify for Medicare payment.
We agree to some extent that limiting referrals for the technical
component of a service should greatly reduce the number of unnecessary
referrals. Nonetheless, there are some DHS that consist only of a
professional component (for example, some radiation therapy services)
or are primarily professional in nature, and these would not otherwise
be subject to the law if we carved out all professional components.
We agree with the commenters that we should include professional
components when relevant in all DHS categories. Therefore, we have
revised the definitions of each of the DHS to include the professional
components in each case in which a professional component is included
in the CPT or HCPCS codes that represent one of those services.
We understand that these rules may impose an administrative burden
on some group practices, depending on how they choose to comply with
section 1877 of the Act. We think Phase I of this rulemaking has a
number of substantive changes that will ease the administrative burden
of compliance, including the exception from the definition of
``referral'' for personally performed services and the greater
flexibility afforded group practices over their distribution of
revenues. As a practical matter, the professional component of many of
these services will be excluded from the definition of a referral as
services personally performed by the referring physician.
Individual Designated Health Services
We discuss below each designated health service category in the
order in which it appears in section 1877(h)(6) of the Act. Each
discussion includes a general summary of the category, summaries of the
relevant public comments, and our responses.
C. Clinical Laboratory Services
In the August 1995 final rule covering a physician's referrals for
clinical laboratory services, we defined these services in Sec. 411.351
as--
The biological, microbiological, serological, chemical,
immunohematological, hematological, biophysical, cytological,
pathological, or other examination of materials derived from the
human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of,
or the assessment of the health of, human beings. These examinations
also include procedures to determine, measure, or otherwise describe
the presence or absence of various substances or organisms in the
body.
We had stated in the August 1995 final rule, in response to a
commenter who requested a definition of clinical laboratory services,
that we believed the most appropriate way for a physician or clinical
laboratory to determine if a diagnostic test is a clinical laboratory
test subject to the requirements of section 1877 of the Act, is to find
out if the test is subject to categorization under the Clinical
Laboratory Improvement Act (CLIA). We pointed out that there is a list
of clinical laboratory test systems, assays, and examinations
categorized by complexity and published by the Center for Disease
Control (CDC). We also stated that, given this definition, CPT codes
would not be the sole references to identify clinical laboratory
services for physician referral purposes.
Commenters also had asked about the professional components of
laboratory services. We stated that we believed that CLIA covers the
actual examination of materials, their analysis, and any interpretation
and reporting of the results that are performed by a facility that
qualifies as a laboratory, as defined in Sec. 493.2 (Definitions).
However, if a laboratory sent test results to an independent physician,
any interpretation performed by the physician would not be performed by
the laboratory facility. As a result, the services would not constitute
part of the clinical laboratory test.
We stated in the January 1998 proposed rule covering referrals for
the other DHS that we would retain the definition of clinical
laboratory services that was incorporated into our regulations by the
August 1995 final rule. However, in line with our revised approach for
identifying the DHS in this final rule, we have amended the rule to
refer specifically to CPT and HCPCS codes. We have included as DHS the
professional components of laboratory tests when they are listed as
such in the codes. It is our belief that the specification of the codes
in the attachment to this final rule is consistent with, although not
identical to, the definition of clinical laboratory services in our
January 1998 proposed rule.
D. Physical Therapy Services
We proposed to define physical therapy services in Sec. 411.351 as
those
[[Page 925]]
outpatient physical therapy services (including speech-language
pathology services) described at section 1861(p) of the Act and in
Sec. 410.100 (Included services), paragraphs (b) and (d). Under section
1861(p) of the Act, the term ``outpatient physical therapy services''
specifically includes speech-language pathology services. Because
section 1877(h)(6) of the Act lists physical therapy services in
general, and not just outpatient services, we also included in the
definition any other services with the characteristics described in
Sec. 410.100(b) and (d) that are covered under Medicare Part A or Part
B, regardless of who provides them, the location in which they are
provided, or how they are billed.
We pointed out that services that are essentially the same as
``outpatient physical therapy services'' are also covered by Medicare
in other contexts and in different settings, and may be billed under
different categories. For example, we have a longstanding policy of
covering physical therapy and occupational therapy as diagnostic or
therapeutic inpatient hospital services. Similarly, these services can
also be covered as SNF services, and can be furnished as ``incident
to'' physician services under section 1861(s)(2)(A) of the Act.
(Section 1877 implications for DHS provided by SNFs are discussed
earlier in this section.)
It was our view in the January 1998 proposed rule that covered
outpatient physical therapy services basically included three types of
services, which were best described in Sec. 410.100(b) (which
specifically concerns services provided by a comprehensive
rehabilitation facility (CORF)). This definition covers the testing and
measurement of the function or dysfunction of the neuromuscular,
musculoskeletal, cardiovascular, and respiratory systems; assessment
and treatment related to dysfunction caused by illness or injury and
aimed at preventing or reducing disability or pain and restoring lost
function; and the establishment of a maintenance therapy program for an
individual whose restoration has been reached. Many commenters asserted
that the proposed definition was imprecise or improperly included some
procedures that are not generally considered physical therapy services.
We have responded to these concerns by redefining physical therapy
services, as some commenters suggested, by using a list of HCPCS codes.
We believe the list is limited to services that are more traditionally
regarded as physical therapy. In general, these services are described
in the ``Physical Medicine and Rehabilitation'' section (the 97000
series) of the CPT and in other relevant sections of the HCPCS.
In the January 1998 proposed rule, we also included speech-language
pathology services as a designated health service since section 1861(p)
of the Act includes ``speech-language pathology services'' in the
definition of ``outpatient physical therapy services.'' These services
are defined in section 1861(ll)(1) of the Act as speech, language, and
related function assessment and rehabilitation services furnished by a
qualified speech-language pathologist as this pathologist is legally
authorized to perform under State law (or the State regulatory
mechanism) as would otherwise be covered if furnished by a physician.
Section 1861(ll)(3) of the Act defines a ``qualified speech-language
pathologist.''
We used in the proposed rule the brief description of speech-
language pathology services in Sec. 410.100(d), which applies to
services provided in CORFs, as those services that are necessary for
the diagnosis and treatment of speech and language disorders that
create difficulties in communication. In an effort to furnish a
``bright line'' test, we are defining the services in Phase I of this
rulemaking by the specific codes that correspond to the services that
we consider to be speech-language pathology services.
As we developed the list of CPT and HCPCS codes relevant to speech-
language pathology, we realized that our proposed definition, which
cross-refers to the CORF definition in Sec. 410.100(d), did not
encompass the full range of services that are commonly considered to be
speech-language pathology services. It failed to recognize that speech-
language difficulties can be caused by cognitive disorders and failed
to recognize that speech-language pathology may be used to treat
swallowing and other oral-motor dysfunctions. Therefore, in developing
the list of codes for speech pathology in Phase I of this rulemaking,
we included the diagnosis and treatment of cognitive disorders
including swallowing and other oral-motor dysfunctions.
Finally, because of the overlap between physical therapy,
occupational therapy, and speech-language pathology services, we are
listing the codes for all three services together. We believe that this
set of HCPCS codes represents what most clinicians would define as PT/
OT/speech therapy services that are covered by the Medicare program.
The list is set out in the attachment to this final rule.
Comment: A number of commenters were particularly concerned that
the proposed definition of physical therapy services implies that
physical therapists can perform diagnostic testing and measurements,
such as electromyography tests (EMGs). These tests are used primarily
to provide medical diagnostic information regarding neuromuscular
diseases and occasionally to measure neuromuscular function. Although
some States permit physical therapists to perform these tests, the
commenters believe that EMGs are typically performed by a physician as
part of a physical examination to determine whether a patient is a
surgical candidate or if some other course of treatment is warranted.
In addition, other commenters stated that the proposed definition
of physical therapy services could be interpreted to include
therapeutic procedures such as nerve blocks and arthrocentesis that the
commenters believe are physician services. One commenter, a physician
who practices physical medicine and rehabilitation, asserted that our
proposed definition of physical therapy included services that could be
administered by physicians and physical therapists. He feared that this
could prohibit him from treating patients he diagnoses. Several
commenters responded to the inclusion in the definition of physical
therapy of any ``assessment and treatment'' designed to alleviate pain
or disability. The commenters asserted that this phrase captures a
large portion of modern medicine, given that pain is the most common
presenting symptom in a physician's office, and virtually any
assessment or treatment following therefrom would have as its purpose
the alleviation of that pain.
Response: Nothing in the proposed definition affected the scope of
any practitioner's practice. We agree with the commenters that only in
certain States are physical therapists licensed to perform EMGs.
Additionally, we agree that therapeutic procedures such as nerve blocks
and arthrocentesis are typically performed by a physician and are not
generally considered to be a part of physical therapy. These procedures
are not included on the list of codes that defines the scope of
physical therapy for purposes of section 1877(h)(6)(B) of the Act. In
the January 1998 proposed rule, we did not intend to convey the message
that what is generally considered physical therapy would change. We
proposed to use an existing definition of physical therapy (in
Sec. 410.100(b), which covers physical therapy services in CORFs)
precisely because we did not want to change the existing perception of
physical therapy.
[[Page 926]]
In order to avoid confusion, we are revising our proposed
definition by providing a list of CPT and HCPCS codes that are,
collectively, the PT/OT/speech-language therapy DHS. This list of codes
defines the entire scope of PT/OT/speech-language therapy services for
purposes of section 1877 of the Act. Finally, we note that under Phase
I of this rulemaking, if a physician personally provides a designated
health service to his or her patient, there is no ``referral'' for
purposes of section 1877(a)(1) of the Act. See section III.B of this
preamble.
Comment: One commenter asserted that pulmonary function tests are
for the measurement of the function of the respiratory system and have
nothing to do with physical therapy. However, another commenter
recommended that the definition of physical therapy include the
neuromuscular and pulmonary function tests that test for functional
capacity ratings and that are usually performed by a physical therapist
without the direct supervision of a physician.
Response: We agree with the commenter that pulmonary function tests
for the measurement of the function of the respiratory system are not
physical therapy. The only pulmonary function test that may be
considered to be a physical therapy service is pulse oximetry testing,
CPT code 94762, when it is used to test for functional capacity
ratings. A pulse oximetry test that is performed to determine whether a
patient has enough oxygen to perform certain activities of daily living
is, for example, a physical therapy service.
Comment: One commenter recommended that we define physical therapy
as those therapeutic exercises and physical medicine modalities
described in the 97000 series of the CPT codes, included in the
patient's written plan of physical therapy treatment, and provided by a
physical therapist or physical therapy aide.
Response: We agree with the commenter that PT services should be
based on the CPT codes and have modified the rule accordingly. With
respect to which professionals can provide a given service, we defer in
this rule to existing Medicare policy. Many of these DHS can be
provided by physicians.
Comment: A number of commenters opposed the inclusion of speech-
language pathology services in the definition of physical therapy
services. The commenters stated that the Congress did not intend to
include these services within the ban on physician referrals and
asserted that including these services as DHS is unnecessary (although
they did not state why this would be the case). One commenter asserted
that when the Congress intended to include outpatient speech-language
pathology services within the category of outpatient physical therapy
services, the Congress enacted explicit language that made that
intention clear. The commenter pointed to section 4541(a)(1) of the BBA
1997, which added paragraph (8)(A) to section 1833(a) of the Act. That
provision states that, for covered individuals, amounts will be paid
from the Medicare Trust Fund for ``outpatient physical therapy services
(which includes outpatient speech-language pathology services) and
outpatient occupational therapy services furnished--'' * * * by certain
entities.
Response: The definition of ``outpatient physical therapy
services'' in section 1861(p) of the Act specifically states that ``the
term `outpatient physical therapy services' also includes speech-
language pathology services furnished by a provider of services, a
clinic, rehabilitation agency, or by a public health agency, or by
others. * * *'' Thus, by definition, speech-language pathology services
are a subset of outpatient physical therapy services under the Medicare
statute. We believe that the parenthetical language under the BBA 1997
simply confirms our interpretation.
E. Occupational Therapy Services
In the January 1998 proposed regulations text, we proposed to
include those OT services described in section 1861(g) of the Act and
the CORF regulations in Sec. 410.100(c). We proposed that occupational
therapy services would also include any other services with the
characteristics described in Sec. 410.100(c) that are covered under
Medicare Part A or Part B, regardless of who furnishes them, the
location in which they are furnished, or how they are billed. In
proposed Sec. 411.351, OT services included the following:
Teaching of compensatory techniques to permit an
individual with a physical impairment or limitation to engage in daily
activities.
Evaluation of an individual's level of independent
functioning.
Selection and teaching of task-oriented therapeutic
activities to restore sensory-integrative function.
Assessment of an individual's vocational potential, except
when the assessment is related solely to vocational rehabilitation.
As discussed in the preceding section, we are revising our proposed
definition by providing a list of CPT and HCPCS codes that collectively
are the PT/OT/speech therapy DHS. Also, as described above, we are
excluding from the definition of DHS any designated health service that
is paid for as part of a ``bundled'' payment (for example, services
covered by the SNF Part A rate or the ASC rate), unless the statute
otherwise provides that a ``bundled'' set of services is itself a
designated health service (for example, home health services and
inpatient and outpatient hospital services).
Comment: A major OT association asserted that the definition of OT
is too narrow because it does not adequately capture the scope of the
OT benefit. For example, OT is furnished to patients with cognitive
impairments as well as to patients with physical impairments and
limitations. As another example, OT may also be furnished in partial
hospitalization programs for patients with a psychiatric illness. The
commenter believes that it is important for the definition in
Sec. 411.351 to be as complete and accurate as possible to assure
appropriate compliance with the law, and that Sec. 410.100(c) is too
narrow to be used as the complete definition of OT services for
purposes of these regulations. The commenter suggested that we broaden
the definition by adding to it the coverage guidelines stated in
section 3101.9, ``Occupational Therapy Furnished by the Hospital or by
Others under Arrangements with the Hospital and under its
Supervision,'' of the Medicare Intermediary Manual (HCFA Pub. 13-3),
Part 3-- Claims Process, and section 2217, ``Covered Occupational
Therapy,'' of the Medicare Carriers Manual (HCFA Pub. 14-3), Part 3--
Claims Process. The commenter recommended that we use the following
definition for OT in Sec. 411.351:
Occupational therapy services means those services described at
section 1861(g) of the Act, Sec. 410.100(c) of this chapter, and in
the occupational therapy coverage guidelines contained in section
3101.9 of the Medicare Intermediary Manual and section 2217 of the
Medicare Carriers Manual. Occupational therapy services also include
any other services with the characteristics described in
Sec. 410.100(c) and the occupational therapy coverage guidelines
that are covered under Medicare Part A or B, regardless of who
furnishes them, the location in which they are furnished, or how
they are billed.
Response: We agree with the commenter that the proposed definition
does not clearly recognize that OT is furnished to patients with
cognitive impairments. As we have stated previously in this preamble,
we did not intend to change what is commonly regarded as OT. We
referred to the existing definition in Sec. 410.100(c) so
[[Page 927]]
that we would not be proposing any change. However, as the commenter
pointed out, the existing definition at Sec. 410.100(c) is not
complete. Therefore, we are expanding the proposed definition by
including codes for the ``teaching of compensatory techniques to permit
an individual with a physical or cognitive impairment or limitation to
engage in daily activities.''
However, the commenter is correct that a partial hospitalization
program may provide OT services. This is in accordance with section
1861(ff) of the Act, which defines ``partial hospitalization services''
and specifically includes OT as a partial hospitalization service.
However, with respect to partial hospitalization, we have determined
that services provided as part of a group of services paid under a
bundled rate are not DHS. Partial hospitalization services are paid
under a bundled rate. Therefore, partial hospitalization services
(including OT services provided as part of the partial hospitalization
benefit) furnished by a community mental health center are not DHS.
However, partial hospitalization services furnished by a hospital are
outpatient hospital services, which is a category of DHS.
In order to eliminate any confusion the January 1998 proposed
regulations may have caused and to make Phase I of this rulemaking
clear, we are defining OT by a list of specific HCPCS/CPT codes. In
light of the changes we have made in Phase I of this rulemaking, it is
not necessary for us to include the references to the intermediary and
carrier manuals that the commenter suggested.
Occupational therapy services may be furnished by an occupational
therapist, an occupational therapy aide who is supervised by an
occupational therapist, or by a physician. Section 1861(r) of the Act
allows a physician to furnish any medical service that his or her State
allows the physician to furnish.
F. Radiology and Certain Other Imaging Services
In the January 1998 proposed rule, we combined the DHS in section
1877(h)(6)(D) of the Act--``radiology services, including magnetic
resonance imaging, computerized axial tomography, and ultrasound
services''--and 1877(h)(6)(E) of the Act--``radiation therapy services
and supplies'' into the following definition:
Radiology services and radiation therapy and supplies means any
diagnostic test or therapeutic procedure using X-rays, ultrasound or
other imaging services, computerized axial tomography, magnetic
resonance imaging, radiation, or nuclear medicine, and diagnostic
mammography services, as covered under section 1861(s)(3) and (4) of
the Act and Secs. 410.32(a), 410.34, and 410.35 of this chapter,
including the professional component of these services, but
excluding any invasive radiology procedure in which the imaging
modality is used to guide a needle, probe, or a catheter accurately.
Commenters found the proposed definition to be confusing in two
main respects:
The definition both combined two different categories of
radiology-related services (that is, radiology and radiation therapy
and supplies) and included other services not commonly considered to be
radiology-related (ultrasound and nuclear medicine). Many commenters
thought that all services not strictly considered radiology should be
excluded.
At different places in the January 1998 proposed
regulation preamble, we stated that we were excluding DHS that were
peripheral, incidental, or secondary to a nondesignated health service.
In the proposed definition, however, we only excluded imaging
modalities used to ``guide a needle, probe, or catheter.'' Many
commenters thought the scope of excluded radiology and other imaging
services should be broader than just guidance, while others thought the
distinction between primary and secondary services would be difficult
to apply in practice.
Based on the comments, we have redefined this category of DHS in a
manner that should provide greater clarity. First, we have segregated
radiation therapy and supplies from radiology and other imaging
services and returned them to a separate category, as in the statute.
(We discuss comments relating to radiation therapy services in section
VIII.G of this preamble). Second, we are excluding nuclear medicine
since those services are not commonly considered to be radiology.
Third, for purposes of these regulations we have renamed the category
of services covered by section 1877(h)(6)(D) of the Act ``Radiology and
Certain Other Imaging Services'' to make clear the Congress's intent to
include in subsection (D) some imaging services other than radiology.
Fourth, consistent with the approach we are following with several
other of the DHS categories, we are defining the entire scope of
covered services under section 1877(h)(6)(D) of the Act by using lists
of CPT and HCPCS codes, which lists control in all circumstances. The
lists include those services typically considered as radiology or
ultrasound services, or as constituting an MRI or a computerized axial
tomography (CAT) scan. Fifth, we have excluded certain covered
preventive screening procedures, such as screening mammography, that
are subject to HCFA-imposed frequency limits that mitigate the
potential for abuse. In these circumstances, we believe the Congress
did not intend the physician self-referral law to interfere with a
physician's or entity's attempts to provide these preventive procedures
to Medicare patients.
Sixth, based on the comments we received, we concluded that the
terms ``invasive'' radiology and radiology ``incidental'' or
``secondary'' to a non-DHS procedure used in our proposed definition of
``radiology services'' created confusion and uncertainty. We agree with
commenters that ``invasive'' radiology includes more than just those
procedures used to ``guide a needle, probe or catheter.'' Consequently,
we are revising our definition of radiology and certain other imaging
services to exclude from the definitional list of codes x-ray,
fluoroscopy, and ultrasound services that are themselves invasive
procedures that require the insertion of a needle, catheter, tube, or
probe. Thus, cardiac catheterizations and endoscopies will not fall
within the scope of ``radiology services'' for purposes of section 1877
of the Act. All MRIs or CAT scans, however, are within the scope of DHS
because excluding some on the basis that they are ``invasive'' tests
would have the effect of excluding all MRIs and CAT scans that use
contrast injection. The use of contrast is not mandatory for the
performance of a scan, as it is for the performance of a barium enema,
excretory urogram, or traditional vascular angiography. Thus, an
exclusion from the DHS definition of contrast for MRIs and CAT scans
could have the effect of encouraging the use of contrast when it is not
necessary.
In addition, we have concluded that radiology procedures that are
integral to the performance of, and performed during, a nonradiology
medical procedure are not within the scope of DHS. The list of codes
that defines the scope of ``radiology and certain other imaging
services'' will make this distinction clear. Examples of these integral
services include, but are not limited to, imaging guidance procedures
and radiology procedures used to determine, during surgery, whether
surgery is being conducted successfully. In the CPT, these radiology
procedures are identified as cross-references to the principle
procedures with which they are associated. A radiology procedure, such
as a CAT scan or a chest x-ray, performed before or after another
[[Page 928]]
procedure, such as a lung cancer resection, is considered to be a
diagnostic radiology procedure that is not integral to the principle
procedure (that is, the lung cancer resection). While these radiology
procedures are essential to the performance of the principle procedure,
physicians have discretion in choosing which entity provides the
radiology service independent of the entity providing the principle
surgical service. These nonconcurrent services are DHS.
Regardless of our definition of ``radiology and certain other
imaging services,'' some services that are not within the scope of that
definition may still be DHS if they are inpatient or outpatient
hospital services, a separate category of DHS under section
1877(h)(6)(K) of the Act. These services would be subject to the
physician referral rule if the referring physician has a financial
relationship with the hospital. We anticipate most of these financial
arrangements will meet an exception under section 1877 of the Act (for
example, the exception for hospital ownership or either the employment
or personal service arrangements exception).
We address comments related to the definition of services covered
by section 1877(h)(6)(D) of the Act below. To the extent some
commenters raised issues such as the general effects of section 1877 of
the Act on physicians' practices or on medicine in general, those
issues are addressed elsewhere in the preamble, where relevant.
Comment: Several commenters asserted that the proposed definition
of ``radiology services'' that included all sound-based or imaging-
based technologies is contrary to congressional intent. The commenters
argued that the Congress intended to limit the definition by removing
original language that included the phrase ``other diagnostic
services'' along with radiology services.
Response: The phrase ``radiology, or other diagnostic services''
was added in section 1877(h)(6)(D) of the Act by OBRA 1993 as one of
the categories of DHS the Congress chose to cover in addition to
clinical laboratory services. This one set of services appeared to
include the extremely broad category of ``other diagnostic services,''
in addition to radiology services. The Congress narrowed this category
in section 152 of the Social Security Act Amendments of 1994 (SSA
1994), Public Law 103-432, enacted on October 31, 1994, perhaps because
it realized the huge scope of ``diagnostic services.'' The amendments
revised section 1877(h)(6)(D) of the Act, effective January 1, 1995, by
replacing the category with ``radiology services, including magnetic
resonance imaging, computerized axial tomography, and ultrasound
services.'' While all of these services might not be subsumed in the
category ``radiology services,'' the Congress clearly intended to
include them as DHS. We have renamed the category ``radiology and
certain other imaging services'' to reflect the Congress's intent.
Comment: One commenter questioned why cardiac, vascular, and
obstetric ultrasound procedures could not be referred. The commenter
stated that in most institutions these procedures are not considered
radiology procedures since radiologists may never supervise or
interpret them. Another commenter argued that although echocardiography
is a type of ultrasound procedure, it should not be considered a
radiology service because echocardiography is a service developed and
performed primarily by cardiologists, billed under cardiology CPT
codes, and furnished to cardiac patients. As a result, the commenter
argued that it is inaccurate and inappropriate to include
echocardiography within the definition of radiology services.
Response: Cardiac, vascular, and obstetric ultrasound procedures
are subject to the physician self-referral provisions because section
1877(h)(6)(D) of the Act specifically includes ultrasound as a
designated health service, not because they are ordinarily considered
to be ``radiology services.'' Simply stated, the term ``radiology
services'' as applied to the services described by section
1877(h)(6)(D) of the Act is a misnomer. Section 1877(h)(6)(D) of the
Act includes any services that are traditionally regarded as
``radiology'' services, as well as MRIs, CAT scans, and ultrasound
services. Cardiac echography and vascular echography are clearly
ultrasound services. Nothing in the regulation would prohibit a
vascular surgeon, neurologist, or other specialist from ordering a
particular service from an entity with which he or she has no
prohibited financial relationship.
Comment: Several commenters were opposed to our proposal to exclude
as ``invasive'' radiology only those invasive procedures used to guide
a needle, probe, or catheter accurately. Two of the commenters were
concerned that invasive radiology procedures, which use an imaging
modality not only to guide a needle, probe or catheter, but also to
record an accurate picture of the areas of the body being probed or
catheterized, would be included in the definition of radiology. (An
example of this would be an ultrasound device placed at the end of a
catheter or endoscope.)
Response: We agree and have not included x-ray, fluoroscopy, and
ultrasound services that require the insertion of a needle, catheter,
tube, or probe on the list of HCPCS/CPT codes that defines the full
scope of radiology and other imaging services for purposes of section
1877 of the Act. Some of these services may still be DHS when they fall
within the category of inpatient and outpatient hospital services.
Comment: Several commenters objected to our proposal to exclude
radiology services that were ``merely incidental or secondary'' to
another procedure that the physician has ordered. (See our January 1998
proposed rule, 63 FR 1676.) Some commenters noted that it is generally
not possible to establish, based on the CPT code used, whether or not
the primary purpose of the procedure was the interventional procedure
itself (with the imaging being an adjunct procedure) or whether the
primary purpose was to take a picture with an imaging modality. Because
it is extremely difficult and impractical in the commenters' view to
separate the radiology component from the underlying procedure, the
commenters recommended that we exclude all invasive radiology services,
encompassing those procedures that may include an adjunct radiology
procedure performed at the same time as the interventional procedure.
Other commenters thought that the definition of radiology services
should also exclude imaging services when they are performed before
and/or after a surgical procedure. For example, a commenter requested
that we add language to the proposed definition of radiology to exclude
any radiology procedure in which the imaging modality is used to plan
the invasive procedure. The commenter noted that for many invasive
procedures, an ultrasound before the actual procedure might be
routinely necessary in order to plan the manner in which the needle,
catheter, or probe would be guided during the actual invasive
procedure. In these circumstances, the patient already has received the
diagnosis that the invasive procedure is necessary. The commenter
believes that we should maintain the view that a physician would not
refer a patient for these procedures in order to profit from
unnecessary radiology services. Another commenter stated that under our
proposed interpretation of invasive procedures, an echocardiogram that
showed a need for bypass surgery would be a designated health service,
while one that ruled out surgery would not, since there would be no
surgical
[[Page 929]]
procedure to which the imaging service would be ``incidental.''
Finally, a neurologist commented that there are a number of radiology
procedures performed by neurologists that are incidental to other
procedures, particularly certain surgical services. One of the examples
given by the commenter was carotid duplex or transcranial Doppler
ultrasound, which are tests performed after carotid endarterectomy to
look for clots. The commenter believes these radiology services should
be excluded.
Response: We agree with the commenter that the ``incidental/
secondary'' test in the January 1998 proposed rule has led to some
confusion and uncertainty and have abandoned it in Phase I of this
rulemaking. We believe the list of codes set forth in Phase I of this
rulemaking (and annually thereafter in the physician fee schedule rule)
will create a ``bright line'' test that will ease compliance. In
selecting the codes for radiology and ultrasound, we are not including
any codes for radiology or ultrasound procedures that have an invasive
component; that is, that include the insertion of a needle, catheter,
tube, or probe through the skin or into a body orifice. (``Invasive''
would encompass radiology services involving contrast that must be
injected, but not contrast materials that are ingested by the patients
themselves.) In addition, we are not including radiology and ultrasound
procedures that are integral to and performed during the time a
nonradiology procedure is being performed, such as ultrasound used to
provide guidance for biopsies and major surgical procedures or used to
determine, during surgery, whether surgery is being conducted
successfully. Phase I of this rulemaking requires that to be considered
integral to a nonradiology procedure (and therefore not a radiology or
other imaging service for purposes of section 1877(h)(6)(D) of the
Act), the imaging procedure must be performed during the nonradiology
procedure. A radiology or ultrasound procedure performed before or
after another procedure (for example, a scan or a chest x-ray before a
lung cancer resection, an echocardiogram before a bypass, or a duplex
carotid ultrasound before or after surgery) is a diagnostic radiology
procedure that is not integral to another procedure and therefore is a
radiology or other imaging service under section 1877(h)(6)(D) of the
Act. In the case of services performed before or after a procedure,
referring physicians have discretion in choosing the entity that
provides the radiology service independent of the entity providing the
surgical service. Depending on the facts, referrals for these services
to entities with which the referring physician has a financial
relationship may be protected under the various exceptions to the
statute.
In all cases, the definitional list of codes controls in
determining whether a service falls within the scope of ``radiology or
certain other imaging services'' for purposes of section 1877 of the
Act.
Comment: Two commenters were opposed to our proposal to exclude
``invasive'' or ``interventional'' radiology procedures from the
definition of radiology services. The commenters believe that these
procedures should be included as DHS in order to safeguard against
overutilization and ensure that appropriately trained physicians
perform the services. One commenter argued that as a clinical matter,
``invasive'' or ``interventional'' radiology services rarely are
performed in an office setting. Typically, interventional radiologists
perform such procedures as angiography or angioplasty in a hospital
because they involve significant and delicate work on a patient's
cardiovascular system. Patients who undergo invasive procedures must
then be monitored for a period of time in an appropriate medical
setting. Consequently, that commenter, as well as another, objected to
our statement in the preamble to the January 1998 proposed rule (63 FR
1676) that invasive procedures ordinarily are ``merely incidental or
secondary to another procedure that the physician has ordered.'' One of
the commenters stated that the radiology services are neither
incidental nor secondary, but a vital and integral part of the invasive
procedure performed. The procedures are as much radiological as they
are any other portion. One commenter stated that if invasive procedures
occur in an office, they should be performed by a radiologist. The
commenter believes that excluding invasive or interventional radiology
procedures could result in certain referral arrangements by physicians
that might pose some risk of patient or program abuse. One of the
commenters noted that when interventional radiologists perform invasive
radiology procedures, there is no risk of program or patient abuse.
This is because interventional radiologists do not typically make
referrals; they merely perform the invasive radiology procedures and
return the patient to the care of the referring physician. The
commenter believes, however, that physicians other than interventional
radiologists may have an incentive to self-refer.
Response: We agree with the commenter that we were incorrect to
characterize interventional radiology as ``secondary'' to many
procedures, when it can in fact be a vital and integral part of the
invasive procedure being performed. It is not the purpose of the
physician self-referral law to discourage any physicians from
furnishing their own services, such as interventional radiology, within
their own practices, provided the physicians are functioning within the
scope of their license to practice.
Comment: Many commenters asserted that all or particular invasive
cardiology services should be excluded from the definition because they
are not subject to program or patient abuse. Another commenter asked
that we be consistent with regard to all forms of cardiac
catheterizations and endoscopy procedures. The commenter stated that
providers want to be able to perform all endoscopy services or cardiac
catheterization services in the same setting and not have to limit
their services.
Response: Cardiac catheterizations and endoscopy procedures are not
included on the CPT code list that defines the scope of ``radiology and
certain other imaging services,'' because they do not involve imaging
services that are covered under any of the categories in section
1877(h)(6)(D) of the Act. These services may still constitute DHS as
inpatient or outpatient hospital services.
Comment: Two commenters noted that in the preamble to the January
1998 proposed rule (63 FR 1676), we stated that percutaneous
transluminal angioplasty was an example of an invasive radiology
procedure that we would exclude from the definition of radiology. The
commenters stated that this procedure is not commonly considered to
involve ``invasive radiology.''
Response: The commenters are correct in stating that percutaneous
transluminal angioplasty is not fundamentally radiological in nature;
it is predominantly a therapeutic intervention. Our wording in the
examples for invasive radiology may have been confusing. We intended to
convey that the imaging procedures associated with percutaneous
transluminal angioplasty would be considered integral to the
performance of the angioplasty. However, by using specific CPT codes to
define the scope of services covered by section 1877(h)(6)(D) of the
Act, we have now narrowed the definition of radiology services so that
it does not include radiology that is integral to
[[Page 930]]
interventional procedures, such as angioplasty.
Comment: One commenter supported our proposal to exclude screening
mammography from the definition of DHS. The commenter believes that we
should expand the exclusion to cover all DHS for which we have
specified coverage or frequency limits. The commenter stated that
screening tests by definition are not subject to overutilization.
Response: We agree with this commenter and have modified Phase I of
this rulemaking to exclude from the reach of section 1877 of the Act
certain legislatively mandated preventive screening and immunization
services that are subject to HCFA-imposed frequency limits and are paid
based on a fee schedule. The preventive services to which this
exception applies are identified in Appendix A. We will add codes for
new preventive screening tests and immunizations, as appropriate,
through the annual updating of the attachment to this final rule.
Comment: One commenter recommended that all mammography be excluded
from the definition of ``radiology services.'' The commenter argued
that generally diagnostic mammography procedures are performed only
when a woman has clinical indications for a diagnostic mammogram. Thus,
any risk of program or patient abuse is significantly reduced, if not
eliminated. The commenter also mentioned that the quality-centered
requirements of the Mammography Quality Standards Act of 1992 minimize
the risk of potential overutilization of mammography services. Another
commenter recommended the exclusion of ``diagnostic'' mammography
services because he stated that it is necessary to perform the
mammography on the same equipment for purposes of comparing the initial
screening with the second diagnostic mammography. To prohibit patients
from using the same facility adds an unnecessary element of potential
error to the equation.
Response: Diagnostic mammography is clearly a radiological service
under section 1877(h)(6)(D) of the Act, and it could be subject to
abuse. It is our understanding that most women receive mammography from
a radiologist who is requesting diagnostic radiology services. These
physicians have not made a referral under section 1877(h)(5)(C) of the
Act if they request diagnostic mammography as the result of a
consultation requested by another physician. We are regarding this
exception as applying to diagnostic mammography that results when a
radiologist has first performed a screening mammography as the result
of a consultation, and then recommends follow-up diagnostic
mammography, or begins his or her consultation with diagnostic
mammography. (The physician who initiated the consultation with the
radiologist has made a referral that could fall within the scope of the
physician self-referral law if he or she has a financial relationship
with the radiology facility.)
Comment: A commenter asked if stress tests are DHS. The commenter
noted that some stress tests use nuclear medicine procedures.
Response: Stress tests are generally considered to be a physician
service that does not involve radiology, and stress tests are not
specifically listed in the law as DHS. Some stress tests use nuclear
medicine procedures to create an image of the heart. Because these
services are not included on the definitional CPT code list for
radiology or other imaging services, they are not DHS.
Comment: One commenter stated that unless changed or clarified, the
proposed regulations could inhibit the development and application of
telemedicine technology to populations covered by the physician
referral rules. Of specific concern was the area of ultrasound and a
``unified'' payment (that is, a combined payment for the technical and
professional components of the service). The commenter asserted that
Medicare and many State Medicaid programs provide a unified payment for
ultrasound. The commenter described the problems of a unified payment
with an example of a community physician performing the technical
component of an ultrasound service and a distant tertiary hospital's
physician performing the professional component. If the tertiary
provider billed for the ultrasound service under a ``unified'' (that
is, global) fee-for-service payment to cover the professional component
of the ultrasound service, the tertiary facility logically should
determine a payment for the technical component to pay the community
physician who provides that service. However, since the community
physician would be referring to the tertiary facility for the
ultrasound study, such a payment could violate the physician referral
regulations (that is, it would not fall within an exception).
At the time of the comment period for the January 1998 proposed
rule, the commenter was aware that we were considering the publication
of a separate proposed rule that would specify an appropriate ``split''
of global payments in the area of telemedicine; that is, it would
specify separate payment amounts for the technical and professional
components of services. The commenter suggested that if we did issue
those regulations, we should also recognize in the physician referral
rules that payment by the tertiary provider to the referring community
physician for providing the technical component of an ultrasound
service performed via telemedicine should be exempted if it is under a
HCFA-designated, or insurer-designated, allocation between the two
aspects of an otherwise ``global'' payment.
Response: We believe that Phase I of this rulemaking addresses this
issue satisfactorily. The basic principle of Phase I of this rulemaking
is that any payment from an entity furnishing a designated health
service to a referring physician must be at fair market value, not
taking into account the volume or value of any referrals or other
business generated by the referring physician (when this latter
language is included in an exception). We are revising Phase I of this
rulemaking to make clear that ``per service'' payments are allowed,
even with respect to DHS ordered by the physician, provided the payment
meets the fair market value standard. In the situation described by the
commenter, the split is determined by the Medicare program based on its
independent view of the value of the services provided. Of course, any
split between a referring physician and another provider may also raise
concerns under the Federal anti-kickback statute.
With respect to Medicare reimbursement for telehealth services, we
published a proposed rule on June 22, 1998 (63 FR 33882) and final rule
on November 2, 1998 (63 FR 58814) to implement section 4206 of the BBA
1997. Specifically, the November 1998 final rule permitted payment for
professional consultations via interactive telecommunication systems in
rural HPSAs and established separate payment amounts for the referring
and consulting practitioners of a teleconsultation in a rural HPSA. As
we noted in the preamble (63 FR 58883) to that November 1998 final
rule, the rule specifies that the consulting practitioner must submit
the claim for the consultation service and must share 25 percent of the
total payment with the referring practitioner.
We clarified in the November 1998 telehealth final rule that these
provisions only apply to teleconsultation services. Under Medicare, a
teleconsultation is a consultation service delivered via telemedicine.
These services are represented by CPT codes 99241 through 99275.
Diagnostic ultrasound
[[Page 931]]
(CPT code 76506) on the other hand, is a radiology service and would
not fall within the purview of a teleconsultation under Medicare.
Therefore, the payment methodology requiring the sharing of payment
between the consulting and referring practitioners would not apply to
diagnostic ultrasound services. In the case of diagnostic ultrasound,
the physician providing the interpretation of the image typically would
bill for the interpretation, while the technical component (that is,
conducting the test) is billed by the practitioner or facility that
captured the ultrasound image. Medicare has no national rule stating
that the professional and technical components of a service, including
ultrasound services, must be billed in a ``global'' manner. In fact, in
the annual update to the physician fee schedule, separate codes for the
professional component as well as the technical component of a service
are listed, including the diagnostic ultrasound codes. Of course, in
those cases in which there is no technical component, one code is used
for Medicare payment and billing.
G. Radiation Therapy
Section 1877(h)(6)(E) of the Act includes radiation therapy
services and supplies. In the January 1998 proposed rule, we combined
radiation therapy with radiology in a single definition.
Because commenters found the combined definition to be confusing,
we are amending the January 1998 proposed regulation so that radiology
services and radiation therapy services are now separate categories (as
in section 1877 of the Act itself). This change makes it clear that the
two categories are actually very separate kinds of services. We are
basing our definition of radiation therapy services and supplies on
section 1861(s)(4) of the Act. This provision includes, as ``medical
and other health services'' covered by Medicare, ``x-ray, radium, and
radioactive isotope therapy, including materials and services of
technicians.'' However, we want to clarify that, for physician referral
purposes, the list of codes that defines ``radiation therapy services
and supplies'' in Phase I of this rulemaking does not include nuclear
medicine services. While nuclear medicine involves the injection of
radioactive isotopes directly into a patient's bloodstream, these
services are not generally regarded as radiation therapy, they involve
different equipment and procedures, and physicians who provide nuclear
medicine have a separate certification. We have included in the
attachment to this final rule a list of codes that will define
radiation therapy services and supplies. This list will be updated and
reprinted in full annually as part of the physician fee schedule.
Comment: A commenter noted that because the January 1998 proposed
regulations bundle radiology services and radiation therapy and
supplies into a single category of DHS, the professional component of
radiation therapy services has also been included within the definition
of DHS. The commenter stated that some radiation oncologists would
effectively be precluded from being paid on a productivity basis for
their services, given that virtually all of the professional services
that some physicians perform are radiation therapy services for
Medicare patients. The commenter believes that the Congress did not
intend this result.
Response: The law excludes from the definition of a ``referral''
any request by a radiation oncologist for radiation therapy if these
services are furnished by (or under the supervision of) the radiation
oncologist pursuant to a consultation requested by another physician.
In addition, we are amending the definition of a ``referral'' to
exclude any professional components personally performed by referring
physicians themselves. Together, these provisions should largely
address the commenter's concerns.
Comment: Several commenters recommended that we exclude prostate
brachytherapy from the definition of radiation therapy. Prostate
brachytherapy is the placement of radioactive sources into the
prostate, through ultrasound guidance, for the purpose of treating
prostate cancer. The commenters argued that this procedure should be
excluded because it is performed once and is only performed on persons
with a biopsy-proven diagnosis of prostate cancer. They advocated the
use of physician ownership of brachytherapy facilities and equipment
because it means that the urologists and radiation oncologists involved
are actually performing the procedure themselves in a facility
contracting with those physicians. The design of this model includes
the supervision of every case by an experienced brachytherapist present
in the operating room. According to the commenter, physician ownership
of the equipment also ensures quality of physician education and of
surgical technique.
The commenters asserted that we should allow multiple physicians to
own brachytherapy equipment because centralized planning for radiation
physics results in all cases being planned in a controlled and uniform
fashion. Uniformity eliminates many empirical physician decisions that
in the past led to dosimetry errors. In addition, having two or more
physicians owning the equipment encourages reporting of outcome data
collection to a central agency, resulting in a continuous and rapid
review of treatment results and complications. Commenters pointed out
that experts have published restrictive dose guidelines for the various
stages of prostate cancer treated with brachytherapy, so there is no
risk of overutilization. Also, brachytherapy is less expensive and has
a lower complication rate than the other forms of treatment (radical
prostatectomy or external beam radiation therapy).
The commenters believe that because of all of these factors the
procedure has little potential for program or patient abuse and should
be exempt from the physician self-referral prohibition.
Response: We are aware of no logical or empirical evidence that
physician ownership improves quality of services or physicians' skills.
On the other hand, brachytherapy is one of several therapy options for
certain prostate conditions. We believe that ownership of a
brachytherapy center by urologists could well influence their
recommended therapy and, therefore, affect utilization. In short, the
relationship is exactly the type of financial relationship section 1877
of the Act is intended to address. The law excludes from the definition
of a ``referral'' any request by a radiation oncologist for radiation
therapy if these services are furnished by (or under the supervision
of) the radiation oncologist pursuant to a consultation requested by
another physician. In addition, we have amended the definition of a
``referral'' to exclude any professional components performed by
referring physicians themselves.
H. Durable Medical Equipment (DME)
In Sec. 411.351 of the January 1998 proposed rule, we defined DME
as having the meaning given in section 1861(n) of the Act and
Sec. 414.202 (Definitions). In the preamble to the January 1998
proposed rule (63 FR 1677 through 1678), we offered explanations of the
terms and a list of the general DME categories. However, we stated in
the preamble (63 FR 1677) that because the number of items considered
to be DME was so extensive, we could not in the proposed rule identify
all of them. Commenters were concerned about our failure to articulate
a ``bright-line'' definition of DME. The commenters
[[Page 932]]
stated that if we could not do that, physicians would have to assume
that the dispensing of all DME falls under the referral prohibition.
The most frequent complaint was the difficulty the commenters had
in determining whether a given item was DME or a prosthetic, prosthetic
device or orthotic. (The distinction is significant since under section
1877(b)(2) of the Act prosthetics, prosthetic devices, and orthotics
may be provided to a patient by a physician under the in-office
ancillary services exception, while DME (other than infusion pumps)
cannot.) The easiest way to determine the proper classification of an
item is to consult the Durable Medical Equipment, Prosthetics/
Orthotics, and Supplies (DMEPOS) fee schedule, which is updated
quarterly and available on the internet under HCFA's public use files
(www.hcfa.gov/stats/pufiles.htm). Under the DMEPOS fee schedule, items
are identified by their HCPCS code and also include a category
designation that identifies whether the item is DME, prosthetics,
orthotics, or prosthetic devices. DME items include the following
categories:
CR, capped rental DME.
FS, DME requiring frequent and substantial servicing.
IN, inexpensive or routinely purchased DME.
OX, oxygen and oxygen equipment.
SU, DME supplies.
TE, transcutaneous electrical (or electronic) nerve stimulator.
Additionally, DME includes the HCPCS code E1399. This code covers a
number of miscellaneous DME items, but does not appear on HCFA's
national fee schedule. Each DMERC (regional DME carrier) is responsible
for creating a fee schedule for individual items that are not included
on HCFA's fee schedule.
We note that Phase I of this rulemaking does not change existing
definitions for DME, prosthetics, prosthetic devices, or orthotics.
Thus, the existing classification of an item (that is, its
classification as either DME, prosthetic, prosthetic device, or
orthotic) will remain the same.
In sum, if, after reviewing the definitions and accompanying
explanations that we provided in the January 1998 proposed rule, as
well as the DMEPOS fee schedule and the HCPCS codes covering
miscellaneous items, physicians and their staffs still have questions
about whether a specific item is considered to be DME, we would suggest
that they contact their local carrier or DMERC for clarification.
Comment: One commenter asked for clarification on whether
prosthetic and orthotic devices that seem to meet the criteria for DME
are considered DME supplies and whether they could be provided under
the in-office ancillary services exception. The commenter expressed
some confusion regarding whether crutches are DME or a prosthetic or
orthotic device.
Response: The categories of prosthetics, orthotics, prosthetic
devices or DME are mutually exclusive; no item can fall into more than
one of these categories. If individuals are concerned about a
particular type of equipment or a supply, we would suggest that they
review the HCPCS codes or DMEPOS fee schedule or contact their local
carrier or DMERC for clarification. Again, we note that DMERCs process
more than DME claims. They also are responsible for claims for other
types of devices and supplies. Crutches are DME.
Comment: A commenter recommended that we exempt crutches from the
definition of DME. The commenter suggested that crutches are provided
as peripheral parts of a major service (that is, a diagnosis of a
broken leg) and that it is unlikely a physician would over-prescribe
crutches for a diagnosis of a broken leg just so that the physician can
bill for the crutches. The commenter believes that having the physician
provide the crutches and instruct the patient on how to use them helps
to prevent further damage to the patient and is essential to good
patient care.
Response: We believe that crutches are clearly DME and therefore
DHS under section 1877(h)(6)(F) of the Act. As we stated in the January
1998 proposed rule, although we cannot justify excluding crutches as a
designated health service, we recognize that including crutches could
greatly inconvenience patients if physicians were barred from providing
them to patients who need them to ambulate following treatment for an
injury or an incapacitating procedure. For this reason, we proposed
expanding the in-office ancillary services exception to cover crutches
when furnished in a manner that meets the in-office ancillary services
exception requirements and in which the physician realizes no direct or
indirect profit from furnishing the crutches. We have adopted the
proposal in an expanded and modified form--without the proposed profit
restriction--as described in section VI.B.1 of this preamble.
Comment: Several commenters opposed the inclusion of DME as a
designated health service and argued that the inclusion of DME will
result in additional delays in treatment and barriers to access for the
nation's poor and elderly populations. Two of the commenters urged us
to support a legislative change to remove DME from the DHS list, while
others urged us to revise the January 1998 proposed rule to remove DME
entirely as a designated health service. Those commenters argued that
when DME is furnished as an in-office service, it has not been
associated with program abuse and offers little or no opportunity for
overutilization. One of the commenters contended that an unintended
effect of the inclusion of DME on the DHS list would be
underutilization, because physicians would be prohibited from
furnishing DME in their offices.
Response: We believe that we cannot create a separate exception for
DME because we cannot guarantee that such an exception would always be
free from program or patient abuse. The Congress explicitly included
DME as a designated health service in section 1877(h)(6)(F) of the Act;
we have no authority to vitiate that judgment. We note that physicians
would only be prohibited from furnishing DME services when they have an
unexcepted financial relationship with the DME supplier. Moreover,
although we are not removing DME from the list of DHS, we are
substantially revising the manner in which the in-office ancillary
services exception applies to DME. These changes will expand the
provision of DME under the in-office ancillary services exception as
detailed in section VI.B.1 of this preamble.
I. Parenteral and Enteral Nutrients, Equipment and Supplies
Section 1877(h)(6)(G) of the Act includes as DHS the category of
parenteral and enteral nutrients, equipment, and supplies (PEN).
Enteral and parenteral therapy as a Medicare Part B benefit is provided
under the prosthetic device benefit provision in section 1861(s)(8) of
the Act. The regulations cover prosthetic devices in Sec. 410.36
(Medical suppliers, appliances, and devices: Scope), paragraph (a)(2).
Details for enteral and parenteral therapy are set forth in section 65-
10, ``Enteral and Parenteral Nutritional Therapy Covered as Prosthetic
Device,'' of the Medicare Coverage Issues Manual (HCFA Pub. 6). When
the coverage requirements for enteral or parenteral nutritional therapy
are met, Medicare also covers related supplies, equipment, and
nutrients.
We proposed in Sec. 411.351 of the January 1998 rule to define
``enteral nutrients, equipment, and supplies'' as
[[Page 933]]
items and supplies needed to provide enteral nutrition to a patient
with a functioning gastrointestinal tract who, due to pathology to or
nonfunction of the structures that normally permit food to reach the
digestive tract, cannot maintain weight and strength commensurate with
his or her general condition. (See section 65-10, ``Enteral and
Parenteral Nutritional Therapy Covered as Prosthetic Device,'' of the
Medicare Coverage Issues Manual (HCFA Pub. 6) for additional
information.)
We proposed in Sec. 411.351 to define ``parenteral nutrients,
equipment, and supplies'' as items and supplies needed to provide
nutriment to a patient with permanent, severe pathology of the
alimentary tract that does not allow absorption of sufficient nutrients
to maintain strength commensurate with the patient's general condition,
as described in section 65-10, ``Enteral and Parenteral Nutritional
Therapy Covered as Prosthetic Device,'' of the Medicare Coverage Issues
Manual (HCFA Pub. 6).
We are clarifying in Phase I of this rulemaking that this category
includes all HCPCS level 2 codes for these services. We believe this
list will address any uncertainties that physicians and providers might
have about what constitutes PEN, and is consistent with our definition
in the proposed rule.
We also pointed out in the preamble to the January 1998 proposed
rule that, like DME, section 1877(b)(2) of the Act specifically
excludes PEN as services that can qualify for the in-office ancillary
services exception.
Comment: A physician representing himself and an infusion therapy
association asserted that physicians should be allowed to prescribe,
provide, and be reimbursed for parenteral nutrition for their own
patients as an extension of their practices. The commenter asserted
that there has been no evidence of abuse, while there have been major
problems with fraud and abuse and excessive profits by nonphysician
home infusion providers, which function essentially without physician
control and minimal input from physicians. The commenter believes that
because patients with increasingly complex medical problems are sent
home earlier from the hospital, the role of the physician office-based
model is increasingly important. The January 1998 proposed referral
regulations, the payment schedule for medications, and the restriction
on physician reimbursement for ambulatory infusion pumps all discourage
a physician's involvement in these services.
Response: Section 1877 of the Act does not prohibit physicians from
prescribing enteral and parenteral nutrition for their own patients;
nor does it prohibit infusion companies from contracting with expert or
knowledgeable physicians for consulting services provided the
remuneration is fair market value and does not take into account
referrals or other business between the parties. Section 1877 of the
Act does, however, prohibit a physician from furnishing enteral and
parenteral nutrition in his or her own office and billing for it unless
the physician's arrangement qualifies for an exception, such as the
rural provider exception in section 1877(d)(2) of the Act. The Congress
specifically excluded the provision of enteral and parenteral nutrition
and durable medical equipment (DME, other than infusion pumps) from the
in-office ancillary services exception in section 1877(b)(2)of the Act.
We have the authority to create additional exceptions to the
referral prohibition for financial relationships under section
1877(b)(4) of the Act, but only if we determine that there is no risk
of program or patient abuse. However, we believe that physicians could
potentially over-prescribe parenteral nutrition if they have the
financial incentive to do so.
We only cover parenteral nutrition when there is a permanent need
(except when covered under the home health benefit). (See the Medicare
Coverage Issues Manual (HCFA Pub. 6), section 65-10, ``Enteral and
Parenteral Nutritional Therapy Covered as Prosthetic Device,'' for
additional information. Because coverage of nutritional therapy as a
Part B benefit is provided under the prosthetic device benefit
provision, the patient must have a permanently inoperative internal
body organ or function.) We see no reason why a patient should have to
go to a physician's office regularly to receive parenteral nutrition.
Medicare already covers parenteral nutrition delivered in the home
through the home health benefit or the prosthetic device benefit.
Because enteral nutrition is widely available through grocery stores,
drug stores, and other retail outlets, we see no reason why a patient
must purchase enteral nutrition from a physician. A patient can
purchase certain more specialized types of enteral nutrition that are
not widely available from a DME supplier.
If a patient is to receive nutrition via an infusion pump, the in-
office ancillary services exception cannot be used for the furnishing
of the pump, since this exception only allows physicians' offices to
furnish infusion pumps that are DME. See section VI.B.1 of this
preamble for more details about infusion pumps. (To furnish an infusion
pump that is DME for use in the home, a physician would have to meet
all of the supplier requirements in Sec. 424.57.)
As for the commenter's concerns about the payment schedule for
medications, that issue is not addressed by the physician referral
regulation.
J. Prosthetics, Orthotics, and Prosthetic Devices and Supplies
Prosthetics, orthotics, and prosthetic devices and supplies are
included as DHS under section 1877(h)(6)(H) of the Act. We proposed in
the January 1998 rule to define ``prosthetics'' at Sec. 411.351 as
artificial legs, arms, and eyes, as described in section 1861(s)(9) of
the Act. We defined ``orthotics'' as leg, arm, back, and neck braces,
as listed in section 1861(s)(9) of the Act. We proposed to define a
``prosthetic device'' as a device (other than a dental device) listed
in section 1861(s)(8) of the Act that replaces all or part of an
internal body organ, including colostomy bags and including one pair of
conventional eyeglasses or contact lenses furnished subsequent to each
cataract surgery with insertion of an intraocular lens, as well as
services necessary to design the device, select materials and
components, measure, fit, and align the device, and instruct patients
in its proper usage. We proposed defining ``prosthetic supplies'' as
``supplies that are necessary for the effective use of a prosthetic
device (including supplies directly related to colostomy care).''
We are clarifying in Phase I of this rulemaking that this category
includes all HCPCS level 2 codes for these services that are covered
under Medicare. Physicians and other persons can readily determine the
classification of an item by consulting the DMEPOS fee schedule.
However, as with DME, there are several specific HCPCS codes
representing miscellaneous items classified as prosthetics, orthotics,
or prosthetic devices that do not appear in the fee schedule.
We explained in the preamble of the January 1998 proposed rule (63
FR 1678) that Medicare regards intraocular lenses (IOLs) used as part
of cataract surgery as prosthetic devices. We also stated in the
preamble that if these lenses are implanted in an ASC, they would be
covered under the ASC payment rate and would have been excluded under
the exception we proposed to create in Sec. 411.355(d). As explained
above, we are no longer considering DHS that are included in a bundled
ASC payment to be DHS.
[[Page 934]]
Accordingly, when an IOL is included in an ASC bundled payment rate, it
will not be considered to be a designated health service.
We are also addressing a number of commenters' requests by creating
exceptions (through our authority under section 1877(b)(4) of the Act)
for prosthetic devices that are implanted in a Medicare-certified ASC
and for eyeglasses or contact lenses that are prescribed after cataract
surgery. We explain our reasons for these exceptions in our responses
to specific comments.
Comment: One commenter asserted that the final rule should allow
physicians to provide durable medical equipment, orthotics, and
prosthetics directly to patients when they are medically necessary.
Physicians currently supply splints, braces, or other devices directly
to patients who have injuries, thereby ensuring that the patient gets
the appropriate device, that the item is properly fitted, and that the
patient is properly instructed in its use. To require a patient with an
injury to leave the office, go to a DME supplier, purchase the
necessary equipment, and return to the physician's office for fitting
or placement and instructions on use, would be unwise, inconvenient,
and could frequently cause unnecessary pain or further injury.
Response: The splints, casts, and other devices used to treat
fractures and dislocations the commenter mentions are covered under
section 1861(s)(5) of the Act, a benefit category that is different
from the benefit categories that include DME, prosthetics, orthotics,
and prosthetic devices. They are therefore not DHS under section
1877(h)(6) of the Act. Leg, arm, back, and neck braces are considered
to be ``orthotics'' and are thus included as DHS. These can be provided
by a physician within his or her own practice under the in-office
ancillary services exception in section 1877(b)(2) of the Act, which
excepts a physician's referral if the services meet certain
supervision, location, and billing requirements. This exception could
apply to referrals for any prosthetics, orthotics, or prosthetic
devices. As modified by these regulations, the in-office ancillary
exception could also apply to referrals for certain DME services. (See
section VI.B.1 of this preamble.)
Comment: A number of commenters favored our proposal to exclude
IOLs implanted during cataract surgery performed in an ASC because the
IOLs are included in the ASC payment rate. The commenters asserted that
a substantial number of ASCs are owned by the physicians who perform
surgical procedures in them and that these physicians are not members
of one group practice. The commenters see the ASCs as an extension of
the physician's own office and believe they provide a high quality, low
cost setting for outpatient surgery.
Commenters requested that we exempt from the physician self-
referral prohibition other prosthetic devices implanted in conjunction
with surgical procedures because the provision of the prosthetic
devices is incidental to the provision of ASC facility services, which
are exempt from the physician self-referral prohibition. The commenter
asserted that, as we noted in the January 1998 proposed rule, a
physician would not unnecessarily subject patients to a surgical
procedure to profit from the implant. In addition, there is no risk of
program abuse because the Medicare payment for prosthetic devices
implanted in conjunction with ASC facility services is limited to the
lower of the actual charge for the device or a fee schedule amount.
Commenters emphasized that the use of implanted prosthetic devices in
reconstructive surgery is immensely beneficial to patients.
Response: We agree with the commenters that all prosthetic devices
implanted in a Medicare-certified ASC by the referring physician or a
member of the referring physician's group practice should be excluded.
We have chosen this position because, if surgeons refer to an ASC in
which they have an ownership interest, there will, in many cases, be no
exception that would apply to their financial relationship with the
ASC. Implanted prosthetic devices, implanted prosthetics, and implanted
DME are not included in the bundled ASC payment rate and thus would
retain their character as DHS even when implanted in an ASC. As a
practical matter, the absence of an exception for all of these items
implanted in ASCs is likely to result in these procedures moving to
more costly hospital outpatient settings. We believe that the exclusion
of these implants from the reach of section 1877 of the Act (using our
authority under section 1877(b)(4)) will not increase the risk of
overutilization beyond what is already presented by the surgeon's Part
B physician fee and is consistent with the Congress's decision not to
include ambulatory surgical services as a specific designated health
service. We are specifically providing that the exception does not
protect items implanted in other settings. Nor does it protect
arrangements between physicians and manufacturers or distributors of
implants where the manufacturers or distributors furnish DHS, for
example, through subsidiaries or affiliates. We are providing that the
arrangement for the provision of the implant in the ASC may not violate
the anti-kickback statute and all billing and claims submission must be
proper.
Comment: Some commenters recommended that we exclude some or all
implants to assure that there is no chilling of the ability and
opportunity of Medicare patients to obtain the most appropriate and up
to date technology that will be both effective and cost efficient. In
addition, commenters pointed out that invasive surgery always entails a
risk to the patient and is not undertaken without a physician seriously
evaluating that risk in relation to the therapeutic or diagnostic
benefit likely to be brought by the device to be implanted and
determining what specialized model and brand of device will be most
effective. Commenters believe that including implants in the definition
of prosthetic devices will have the counterproductive effect of
preventing surgeons from participating in research and development of
these products, thereby curtailing research activity and blunting
future development. This chilling effect would dramatically affect the
quality of patient life and severely limit progress in reducing the
cost to patients.
Response: Surgeons should be able to provide implants to their
patients in any appropriate setting by meeting exceptions to the
physician self-referral law. As we described in responses to earlier
comments, we are creating an exception for implants that are performed
in Medicare-certified ASCs. As to implants in other settings or those
in ASCs that do not meet the new exception, other exceptions may still
apply. Physicians who perform implants within their own practices may
be able to use the in-office ancillary services exception in section
1877(b)(2) of the Act, which is discussed in section VI.B.1 of this
preamble. If a physician performs the surgery in a hospital, and the
hospital bills for the implant, the service would be a designated
hospital service, regardless of whether the implant is a prosthetic or
prosthetic device. In these cases, any financial relationship between
the physician and the hospital would have to fit in an exception or the
physician could not perform the surgery, much less the implant, since
all hospital services are DHS. There are several exceptions that apply
to referrals for hospital services.
The commenters seem to be under the misapprehension that section
1877 of the Act would prevent financial relationships between the
manufacturer of an implant and a physician. These
[[Page 935]]
financial relationships would not be subject to section 1877 of the Act
unless the manufacturer were an entity that bills Medicare directly.
However, arrangements between physicians and manufacturers may be
problematic under other legal authorities, including, for example, the
Federal anti-kickback statute.
Comment: One commenter believes that we should not interpret the
definition of prosthetics, orthotics, and prosthetic devices and
supplies for physician referral purposes to include hip and knee
implants. The commenter believes that hip and knee implants do not fall
within the definitions of prosthetics, orthotics, and prosthetic
devices and supplies that we included in the January 1998 proposed
rule. The commenter pointed out that ``prosthetics'' is defined as
artificial legs, arms, and eyes, that ``orthotics'' is defined as leg,
arm, back and neck braces, and ``prosthetic devices'' is defined as
devices that replace all or part of an internal body organ. The
commenter believes that hip and knee replacements do not fall under any
of these categories.
The commenter further stated that, if hip and knee implants are
somehow considered as prosthetic devices under Medicare, they should be
excluded from the referral prohibition on the basis that they are only
a component of a primary surgical procedure meant to repair damaged or
painful joints. The commenter believes physicians will not ask patients
to undergo painful and debilitating surgery for the sake of implanting
an unnecessary artificial knee or hip implant. Also, if these items are
billed as part of the hospital diagnosis-related group (DRG) payment
for a surgical procedure, there is no financial incentive to use more
costly or unnecessary implants and there is no increased cost to the
program if one implant is chosen over another.
Response: Knee implants are considered to be ``prosthetics.'' They
are components of the artificial legs that are identified as
prosthetics under section 1861(s)(9) of the Act. Artificial hips are
only furnished to hospital inpatients under Medicare Part A, so we
consider them to be a component of an inpatient hospital service. If a
physician sends a patient to a hospital for a hip or knee implant or
the insertion of a prosthetic device, all the services billed by the
hospital would qualify as DHS under section 1877(h)(6)(K) of the Act
because they are ``inpatient or outpatient hospital services.'' The
implants would therefore be subject to the physician self-referral law,
even if we excluded them from the separate category of ``prosthetics,
orthotics, or prosthetic devices and supplies.''
Comment: A commenter asserted that we should exclude cochlear
implants from the definition of prosthetic devices. In the January 1998
proposed rule, we had indicated our concern that a physician would
choose a particular device because he or she had supplied it to the ASC
where the patient's implant surgery was performed or because the
physician receives money from a supplier for ordering the particular
device. The commenter stated that the professional association he
represents is unaware of any abuses in this area and, if there were
abuses, they would be subject to the anti-kickback law.
Another commenter from an association of audiologists agreed with
us that cochlear implants are a type of prosthetic device that is
properly within the scope of the proposed rule. The commenter regards a
cochlear implant as clearly being a prosthetic device because it
replaces all or part of an internal body organ. A cochlear implant is
an electronic device specifically designed to replace the function of a
damaged cochlea.
Response: We agree with the second commenter that cochlear implants
are covered as prosthetic devices under Medicare and are categorized as
such in the CPT codes in the attachment to this final rule. As noted
above, we are excepting all implants performed in a Medicare-certified
ASC by the referring physician or a member of the referring physician's
group practice, subject to certain conditions set forth in the
exception.
Comment: A commenter noted that in the January 1998 proposed rule
we stated that a prosthetic device includes services necessary to
design the device, select materials and components, measure, fit, and
align the device, and instruct patients in its proper usage. The
commenter requested that we expressly clarify that certain services
provided to patients after a cochlear implant are subject to the
physician self-referral provisions. These services include device
mapping, aural rehabilitation programs for adults to enable them to
learn to use the device, and aural habilitation programs for children
to maximize speech and language development.
The commenter asserted that these postsurgical services are
provided by audiologists without physician involvement or supervision
of any kind. In addition, the commenter stated that cochlear
rehabilitation services are not included in the global fee for cochlear
implantation surgery. Instead, these services are billed under a unique
CPT code, 92510.
Response: The Medicare definition of a prosthetic device ordinarily
includes the services necessary to design the device, select materials
and components, measure, fit, and align the device, and instruct
patients in its proper usage. In fact, the costs of delivery, fitting,
measuring and instructing the patient are bundled into the fee schedule
payment amount for not only prosthetic devices, but for DME, orthotics,
and prosthetics as well. However, cochlear implants are somewhat
unique. Because it can be particularly difficult for a patient to learn
to use the implant, cochlear rehabilitation services are categorized
separately as speech-language pathology services. These services are
billed under CPT code 92510 (which is included as a PT service because
it is a speech-language pathology service). Therefore, all of these
services qualify as ``designated health services,'' but under different
categories.
Comment: A commenter pointed out that items such as rib belts,
slings, and basic braces (those not custom-fitted) are in the
prosthetic/orthotic section of the HCPCS. The commenter asked whether
these items would be considered orthotics or DME, since the patient
would be wearing the item home. The commenter believes that, in either
case, it would be inappropriate to prevent a physician from supplying
and billing for these items when the patient has come to the office
with an injury. The commenter asserted that requiring a patient to
leave the physician's office to purchase necessary equipment is
inconvenient and unwise because it may result in unnecessary pain or
injury to the patient.
Response: The items described as ``rib belts'' and ``slings'' are
not included in any DHS category. The items described as ``basic
braces'' are orthotics. Nothing in Phase I of this rulemaking moves any
item or device from one coverage category to another coverage category.
If the items qualify as in-office ancillary services under section
1877(b)(2) of the Act, a physician who supplies them in his or her
office in the course of seeing a patient should be able to use the in-
office ancillary services exception in order to provide them to the
patient, even if the patient takes the items home. We regard the
physician as ``furnishing'' an item in his or her office if the
physician dispenses the item to the patient there.
Comment: Several commenters urged us to exclude eyeglasses and
contact lenses from the definition of prosthetic devices. Commenters
noted that there is
[[Page 936]]
no incentive to overutilize or abuse this benefit because we
acknowledge that one pair of conventional eyeglasses or contact lenses
is medically necessary after cataract surgery; Medicare coverage is
limited to one pair of conventional eyeglasses or contact lenses; and
Medicare payment is on a reasonable charge basis.
Response: We agree with the commenters that eyeglasses and contact
lenses should be excluded from the reach of section 1877 of the Act for
purposes of Medicare referrals. The Medicare coverage of these items is
unique in that it is limited to one pair of either item after each
cataract surgery and is available to any patient who has had this
surgery. In that respect, the coverage is similar to the coverage of
preventive screening services that are subject to frequency limits, as
discussed earlier in this section. In addition, the Medicare-approved
amount of payment does not vary based on the expense of a particular
pair of glasses or contact lenses. Medicare pays fixed amounts for
eyeglasses and contact lenses that are single focal, and fixed amounts
for eyeglasses and contact lenses that are bifocal. In sum, we see
little opportunity or incentive for a physician to either under or
overutilize these items in the Medicare program. Accordingly, we are
creating a new exception under the authority in section 1877(b)(4) of
the Act for eyeglasses and contact lenses after cataract surgery. Like
other section 1877(b)(4) exceptions, the new exception is subject to
there being no violation of the anti-kickback statute or any billing or
claims submission law or regulation.
K. Home Health Services
In the January 1998 proposed rule, we proposed to define home
health services as the services described in section 1861(m) of the Act
and part 409, subpart E. We included in the preamble to that rule (63
FR 1679), a discussion of how we proposed to reconcile section 1877 of
the Act and the physician certification requirements for home health
services in Sec. 424.22 (Requirements for home health services),
paragraph (d) (Limitations on the performance of certification and plan
of treatment functions). In that discussion, we explained that the home
health agency (HHA) rule and its exceptions have been superseded by
section 1877 of the Act. Phase I of this rulemaking reflects this
change. Our responses to comments mostly serve to clarify how the
modified home health rule will work.
Comment: Four commenters supported our proposal to reconcile the
physician self-referral law with the physician certification
requirements for home health services contained in Sec. 424.22(d). One
commenter specifically expressed agreement with our proposed position
that the exceptions to the physician self-referral law would also apply
to physician certification requirements for home health services.
Another commenter specifically supported the proposed changes that
would eliminate the 5 percent ownership and $25,000 financial or
contractual relationship limits and replace them with the prohibition
on self-referral contained in section 1877 of the Act. The commenter
stated that this change would allow HHAs to provide for medical
oversight by a salaried physician as permitted under the Medicare
hospice benefit. (We believe that commenter meant that the proposed
elimination of the $25,000 financial or contractual relationship
provision would allow an HHA to pay a physician medical director more
than $25,000 as long as the HHA meets relevant ownership and
compensation exceptions described in the proposed rule.) Another
commenter asked that we clarify whether the current $25,000 limit on
financial or contractual relationships as it relates to medical
directors of home care agencies will be removed.
Response: We are removing the current 5 percent ownership limit and
the $25,000 limit on financial or contractual relationships from
Sec. 424.22(d). The new Sec. 424.22(d) appears exactly as we proposed
it: ``The need for home health services to be provided by an HHA may
not be certified or recertified, and a plan of treatment may not be
established and reviewed, by any physician who has a financial
relationship, as defined in Sec. 411.351 of this chapter,
`Definitions,' with that HHA, unless the physician's relationship meets
one of the exceptions in Secs. 411.355 through 411.357 of this chapter
* * *.'' The elimination of the $25,000 financial or contractual
relationship provision will allow an HHA to pay a physician medical
director more than $25,000 as long as the financial relationship meets
a relevant ownership or compensation exception under section 1877 of
the Act.
Although we are delaying the effective date for most of Phase I of
this rulemaking for 1 year, we are making the change in Sec. 424.22(d)
effective February 5, 2001. Having weighed the alternatives, we believe
an effective date of February 5, 2001 for the revision of
Sec. 424.22(d) is desirable, even though the revisions to Secs. 411.355
and 411.357 will not be effective until later. In the interim, the
references to Secs. 411.355 and 411.357 will cross-refer to the
statutory exceptions set forth in section 1877 of the Act. It is our
view that during the interim period, the exceptions set forth in those
sections would apply under Sec. 424.22(d) for services other than
laboratory services.
Comment: One commenter requested that we retain the provisions in
Sec. 424.22(e) (Exceptions to limitations), (f) (Procedures for
classification as a sole community HHA) and (g) (Basis for
classification as a sole community HHA) that except governmental
entities and sole community HHAs from the prohibition on certification
of need for home health services by related physicians. The commenter
noted that keeping this language would remove the threat of unfair
competition for agencies that have historically been the sole providers
in their communities. The commenter explained that the ``rural
provider'' exception to the physician self-referral law would permit an
urban physician to establish a new HHA in a rural area, as long as the
agency's service population is at least 75 percent rural. This would
create new and unfair competition for many rural agencies that are
small, nonprofit organizations.
Response: We realize that eliminating the exceptions for
governmental entities and sole community HHAs in combination with the
ownership exception for rural providers under the physician self-
referral law may create new competition for small, nonprofit HHAs.
Nonetheless, we believe that we do not have the legal authority to
retain these exceptions in any meaningful way. As we pointed out in the
preamble to the January 1998 proposed rule (63 FR 1680), even if a
physician and an HHA are involved in an arrangement that meets one of
the home health exceptions at issue, the arrangement simultaneously
remains subject to the requirements in section 1877 of the Act. That
is, if an exception under the HHA certification regulations is subsumed
within the exceptions in section 1877 of the Act, a physician will be
able to refer; if it is not, the arrangement will disqualify the
physician from referring in spite of Sec. 424.22. Thus, the HHA
exceptions have been superseded by section 1877 of the Act.
The Secretary does have the authority to create additional
exceptions to the referral prohibition under section 1877(b)(4) of the
Act, but only in situations in which she determines that there is no
risk of program or patient abuse. We believe that the fact that an
entity is run by the government or is a sole community HHA does not
guarantee that there will be no
[[Page 937]]
unnecessary referrals. In addition, it is our view that we should treat
all providers equally and allow them an equal opportunity to compete,
particularly in areas where there have historically been too few
providers. In fact, the purpose of the ``rural provider'' exception in
section 1877(d)(2) of the Act is to encourage physicians to invest in
or remain invested in under-served areas. (Note that hospitals do not
have similar exceptions for governmental entities or sole community
hospitals.) Therefore, we do not intend to include the exceptions for
governmental entities and sole community providers in the revised HHA
certification regulations because we believe that our proposed approach
provides the best protection against possible program abuse and
fulfills the intent of the law.
Comment: A commenter representing home care physicians asked that
we clarify whether physicians making home visits are providing services
that qualify as DHS under the January 1998 proposed regulations.
Response: Under the Medicare program, when a physician performs a
physician service, including a visit to a home health patient, the
physician service is billed as a physician service and is not
considered a home health service. This is the case even when the
physician has an employment contract with the HHA, such as when a
physician is employed as a medical director. Thus, the commenter is
correct in noting that physician home visits are not themselves on the
list of DHS in section 1877(h)(6) of the Act, and would only qualify as
such if the physician was actually performing a specific designated
health service (for example, performing physical therapy). In these
cases, the service would still be protected if it is personally
performed by the referring physician, since it would not be considered
a referral under the final rule. (See section III.B of this preamble.)
In addition, some in-home services provided by a home care physician
may qualify under the in-office ancillary services exception. (See
section VI.B of this preamble.)
L. Outpatient Prescription Drugs
Section 1877(h)(6)(J) of the Act provides that ``designated health
services'' includes the category of ``outpatient prescription drugs,''
but does not define this term. Because Medicare does not cover a
category of services called ``outpatient prescription drugs,'' we
proposed to define this term in the regulation. We proposed to include
only drugs (including biologicals) defined or listed under section 1861
(s) and (t) of the Act, and in part 410, furnished under the Medicare
Part B benefit that patients can obtain from a pharmacy with a
prescription, even if patients can only receive the drug under medical
supervision. In the preamble to the January 1998 proposed regulation
(63 FR 1680), we included as an example oncology drugs that are
routinely furnished in a physician's office, under the physician's
direct supervision, provided the drugs could be obtained by
prescription from a pharmacy.
We proposed specifically to exclude from the definition of
``outpatient prescription drugs'' erythropoietin (EPO) and other drugs
furnished as part of a dialysis treatment for an individual who
dialyzes at home or in a facility.
Upon further review of the law, existing regulations, and the
public comments, we have concluded that our proposed definition of
``outpatient prescription drugs'' was not clear enough. In Phase I of
this rulemaking, we are revising the definition of outpatient
prescription drugs to make clear that it includes all prescription
drugs covered by Medicare Part B. We are not excluding any outpatient
prescription drugs from the DHS category of ``outpatient prescription
drugs.'' Including all outpatient prescription drugs is consistent with
our policy throughout these final regulations of avoiding carving
services out of DHS definitions through service-by-service analyses of
the potential for fraud and abuse. Our definition of outpatient
prescription drugs provides physicians and DHS entities with a ``bright
line,'' common sense rule. Moreover, the breadth of the definition is
ameliorated to a very large extent by our expansion of the exception
for in-office ancillary services, which includes much greater
flexibility with respect to the direct supervision requirement, and our
promulgation of a new limited exception under section 1877(b)(4) of the
Act for the provision of EPO and certain other dialysis-related drugs
by or in ESRD facilities (described in greater detail below). Those
changes, together with the changes in the definition of ``group
practice'' and ``referral,'' should permit a physician to furnish
patients with covered drugs, either by administering or dispensing the
drugs to patients in his or her office or, in the case of EPO and other
specific dialysis drugs, by furnishing the drugs in or through a
physician-owned ESRD facility. We wish to make clear that nothing in
this regulation affects, or is intended to affect, current or future
coverage of any particular prescription drug.
We are creating an exception for EPO and certain other specific
drugs that are required for the efficacy of dialysis when they are
furnished by an ESRD facility with which the referring physician has a
financial arrangement. We are similarly excepting certain vaccinations,
immunizations, and preventive screening tests that are subject to HCFA-
imposed frequency limits. We are also clarifying that physicians who
provide drugs in their own offices are not required to pass on to
Medicare discounts they receive in purchasing these drugs, unless
otherwise required to do so by the Medicare program. These issues are
discussed in detail below.
Comment: A number of commenters raised the issue of whether drugs
and biologicals provided incident to physician services are included in
the definition of outpatient prescription drugs. The commenters pointed
out that most drugs and biologicals are covered under Medicare Part B
only if they require administration by a physician, and thus typically
are covered in the physician office setting only if furnished as
``incident to'' physician services. Thus, the resulting ``self
referral'' is effectively a requirement for Medicare coverage. In the
commenters' view, excluding drugs furnished incident to physician
services from the definition of ``outpatient prescription drugs'' would
ensure that the physician self-referral law does not discourage the
types of ``referrals'' that are prerequisites to Medicare coverage.
One commenter asserted that drugs that are covered under Medicare
only as a component of a physician service should be excluded because
physician services were never intended to be included within the
referral prohibition. Another commenter recommended that we make all
injectable drugs exempt from the referral prohibition under the in-
office ancillary services exception.
Several commenters were particularly concerned about antigens and
serums that a patient receives in a physician's office, stating that
they should be excluded from the category of outpatient prescription
drugs, along with chemotherapy. Another commenter pointed out that if
our definition of outpatient prescription drugs includes drugs
administered during a patient's office visit, patients could have
serious access problems to such drugs as antibiotics, renal therapy,
and vaccines. Another commenter recommended that we limit outpatient
prescription drugs to those that are self-administered, such as oral
cancer drugs, oral antiemetics, and immunosuppressives, for which there
is Medicare coverage that does not
[[Page 938]]
depend on administration in a physician's office.
Response: We believe the commenters are conflating two issues: (1)
What drugs fit in the term ``outpatient prescription drugs'' in section
1877(h)(6)(J) of the Act and (2) the scope of the in-office ancillary
services exception in section 1877(b)(2) of the Act. Upon review, for
purposes of defining ``outpatient prescription drugs'' under section
1877(h)(6)(J) of the Act, we can ascertain no meaningful distinction
between prescription drugs dispensed by pharmacies or those mixed and
administered in a physician's office. To the extent the latter is
permitted, it is through the vehicle of the in-office ancillary
services exception. The scope of that exception is discussed in section
VI.B.1 of this preamble.
Comment: Many commenters stated that oncology drugs administered to
patients by injection or infusion in a physician's office should be
excluded from the definition of outpatient drugs because a patient
essentially cannot obtain these drugs from a pharmacy before visiting
his or her physician. When a patient comes to a physician's office for
chemotherapy, the patient receives a series of blood tests to determine
the patient's physiological state. Based on these tests, the
chemotherapy agents are mixed and tailored by the oncologist's staff to
address the patient's current health status. Therefore, a patient
cannot pick up from a pharmacy the medication he or she needs before
visiting the physician. We may have misunderstood how chemotherapy
drugs are actually administered.
In addition, the commenters pointed out that a great majority of
retail pharmacies are not currently prepared to provide
chemotherapeutic mixing and dispensing services for infusion drugs.
That is because Federal regulations and accepted standards of practice
for physicians, oncology nurses, technicians, and pharmacists require
that the preparation, storage, transportation, and disposal of
chemotherapy drugs and applicable supportive agents be conducted under
the most rigorously controlled circumstances.
Response: We agree that chemotherapy agents are not commonly
available from retail pharmacies, but are prepared for individual
patients. However, these drugs are outpatient prescription drugs; they
are available only upon a physician's order and are provided in an
outpatient setting. (When provided in an inpatient setting, they would
be inpatient hospital services under section 1877(h)(6)(K) of the Act.)
We believe these drugs are usually administered in oncologists' offices
and typically should qualify for the in-office ancillary services
exception. (See discussion in section VI.B.1 of this preamble.)
Comment: Several commenters have stated that in-office x-rays and
laboratory tests that are performed in conjunction with the provision
of chemotherapy should be excluded from the definition of DHS. The
commenters seemed particularly concerned that if these services are
regarded as DHS, a physician would have to directly supervise them. The
commenters expressed concern that requiring a physician to be present
during the times these services are provided would run directly counter
to common practice in oncology offices and would greatly inconvenience
patients.
These commenters asserted that it is extremely unlikely that a
physician would refer a patient for chemotherapy simply to obtain the
revenue from the x-ray and laboratory tests that are performed in
conjunction with the provision of chemotherapy. They regard as a
precedent for this exception our proposals to exclude from the
definition of radiology certain invasive radiology services in which an
imaging modality is used to guide a needle, probe, or catheter properly
and to exclude EPO from the definition of outpatient prescription drugs
when EPO is provided incidental to dialysis treatment. We had proposed
to exclude these invasive radiology procedures and EPO because they are
merely furnished incidental to, or secondary to, another procedure that
the physician has ordered.
Response: The Congress has imposed certain constraints on
physicians' financial arrangements with entities to which they refer
patients for DHS. The provision of chemotherapy is a designated health
service, as is the provision of radiology and clinical laboratory
services. In order for a physician to refer patients to an entity with
which the referring physician has a financial arrangement, the
physician's financial relationship with the entity must come within an
exception to section 1877 of the Act.
As discussed elsewhere, we are not prepared to limit the scope of
DHS under section 1877(h)(6) of the Act except in rare situations. We
believe that most arrangements for the provision of chemotherapy and
related ancillary services by physicians to their patients can be
restructured to come within the in-office ancillary services exception
as modified by this final rule. (See section VI.B of this preamble.) As
discussed above, we are abandoning the ``peripheral/incidental'' test
that was proposed in the January 1998 proposed rule; we point out that
even under that test, the primary procedure could not itself be a
designated health service.
Finally, we wish to clarify that we are excepting EPO under certain
circumstances because we believe that the Congress did not intend to
preclude physician ownership of ESRD facilities. Commenters have noted
that when the Congress intended to cover specific Medicare services,
including composite rate services, it did so expressly. We agree. The
Congress did not list ESRD facility services under section 1877(h)(6)
of the Act, while it did list home health services and hospital
services. Therefore, we do not regard services furnished under a
composite rate by an ESRD facility as DHS. Given the high correlation
between EPO and ESRD services, the inclusion of EPO as a DHS would
vitiate the Congress' apparent intent. Accordingly, we are excepting
from the reach of the statute under our section 1877(b)(4) of the Act
authority EPO or other drugs required for dialysis when furnished in or
by an ESRD facility owned by physicians. The list of these drugs is set
forth in the attachment to this final rule. Given the strict
utilization and coverage criteria for EPO in particular and ESRD in
general, we conclude this narrow exception presents no quantifiable
risk of fraud or abuse. We are not protecting any physician investment
in a home dialysis supply company or other entity that supplies EPO to
ESRD facilities or that supplies EPO to patients pursuant to a contract
with an ESRD facility; in such situations, the physician's investment
in the dialysis supply company is no different from any other
investment in a DHS entity and there is no indication in the
legislative history that home dialysis supply companies were not meant
to be covered by the statute.
Comment: A substantial number of commenters requested that we not
require physicians to pass on to Medicare discounts they receive in
purchasing oncology drugs. Commenters pointed out that the proposed
regulations appear to require this result. Some commenters believe that
this proposed requirement conflicts with section 1877(e)(8)(B) of the
Act, which excepts any payment made by a physician for items and
services if the price is consistent with fair market value.
Response: Nothing in this section 1877 of the Act or these
regulations is intended to impose on physicians a requirement to pass
discounts on drugs
[[Page 939]]
on to the Medicare and Medicaid programs; whether a discount must be
passed on to a Federal health care program by physicians or others,
however, remains the subject of other statutory and regulatory
provisions.
Comment: One commenter asked that we confirm that the definition of
``outpatient prescription drugs'' would apply only to those drugs that
are furnished to ``outpatients'' of any facility, including a SNF or
nursing facility. The commenter believes that if the Congress had
intended that the statute cover drugs provided to ``inpatients'' of
facilities, it could have easily written the statute to do so. The
commenter pointed out that drugs provided to ``inpatients'' are
generally covered under Medicare Part A and are peripheral components
of the services being provided and billed for, particularly under the
prospective payment system for SNFs under which SNFs receive a per diem
rate for virtually all items and services furnished to a Medicare Part
A patient.
Response: In the January 1998 proposed rule, we proposed to include
only drugs furnished to an individual under the Medicare Part B benefit
and to exclude drugs furnished by providers under Medicare Part A. We
have reflected this in Phase I of this rulemaking. A patient may reside
in a SNF under a Part A stay or a patient may reside in a SNF without
being covered under Part A. If the stay is not covered under Part A, it
is possible that the patient may receive some drugs under the Part B
benefit that are considered ``outpatient prescription drugs'' under
these physician self-referral provisions. In addition, under section
1835(a) of the Act, a SNF may furnish services to an individual who is
not a SNF inpatient. That is, it is possible for a SNF to provide
services to an individual who does not reside in the SNF. For example,
a SNF with an x-ray machine may furnish x-ray services to a nonresident
if the individual has a referral for an x-ray and he or she wishes to
receive the x-ray at this location. We assume the individuals who
receive these services are the ``outpatients'' to whom the commenter is
referring. (We note that drugs provided to patients in a hospital
setting would be inpatient or outpatient hospital services under
section 1877(h)(6)(K) of the Act.)
Patients in nursing facilities are typically covered under the
Medicaid program. We intend to address all Medicaid-related physician
referral issues in a separate rulemaking.
Comment: A commenter requested that we amend the January 1998
proposed rule to clarify that immunizations are not DHS under the
definition of ``outpatient prescription drugs.'' The commenter pointed
out that immunizations, particularly in pediatric and family care
practices, are often personally administered by a physician to his or
her own patients or are furnished on an ``incident to'' basis under the
physician's direct supervision. In the adult population, there is also
an increasing public awareness of the need for preventive
immunizations, such as pneumococcal vaccine and influenza vaccine.
These immunizations are widely and actively promoted in this country as
constituting good preventive medicine. The commenter believes that the
January 1998 proposed regulation could discourage immunizations because
under the proposed interpretation of productivity bonuses in the group
practice definition, a physician would be unable to share in a
productivity bonus based on his or her own administration of, or direct
supervision of, these immunizations.
Response: The commenter raised issues relating to immunizations
that are covered by Medicare under section 1861(s)(10) of the Act,
which covers pneumococcal vaccine and influenza vaccine and their
administration, as well as hepatitis B vaccine and its administration
if furnished to an individual who is at high or intermediate risk of
contracting hepatitis B. Under our authority to create additional
exceptions in section 1877(b)(4), we are excluding from the reach of
section 1877 of the Act certain immunizations and vaccines covered
under section 1861(s)(10) of the Act that are subject to HCFA-imposed
frequency limits and that are paid by Medicare on the basis of a fee
schedule. We believe that under the terms of the exception the risk of
abuse for these services is extremely low and that this exclusion is
consistent with the statutory language and structure and the expressed
Congressional intent to provide preventive care to Medicare
beneficiaries.
In referring to drugs furnished in pediatric and family practices,
we assume that the commenter was interested in the definition of
outpatient prescription drugs under the Medicaid program. We intend to
address the effects of the physician self-referral prohibition on the
Medicaid program in Phase II of this rulemaking.
Comment: A commenter raised questions about our decision to exclude
EPO and other drugs furnished as part of a dialysis treatment from the
definition of ``outpatient prescription drugs.'' The commenter
considered this exclusion ambiguous and requested clarification about
whether a particular drug provided by a facility is ``part of a
dialysis treatment.'' The commenter pointed out that EPO and other
pharmaceuticals are typically administered during the course of
treatment to avoid the painful process of injecting the patient
multiple times, but that it could be argued that these pharmaceuticals
are not ``part of'' the treatment itself. Therefore, the commenter
requested that we revise the exclusion of ``other drugs furnished as
part of the dialysis treatment'' to instead apply to ``other drugs
furnished to an individual who dialyzes at home or in a facility, as
part of an ESRD patient's plan of care.''
Response: When we carved out of the definition of ``outpatient
prescription drugs, EPO and other drugs furnished as part of the
dialysis treatment,'' we did not aim to carve out the far broader
category of all ``other drugs furnished * * * as part of an ESRD
patient's plan of care.'' We regard ``other drugs furnished as part of
the dialysis treatment'' to be those furnished so that the dialysis
treatment can be effective and to counteract the problems that can be
caused directly by dialysis. For example, dialysis makes some patients
anemic, so EPO is provided to deal with this dialysis-related problem.
In addition, iron therapy is covered to make EPO therapy effective and
Vitamin D hormone therapy is covered to correct for bone density loss
caused by dialysis. Other drugs furnished to an individual who dialyzes
at home or in a facility may include drugs that a patient uses for
reasons other than to make the dialysis treatment effective. In fact,
these other drugs may have nothing whatsoever to do with a patient's
renal problems.
Comment: Another commenter agreed with our proposal to exclude EPO
in the January 1998 proposed rule because it would allow physicians who
own a dialysis facility to prescribe Medicare-covered medications to
patients of the dialysis facility on the basis that the drugs are an
integral part of the dialysis procedure. The commenter asked that we
clarify that self-administered medications for home dialysis such as
EPO can only be furnished by the dialysis provider or a supplier that
has an agreement with the dialysis provider (a Method II supplier) and
cannot be provided through the referring physician's office. The
commenter contended that teaching the home dialysis patients to self-
administer medications and monitoring the effects
[[Page 940]]
of self-administered medications is the responsibility of the dialysis
facility.
Response: We agree with the commenter. As provided in Sec. 414.335
(Payment for EPO furnished to a home dialysis patient for use in the
home), medications for home dialysis can only be furnished by the
dialysis provider or a Method II supplier that has an agreement with a
provider. If a referring physician has a financial agreement with a
Method II supplier, the arrangement must meet an exception.
Comment: A commenter asked that immunosuppressant drugs prescribed
for patients following organ transplants and covered by Medicare be
excluded from the definition of ``outpatient prescription drugs.'' The
commenter believes that the rationale for excluding these drugs is
similar to the rationale for excluding EPO, since the use of these
drugs is peripheral to the transplant surgery, but medically integral
to the success of the surgery.
The commenter contended that excluding immunosuppressants from the
definition will not provide an opportunity for program or patient abuse
because their cost is an economically minor, though medically critical,
part of a large and immensely complicated treatment. In addition, the
commenter believes that physicians have no motivation to overprescribe
these drugs, because the drugs are only used for transplant patients
according to clinically accepted protocols that are designed to prevent
organ rejection while avoiding unnecessarily high levels of toxicity.
The commenter believes that the transplant community adheres to the
prevailing standards of medical care with only minor deviations. In
addition, each transplant center is required to report its transplant
survival rates to an HHS contractor. Centers with survival rates below
established thresholds can lose their certification.
Response: Immunosuppressant drugs furnished in an outpatient
setting are ``outpatient prescription drugs'' under Phase I of this
rulemaking. (They are inpatient or outpatient hospital services when
furnished in a hospital setting.) We are not persuaded that an
exception is appropriate or necessary. We believe that to the extent
physicians provide transplant drugs to patients in their offices, they
will generally be able to do so under the in-office ancillary services
exception. If a referring physician has an ownership or investment
interest in a free-standing transplant pharmacy or other pharmacy that
provides transplant drugs to his or her patients pursuant to a
referral, the financial relationship would have to fit in an applicable
exception.
M. Inpatient and Outpatient Hospital Services
In Sec. 411.351 of the January 1998 proposed rule, we defined
inpatient hospital services as services that a hospital provides for
its patients that are furnished either by the hospital or by others
``under arrangements'' with the hospital. For outpatient services, we
explained in the preamble of the January 1998 proposed rule (63 FR
1683) that we would consider all covered services (either diagnostic or
therapeutic) performed on hospital outpatients that are billed by the
hospital to Medicare (including arranged for services) as outpatient
hospital services. We have revised the definition of outpatient
hospital services in the regulations text to clarify that it includes
services furnished ``under arrangements.'' Inpatient services are not
coded by HCPCS codes. Any outpatient hospital service, regardless of
the HCPCS code, is a designated health service.
In the January 1998 proposed rule, we requested comment on whether
we should exclude lithotripsy from the definition of inpatient or
outpatient hospital services on the theory that it could not be
overutilized, since the procedure itself apparently documents the
medical necessity to prescribe it. Commenters were also concerned about
physician services that are ``bundled'' into hospital payments and
about services furnished by a hospital ``under arrangements'' with an
outside facility. We discuss each of these topics below.
Comment: We received hundreds of comments on the subject of
lithotripsy, mostly from urologists who have ownership interests in a
lithotriptor that a hospital rents. These commenters requested that
lithotripsy be excluded from the definition of inpatient and outpatient
hospital services so that they could continue to refer to the hospitals
without being concerned about how the hospital compensates them.
According to these commenters, urologist-owned lithotriptors increased
quality of care and patient access without any risk of overutilization
of lithotripsy. We also received comments on this topic from individual
hospitals, a State and national hospital trade association, and
nonphysicians who rented lithotriptors to hospitals in competition with
physician owners. These commenters asserted that hospitals pay more for
the use of physician-owned lithotriptors than hospitals pay for the use
of their own lithotriptors or lithotriptors owned by nonphysicians and
urged us to include lithotripsy in the definition of inpatient and
outpatient hospital services.
Response: We have determined that there is no reason to treat
lithotripsy any differently than other inpatient or outpatient hospital
services. As we have said elsewhere in the preamble, we believe the
Congress did not intend that we make service-by-service decisions on
whether a service is a designated health service based on the service's
potential for overutilization. Even were we able to determine that
there is no potential for overutilization of lithotripsy (including
comparisons to alternative treatments), there is a substantial
potential for urologists who own lithotriptors to extract higher than
market rate rents for their equipment or for the financial arrangement
between the lessor urologists and the lessee hospital to encourage
overutilization of other hospital services. Commenters provided no
evidence to support their claims that physician ownership of
lithotriptors increased quality of care or access to treatment.
In any event, the exclusion of lithotripsy from the definition of
inpatient and outpatient services would not obviate the need for the
physician-owners to structure their rental arrangements to comply with
section 1877 of the Act. Whether lithotripsy is a designated health
service or not, the rental arrangement itself would create a financial
relationship between the physician-owners and the hospital. Unless the
financial relationship (that is, the lithotriptor lease) fit into a
compensation exception (such as the equipment rental exception), the
physicians could not refer any Medicare patients to the hospital for
any inpatient or outpatient services. In short, the relief sought by
these commenters would be illusory.
We believe that the changes we have made in Sec. 411.354(d) of
these regulations to the volume or value standard (discussed in section
V of this preamble) will enable hospitals and urologists to protect
bona fide arrangements either under an equipment lease or a personal
service arrangements exception or under the fair market value
exception. Most importantly, Phase I of this rulemaking clarifies that
``per service'' or ``per use'' rental or services payments are
permitted, even for services performed on patients referred by the
urologist-owner, provided the rental or services payment is fair market
value and does not take into account any Federal or private pay
business generated between the urologist and the hospital (and provided
all other conditions of an
[[Page 941]]
exception are met). Because the prevalence of physician ownership of
lithotriptors may distort pricing in the marketplace, we believe
valuation methods that look to the prices charged by persons not in a
position to refer to the hospital or that consider acquisition cost and
rate of return are especially appropriate. We also are aware that some
manufacturers of lithotriptors lease the machines to urologists on a
``per use'' basis with the urologists, in turn, leasing the
lithotriptors to hospitals on a ``per use'' basis. In these
circumstances, any disparity in the ``per use'' fee charged by the
manufacturer to the urologists and the ``per use'' fee charged in turn
by urologists to the hospital would call into question whether both
sets of fees could be fair market value.
Comment: Several commenters suggested that section 1877 of the Act
was only intended to address diagnostic procedures. Accordingly, they
asked that we exclude therapeutic treatments such as lithotripsy from
the definition of inpatient or outpatient hospital services in cases in
which the referring urologist or a member of his practice actually
treats the referred patient.
Response: The list of DHS in section 1877(h)(6) of the Act contains
both therapeutic and diagnostic types of service (for example, physical
therapy services are therapeutic and clinical laboratory services are
diagnostic). This indicates that the Congress believed that both types
of services could be subject to abuse. We have concluded that when a
physician initiates a designated health service and personally performs
it him or herself, that action would not constitute a referral of the
service to an entity under section 1877 of the Act. However, in the
context of inpatient and outpatient hospital services, there would
still be a referral of any hospital service, technical component, or
facility fee billed by the hospital in connection with the personally
performed service. Thus, for example, in the case of an inpatient
surgery, there would be a referral of the technical component of the
surgical service, even though the referring physician personally
performs the service. If the referring physician has a financial
relationship with the hospital, that relationship must fit in an
exception. Potentially available exceptions, depending on the
circumstances, include, for example, the personal service arrangements
exception, the employee exception, the space or equipment rental
exception, the whole hospital exception, and the fair market value
exception.
Comment: Several commenters stated that the only reason
extracorporeal shock wave lithotripsy (ESWL) is even subject to the
physician self-referral provisions is because Medicare only pays for
lithotripsy if it is billed through a hospital, thus forcing the
procedure into the realm of inpatient or outpatient hospital services.
Many commenters have cited debate language pertaining to adopting the
Conference Report for OBRA '93, which language suggests that the
sponsor of section 1877 of the Act, Representative Stark, did not
intend for ESWL to come under the law.
Response: We believe that lithotripsy was meant to be a
``designated health service'' under the law, since the law does not
exclude any particular hospital services, nor does the legislative
history indicate that the Congress meant to exclude them. The House
Report for the first version of the physician self-referral law
mentioned a specific exception for a facility providing lithotripsy
services performed personally by the referring physician. (See H. Rep.
No. 101-247, 101st Cong. 1041 (1989).) This exception did not apply to
the hospital services at issue, nor was it enacted. In adding hospital
services to the list of DHS, the legislative history reveals that the
Congress was concerned about increased admissions to hospitals,
regardless of the reason for the admission. (We discuss this issue
further below, where we address hospital services provided ``under
arrangements.'')
Comment: Another commenter pointed out that we proposed excluding
from the definition of inpatient hospital services those services
performed by physicians and other providers who bill independently. The
commenter asked us to clarify whether physician and individual
professional services are excluded from the definition of inpatient
hospital services when they are billed by a hospital. Hospitals bill
for these services when they are part of a global fee that covers both
the technical and professional components of a service or when they
bill on an assignment (or reassignment) basis. This commenter argued
that if these services are not excluded under section 1877 of the Act,
a hospital may not be able to compensate a physician for services
performed in, and billed by, the hospital, or to compensate a doctor
who supervises a nurse practitioner in a hospital. The commenter also
suggested that we clarify that we will treat both inpatient hospital
services and outpatient hospital services the same way.
Response: Professional services that Medicare pays independently of
an inpatient or outpatient hospital service do not become DHS if they
are billed by a hospital under assignment or reassignment; they remain
physician services and are not considered hospital services. Any other
service for which a hospital bills is a hospital inpatient or
outpatient service, even though it may consist of both a technical and
professional component. Therefore, these services constitute DHS under
section 1877 of the Act. However, if a hospital is paying the physician
for his or her professional services under either a personal services
contract or an employment agreement, the physician can still refer to
the hospital as long as the compensation arrangement meets an
exception, such as the exception that applies to personal service
arrangements or the exception for employment agreements. These
exceptions require, among other things, that the hospital pay the
physician an amount that is based on a fair market value standard.
Comment: Several commenters expressed concern with the effect the
definitions of inpatient and outpatient hospital services may have when
a hospital purchases services ``under arrangements'' from an entity
owned in whole or in part by a referring physician. Commenters fear
that if services are deemed to be inpatient or outpatient hospital
services for the purposes of 1877 of the Act when furnished by a
hospital ``under arrangements'' with an entity owned by a physician,
physicians may be unwilling to invest in equipment using new
technologies. One commenter specifically proposed an exception that
would apply to any service that would be exempt from the physician
self-referral prohibition if the physician referred directly to the
entity, outside of the hospital context. According to several
commenters, it is the nature of the service itself that should
determine whether or not a referral may be made, not the inpatient or
outpatient status of the patient. Commenters were concerned that a
physician will not be able to refer a patient to a hospital if the
hospital has an arrangement with an entity that the physician owns. The
commenters believe that, as long as the actual services are compensated
at fair market value, there should be no risk of program or patient
abuse.
Response: The Congress specifically chose to include inpatient and
outpatient services as DHS under section 1877(h)(6)(K) of the Act.
Inpatient and outpatient hospital services include any services that a
hospital provides to a hospital patient, whether it provides them
itself or provides them by purchasing them from another entity under
arrangements; any
[[Page 942]]
other policy would encourage hospitals to purchase as many services as
possible under arrangements in order to avoid the effects of the
physician self-referral provision. In light of the description of
``volume or value'' in Phase I of this rulemaking, we believe that bona
fide ``under arrangements'' relationships can easily be structured to
comply with the personal service arrangements exception, or, in some
cases, the fair market value exception. We believe this approach is
consistent with section 1877(e)(7) of the Act, which provides a limited
exception for certain ``under arrangements'' relationships that were
established before 1989 and met several other requirements.
We are concerned that the provision of services ``under
arrangements'' could be used to circumvent the prohibition in section
1877(c)(3) of the Act of physician ownership of parts of hospitals. We
understand that some hospitals are leasing hospital space to physician
groups, which the groups then use to provide services ``under
arrangements'' that the hospital had previously provided directly.
These arrangements, especially when they involve particularly lucrative
lines of business, raise significant issues under section 1877 of the
Act, as well as the anti-kickback statute.
However, we also recognize that ``under arrangements''
relationships are pervasive in the hospital industry and that many of
the services being provided by physician groups ``under arrangements''
are services that the physicians provide in physician-owned facilities
primarily to their own patients who are hospital inpatients. In these
situations, an ``under arrangements'' relationship can avoid
unnecessary duplication of costs and underutilization of expensive
equipment.
While we believe section 1877 of the Act could reasonably be
interpreted to prohibit ``under arrangements'' relationships as
constituting prohibited ownership interests in a part of a hospital, we
decline to do so at this time for several reasons. First, given the
sheer number of these arrangements, we think prohibiting these
arrangements would seriously disrupt patient care. Second, almost all
these arrangements could be restructured to fit into a combination of
the personal service arrangements and equipment lease exceptions (or
fair market value exception), although this restructuring will in some
cases be administratively burdensome. Third, we believe there is
precedent in the statute for treating this situation solely as a
compensation arrangement. In section 1877(e)(7) of the Act, the
Congress created a specific compensation exception for certain hospital
services provided by physician groups ``under arrangements.'' Since, by
definition, all services protected under section 1877(e)(7) of the
Act--and the resources used to produce them--were ``owned'' by the
physician groups, the Congress would not have created a protected
compensation relationship unless it had first determined that these
arrangements did not create a prohibited ownership or investment
interest in the hospitals. Simply stated, the Congress would not have
excepted these relationships from the compensation arrangement
restriction, if they were prohibited as an ownership or investment
interest.
In sum, for purposes of section 1877 of the Act, we will treat
``under arrangements'' financial arrangements between hospitals and
physician-owned entities as compensation and not ownership
relationships. These arrangements can be protected provided they meet
an appropriate compensation exception. We will, however, monitor these
arrangements and may reconsider our decision if it appears that the
arrangements are abused. We also caution physician groups and hospitals
that these arrangements remain subject to the Federal anti-kickback
statute.
Comment: One commenter requested that we clarify how the physician
self-referral law applies in cases in which a financial relationship
arises solely because of Medicare requirements. The commenter discussed
a situation in which a radiation therapy group and a radiation therapy
facility (owned by some or all of the group members) are located in a
medical office building across the street from a hospital in a nonrural
area. The closest comparable facility is over 35 miles away.
Occasionally, the hospital sends an inpatient for radiation therapy to
the radiation facility, which provides the services as ``arranged for''
inpatient hospital services. The hospital pays the facility for use of
the radiation equipment from money it receives from Medicare for the
inpatient hospital stay. (The group practice bills Medicare for the
professional services of the radiation oncologists.) The commenter
erroneously asserted that Medicare requires the hospital to pay the
radiation facility for the amount that it would have received under
Medicare Part B if the radiation therapy had been provided as an
outpatient service. The commenter believes that the payment by the
hospital to the radiation therapy facility creates a compensation
arrangement with the facility and, in turn, the physicians.
Often, a radiation oncologist will refer a patient of the radiation
facility to the hospital for certain tests and other services. The
radiation oncologist receives no economic benefit for referring
patients to the hospital and refers there for the patient's
convenience, not because there is any requirement to do so. The
commenter believes that, under our proposed rule, the ``under
arrangements'' compensation arrangement would trigger the physician
self-referral law, preventing the radiation oncologists from referring
Medicare patients to the hospital for services, even though this
financial relationship is not voluntary and not subject to abuse.
The commenter requested clarification whether the proposed
Sec. 411.355(d)(2), covering services furnished under composite types
of payment rates that the Secretary determines provide no financial
incentive for underutilization or overutilization, or any other risk of
program or patient abuse, would apply. The commenter also wished to
know whether we could include an additional described compensation
arrangement exception under Sec. 411.357(d) (the personal service
arrangements exception) or clarify Sec. 411.357(g) (the exception for
remuneration from a hospital to a physician if the remuneration does
not relate to the furnishing of DHS) to include the arrangements the
commenter mentioned, or create some variation in the fair market value
exception in Sec. 411.357(l)(3) that would allow compensation
determined on the basis of the volume of services (that is, fee-for-
service payments as covered under Medicare Part B) in the type of
situation the commenter described.
Response: As discussed above in section VIII.A of this preamble, we
have determined not to include the proposed Sec. 411.355(d)(2) in Phase
I of this rulemaking for DHS other than clinical laboratory services.
However, as discussed in the preceding response, the arrangement
described by the commenter would be a compensation arrangement that
could be structured to fit in one of the compensation exceptions, such
as the equipment rental, personal service arrangements, or the new fair
market value exceptions.
N. Other Definitions
1. Consultation
The definition of ``consultation'' is addressed in section III.B.2
of this preamble and in the regulations in Sec. 411.351.
[[Page 943]]
2. Entity
In Sec. 411.351 of the August 1995 final rule covering referrals
for clinical laboratory services, we defined the term ``entity''
broadly to cover a sole proprietorship, trust, corporation,
partnership, foundation, not-for-profit corporation, or unincorporated
association. We revised this definition in the January 1998 proposed
rule to make it clear that the definition covers a physician's sole
practice or a practice of multiple physicians that provides for the
furnishing of DHS, or any other sole proprietorship, trust,
corporation, partnership, foundation, not-for-profit corporation, or
unincorporated association. We explained in the preamble to the January
1998 proposed rule at 63 FR 1706 that we regard an ``entity'' for
purposes of the referral prohibition as the business organization, or
other association that actually furnishes, or provides for the
furnishing of, a service to a Medicare or Medicaid patient and bills
for that service (or receives payment for the service from the billing
entity as part of an ``under arrangements'' or similar agreement). We
explained that we meant that the referral prohibition applies to a
physician's referrals to any entity that directly furnishes services to
program patients, or to any entity that arranges for the furnishing of
these services under arrangements. We are clarifying in Phase I of this
rulemaking that, for purposes of section 1877 of the Act, a person or
entity is considered to be furnishing DHS if it is the person or entity
to which we make payment for the DHS, directly or upon assignment on
the patient's behalf, except that if the person or entity has
reassigned its right to payment to (i) an employer pursuant to
Sec. 424.80(b)(1); (ii) a facility pursuant to Sec. 424.80(b)(2); or
(iii) a health care delivery system, including clinics, pursuant to
Sec. 424.80(b)(3) (other than a health care delivery system that is a
health plan (as defined in Sec. 1000.952(l)), and other than any MCO,
PSO, or IPA with which a health plan contracts for services provided to
plan enrollees), the person or entity furnishing DHS is the person or
entity to which payment has been reassigned. Provided further, that a
health plan, MCO, PSO, or IPA that employs a supplier or operates a
facility that could accept reassignment from a supplier pursuant to
Secs. 424.80(b)(1) and (b)(2) is the entity furnishing DHS for any
services provided by such supplier.
A number of commenters pointed out, in various contexts, that they
did not believe a physician could make a ``referral'' to himself or
herself. We agree and discuss this issue in section III.B of this
preamble, which covers the definition of a referral. In our analysis of
this issue, we also concluded that when a physician is referring to
himself or herself, that act is not a referral to an ``entity,'' as we
have defined it in Sec. 411.351. However, when the physician requests a
service from another member of his or her group practice or from the
practice's staff, that would be a referral to the practice for purposes
of the physician self-referral law. These concepts are discussed in
more detail in our responses to specific comments on the definition of
a ``referral'' and on some of the DHS.
In the preamble to the January 1998 proposed regulation (63 FR
1710), we addressed the question of when the owner of a DHS provider is
considered to be equivalent to the entity providing DHS. We had
proposed to equate a referring physician with the entity when the
physician (or a family member) has a significant ownership or
controlling interest that allows the physician to determine how the
entity conducts its business and with whom. We used two examples to
illustrate this concept. Commenters found both our analysis and those
examples to be confusing. As a result, we have abandoned this analysis
and will simply apply the rules related to indirect financial
relationships and indirect referrals as described in detail in section
III of this preamble, which covers the general referral prohibition
under section 1877(a) of the Act. Section III.A of this preamble
includes a discussion about when there is a financial relationship
between a physician and an entity.
Comment: A commenter suggested that we clarify in both the preamble
and regulations text that a medical device manufacturing company is not
an ``entity'' for the purposes of section 1877 of the Act, and that the
manufacturer does not receive payments from billings ``under
arrangements.'' Another commenter requested that we clarify that drug
manufacturers are not ``entities'' for purposes of section 1877 of the
Act, and that a referral for outpatient prescription drugs only occurs
when a physician sends a patient to a particular entity that actively
furnishes drugs, such as a pharmacy.
Response: We generally do not regard manufacturers as entities that
furnish items or services directly to patients, or as entities that
furnish services ``under arrangements.'' Thus, the commenters are
correct in stating that a medical device manufacturer or a drug
manufacturer is unlikely to be an entity furnishing DHS for purposes of
section 1877 of the Act, while a pharmacy, which delivers outpatient
prescription drugs directly to patients, would be one. (We discuss this
issue in more detail in section VIII.B of this preamble.) A person or
entity is considered to be furnishing DHS if it is the person or entity
to which we make payment for the DHS, directly or upon assignment on
the patient's behalf, except that if the person or entity has
reassigned its right to payment to (i) an employer pursuant to
Sec. 424.80(b)(1); (ii) a facility pursuant to Sec. 424.80(b)(2); or
(iii) a health care delivery system, including clinics, pursuant to
Sec. 424.80(b)(3) (other than a health care delivery system that is a
health plan (as defined in Sec. 1000.952(l)), and other than any MCO,
PSO, or IPA with which a health plan contracts for services provided to
plan enrollees), the person or entity furnishing DHS is the person or
entity to which payment has been reassigned. Provided further, that a
health plan, MCO, PSO, or IPA that employs a supplier or operates a
facility that could accept reassignment from a supplier pursuant to
Secs. 424.80(b)(1) and (b)(2) is the entity furnishing DHS for any
services provided by such supplier.
Comment: A commenter asked us to clarify that State governments and
their instrumentalities are not ``entities'' for purposes of section
1877 of the Act. The commenter noted that many State and local
governments create integrated delivery systems and payment arrangements
in order to increase access to and decrease the cost of publicly
provided care. If the governments or their instrumentalities were to be
considered ``entities,'' the commenter argued that State-sponsored
clinics and programs may cease to exist, thus restricting access to,
and raising the costs of, public programs.
Response: The referral prohibition applies whenever a physician has
an unexcepted financial relationship with ``an entity'' that furnishes
DHS. The statute makes no distinction between private and governmental
entities, nor do we believe that we have the authority to make such a
distinction. We have no basis for concluding that referrals to
governmental entities are always free from potential patient or program
abuse, so we see no grounds for creating an additional exception under
section 1877(b)(4) of the Act. However, we would assume that many
governmental entities have compensation arrangements with physicians,
rather than being owned in any way by physicians. If this is the case,
there are a number of compensation related exceptions in the statute
and regulations that are designed to allow physicians who receive fair
compensation to continue making referrals.
[[Page 944]]
3. Fair Market Value
The term ``fair market value'' appears in most of the compensation
related exceptions. These exceptions, among other things, require that
compensation between physicians (or family members) and entities be
based on the fair market value of the particular items or services that
these parties are exchanging. We defined this term in the August 1995
final rule covering referrals for clinical laboratory services by using
the definition that appears in section 1877(h)(3) of the Act. This
provision defines fair market value as the value in arm's-length
transactions, consistent with the general market value, with other
specific terms for rentals or leases.
In the January 1998 proposed rule, we discussed what constitutes a
value that is ``consistent with the general market value.'' We drafted
the definition as follows so that it applies to any arrangements
involving items or services, including, but not limited to, employment
relationships, personal service arrangements, and rental agreements:
``General market value'' is the price that an asset would bring,
as the result of bona fide bargaining between well-informed buyers
and sellers, or the compensation that would be included in a service
agreement, as the result of bona fide bargaining between well-
informed parties to the agreement, on the date of acquisition of the
asset or at the time of the service agreement. Usually the fair
market price is the price at which bona fide sales have been
consummated for assets of like type, quality, and quantity in a
particular market at the time of acquisition, or the compensation
that has been included in bona fide service agreements with
comparable terms at the time of the agreement.
The definition of ``fair market value'' in the proposed rule
continued to include the additional requirements in section 1877(h)(3)
of the Act for rentals or leases. Among other things, the statute
defines the fair market value of rental property as its value for
general commercial purposes, not taking into account its intended use.
Most of the comments we received addressed the question of how to
establish the fair market value of an asset or agreement and how to
value rental property ``for general commercial purposes.'' We have
tried to clarify these concepts in our responses.
Comment: Several commenters asked that we clarify the documentation
that will sufficiently establish a transaction as consistent with fair
market value (and general market value) for the exceptions that apply
to compensation arrangements. The proposed definition of fair market
value states that ``usually the fair market price is the price at which
bona fide sales have been consummated for assets of like type, quality,
and quantity in a particular market at the time of acquisition or the
compensation that has been included in bona fide service agreements
with comparable terms at the time of the agreement.'' One commenter
stated that using the word ``usually'' may create ambiguities and
suggested making clear in the definition of fair market value that the
standard of comparable transactions is only one potential means of
establishing fair market value.
Another commenter stated that the January 1998 proposed rule is
unclear about the steps that must be taken to confirm fair market
value. The commenter asked that we adopt the position that a valuation
from an independent person experienced in the valuation of health care
operations is sufficient as one approach (but not the only approach) to
establishing fair market value. However, the commenter further stated
that, because sales of medical practices are private and not reported
to any central data base, and because there is often a lack of a
representative pool upon which to draw comparisons, we should adopt the
position that confirmation of fair market value does not necessarily
require the finding of comparable entities for comparison. Another
commenter stated that the Internal Revenue Service (IRS) guidelines for
determining fair market value with respect to tax exempt organizations
are too restrictive and are inappropriate for application to for-profit
entities.
Response: To establish the fair market value (and general market
value) of a transaction that involves compensation paid for assets or
services, we intend to accept any method that is commercially
reasonable and provides us with evidence that the compensation is
comparable to what is ordinarily paid for an item or service in the
location at issue, by parties in arm's-length transactions who are not
in a position to refer to one another. (As discussed in section V of
this preamble, in most instances the fair market value standard is
further modified by language that precludes taking into account the
``volume or value'' of referrals, and, in some cases, other business
generated by the referring physician. Depending on the circumstances,
the ``volume or value'' restriction will preclude reliance on
comparables that involve entities and physicians in a position to refer
or generate business.) The amount of documentation that will be
sufficient to confirm fair market value (and general market value) will
vary depending on the circumstances in any given case; that is, there
is no rule of thumb that will suffice for all situations. The burden of
establishing the ``fairness'' of an agreement rests with the parties
involved in the agreement. Depending on the circumstances, parties may
want to consider obtaining good faith, written assurances as to fair
market value from the party paying or receiving the compensation,
although such written assurances are not determinative.
For example, a commercially reasonable method of establishing fair
market value (and general market value) for the rental of office space
can include providing us with a list of comparables. We would also find
acceptable an appraisal that the parties have received from a qualified
independent expert. Although some transactions are not subject to
public scrutiny, we believe generally that there should be sufficient
documentation of similar public transactions that the parties can use
as a basis of comparison. In regions with inadequate direct
comparables, such as rural areas, a reasonable alternative may involve
comparing institutions or entities located in different, but similar,
areas where property is zoned for similar use. For example, a hospital
affiliated with a university in one part of the country could be
comparable to other hospitals affiliated with universities that are
located in similar types of communities. In other cases, all the
comparables or market values may involve transactions between entities
that are in a position to refer or generate other business. For
example, in some markets, physician-owned equipment lessors have driven
out competitive third-party lessors of similar equipment. In such
situations, we would look to alternative valuation methodologies,
including, but not limited to, cost plus reasonable rate of return on
investment on leases of comparable medical equipment from disinterested
lessors.
In contrast, there may be cases in which finding a commercially
reasonable representation of fair market value (or general market
value) could be as simple as consulting a price list. As for using the
IRS guidelines for determining fair market value that applies to tax
exempt organizations, we recognize that in some cases they may not be
appropriate for for-profit entities. Nonetheless, it is our view that
some elements of the IRS guidelines could be applied under certain
circumstances, depending upon the specifics of any particular
agreement. We do not wish to either mandate their use or rule them out
if they can be appropriately used to demonstrate fair market value.
Comment: One commenter noted that, as part of our definition of
``fair market
[[Page 945]]
value,'' we include the term ``general market value,'' which applies to
any arrangement involving items and services, including employment
relationships, personal service arrangements, and rental agreements.
The commenter pointed out that in the January 1998 proposed rule we do
not address the specific documentation requirements necessary to verify
and document that the price of an asset or the compensation for certain
services actually reflects the market rate. The commenter requested
that we confirm that internally generated surveys are sufficient for
establishing the market rate, and that there is no requirement to use
an independent valuation consultant.
Response: We agree that there is no requirement that parties use an
independent valuation consultant for any given arrangement when other
appropriate valuation methods are available. However, while internally
generated surveys can be appropriate as a method of establishing fair
market value in some circumstances, due to their susceptibility to
manipulation and absent independent verification, such surveys do not
have strong evidentiary value and, therefore, may be subject to more
intensive scrutiny than an independent survey.
Special Rule for Rental Property. Under section 1877(h)(3) of the
Act, fair market value means the value of rental property for general
commercial purposes (not taking into account its intended use). In the
case of a lease of space, this value may not be adjusted to reflect the
additional value the prospective lessee or lessor would attribute to
the proximity or convenience to the lessor where the lessor is a
potential source of patient referrals to the lessee. We incorporated
this provision into the August 1995 final rule covering referrals for
clinical laboratory services and into the January 1998 proposed rule at
Sec. 411.351. Commenters raised questions about the meaning of the
statutory provision.
Comment: With respect to the rental of property, commenters
questioned our definition of fair market value as ``the value of rental
property for general commercial purposes (not taking into account its
intended use).'' The commenters believe this language is problematic
for appraising a medical office building because it requires the
appraiser to compare the property to the broad category of properties
that are ``used for general commercial purposes.'' This latter category
can include properties that are highly dissimilar in character and
value. For example, the appraisal for medical office property could
include retail or industrial rates. Such an approach conflicts with the
fundamental principle that appraisals should be based on comparing
properties with similar attributes.
Response: We believe that a rental property meets the requirement
that a payment reflect the ``value of property for general commercial
purposes, not taking into account its intended use'' when the payment
takes into account any costs that were incurred by the lessor in
developing or upgrading the property, or maintaining the property or
its improvements, regardless of why the improvements were added. That
is, the rental payment can reflect the value of any similar commercial
property with improvements or amenities of a similar value, regardless
of why the property was improved. On the other hand, we also believe
that rental payments would specifically take into account the intended
use of the property if the lessee paid inflated amounts solely to
enhance his or her medical practice. For example, rental payments by a
physical therapist would not be fair market value for purposes of
section 1877 of the Act if the physical therapist agreed to pay an
inflated rate that was not justified by improvements or other amenities
and was higher than the rate paid by other, similarly situated medical
practitioners in the same building just because the building was
occupied by several orthopedic practices.
A rental payment cannot be adjusted to reflect the additional value
the prospective lessee or lessor would attribute to the proximity or
convenience to the lessor where the lessor is a physician and a
potential source of patient referrals to the lessee. We interpret this
requirement to allow rental payments that reflect the fair market value
of the area in which the property is located, even if a lease is for
medical property in a ``medical community.'' To qualify, the payments
should not reflect any additional value, such as an amount that is
above that paid by other medical practitioners in the same building or
in the same or in a similar location, just because the lessor is a
potential source of referrals to the lessee. That is, the rental
payments should be roughly equivalent to those charged to similarly
situated parties in arrangements in which referrals are not an issue.
Also, the statute requires that the rental payments not reflect the
additional value either party attributes to the proximity or
convenience to the lessor where the lessor is a potential source of
patient referrals to the lessee. The definition of a ``referral'' by a
``referring physician'' in section 1877(h)(5) of the Act focuses only
on actions and requests for services that are initiated by physicians;
it does not include any requests for services initiated by entities or
other providers or suppliers, nor does the referral prohibition itself
apply to anything but physician referrals. Thus, we believe that it is
fair to interpret the limitation in the fair market value definition as
confined to situations in which a physician is the lessor and a
potential source of referrals to an entity lessee. That limitation does
not appear to us to apply when an entity, such as a hospital, is the
lessor that rents space to physicians, even if the hospital is in a
position to refer to the physicians. As a result, we believe a hospital
should factor in the value of proximity when charging rent to lessee
physicians.
4. Group Practice
The definition of a group practice under section 1877(h)(4) of the
Act is addressed in this preamble at section VI.C and in the
regulations at Sec. 411.352.
5. Health Professional Shortage Areas
The existing regulations covering referrals for clinical laboratory
services define a health professional shortage area (HPSA) for purposes
of section 1877 of the Act as ``an area designated as a health
professional shortage area under section 332(a)(1)(A) of the Public
Health Service Act for primary medical care professionals (in
accordance with the criteria specified in 42 CFR part 5, appendix A,
part I--Geographic Areas)'' and, in addition, ``an area designated as a
health professional shortage area under section 332(a)(1)(A) of the
Public Health Service Act for dental professionals, mental health
professionals, vision care professionals, podiatric professionals, and
pharmacy professionals. We proposed no changes to the existing rule.
The definition of a HPSA for purposes of Phase I of this rulemaking
is intended to track the definition of a HPSA as promulgated by the
Health Resources Services Administration (HRSA), which administers the
HPSA designation process. HRSA has proposed revising the existing HPSA
regulations. (See 63 FR 46538; 64 FR 29831.) We have modified the
definition of a HPSA in these regulations to track current HRSA
interpretations of the HPSA regulations and to make clear that the
definition incorporates any future changes or amendments to HRSA's
definition of a HPSA, which is codified in 42 CFR part 5.
[[Page 946]]
6. Employee
We defined an ``employee'' in the existing regulation and in the
January 1998 proposed regulation in Sec. 411.351 by reiterating the
statute. Section 1877(h)(2) of the Act specifically defines an
``employee'' of an entity as an individual who would be considered to
be an employee under the usual common law rules that apply in
determining the employer-employee relationship, as applied for purposes
of section 3121(d)(2) of the Internal Revenue Code of 1986.
Comment: Two commenters recommended an expansion of the proposed
definition of ``employee'' to include ``leased employees'' to better
reflect the realities of the market place. The current definition,
which references income tax law, limits an employee to an individual
who meets the definition of a ``common law'' employee. But the
definition of a common law employee does not include leased employees,
who are defined by State law and have a quasi-common law status.
Response: We do not believe we have the authority to expand the
definition of employee that appears in the law. It is our understanding
that leased employees are essentially regarded by the courts, the IRS,
and Federal legislators as ``contingent employees.'' Contingent workers
are generally described as workers who are not part of the employer's
regular work force, but are hired to meet certain needs. These workers
are technically employed by an entity other than the one for whom the
services are performed. Other types of contingent workers include
independent contractors and consultants.
A leased employee is defined in section 414(n) of the Internal
Revenue Service Code as an individual who performs services under an
agreement between the service recipient and a leasing/staffing
organization; performs services under the primary direction or control
of the service recipient; and performs services for the service
recipient on a substantially full-time basis for a 12-month period. The
labeling of a worker as a leased employee under a leasing/staffing
arrangement does not mean that the worker will be defined as a ``leased
employee'' under section 414(n) of the Internal Revenue Code for
employee benefit plan purposes. The IRS determines the common law
employment relationship between a worker and an organization by
analyzing the facts and circumstances of each particular situation. The
IRS uses guidelines, in the form of a list of factors, for classifying
workers as either employees or independent contractors, in order to
determine whether there is actually an employer/employee relationship.
We would regard any leased employee that qualifies as an ``employee''
under the IRS test as an employee for purposes of section 1877 of the
Act.
7. Immediate Family Members
The referral prohibition in section 1877(a) of the Act states that
if a physician, or immediate family member, has a financial
relationship with an entity, the physician cannot refer a Medicare
patient to that entity for the furnishing of DHS, unless an exception
applies. In the August 1995 final rule, we listed in Sec. 411.351 the
individuals who qualify as a physician's ``immediate'' family members.
These individuals include a husband or wife; natural or adoptive
parent, child, or sibling; stepparent, stepchild, stepbrother, or
stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law; grandparent or grandchild; and spouse
of a grandparent or grandchild. We adopted this definition without any
changes in the January 1998 proposed rule.
We did not receive any comments on this definition. We did receive
comments that relate to whether physicians should be precluded from
referring to people who qualify as members of their immediate family.
We have addressed these comments in section VI.B of this preamble. To
conform to common usage, we have amended the definition to substitute
the term ``birth'' for ``natural'' parent.
8. Referral
The definition of ``referral'' is addressed in this preamble in
section III and in Sec. 411.351 of the regulations.
9. Remuneration and the Exceptions in Section 1877(h)(1)(C) of the Act
The definition of ``remuneration'' in section 1877(h)(1)(B) of the
Act is drafted broadly to include ``any remuneration, directly or
indirectly, in cash or in kind.'' However, a ``compensation
arrangement'' is defined in paragraph (h)(1)(A) of section 1877 of the
Act to specifically exclude various kinds of remuneration that are
listed in paragraph (h)(1)(C) of section 1877 of the Act. These are
arrangements involving only the following remuneration:
(i) the forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the
correction of minor billing errors;
(ii) the provision of items, devices, or supplies that are used
solely to--
(I) collect, transport, process, or store specimens for the
entity furnishing the item, device, or supply, or
(II) to order or communicate the results of tests or procedures
for such entity.
(iii) a payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee for service basis,
for the furnishing of health services by that physician to an
individual who is covered by a policy with the insurer or by the
self-insured plan, if--
(I) the health services are not furnished, and the payment is
not made under a contract or other arrangement between the insurer
or the plan and the physician,
(II) the payment is made to the physician on behalf of the
covered individual and would otherwise be made directly to the
individual,
(III) the amount of the payment is set in advance, does not
exceed fair market value, and is not determined in a manner that
takes into account directly or indirectly the volume or value of any
referrals, and
(IV) the payment meets such other requirements as the Secretary
may impose by regulation as needed to protect against program or
patient abuse.
We incorporated these exclusions from the definition of
``remuneration'' into the August 1995 final rule and into the January
1998 proposed rule in Sec. 411.351. We interpreted the exclusions in
the January 1998 proposed rule at 63 FR 1693 through 1694 to mean that
the portion of any business arrangement that consists of the
remuneration listed in paragraph (h)(1)(C) of section 1877 of the Act
alone does not constitute a compensation arrangement. The final
regulation adopts our proposed regulations text and incorporates
expressly the interpretation applicable to arrangements that include
portions of remuneration that meet the exclusions in section 1877
(h)(1)(C) of the Act.
a. Minor Billing Errors.
Comment: One commenter, in referring to the exclusion from
remuneration of forgiveness for amounts due to corrections of minor
billing errors, stated that even a ``minor'' billing error might have
large dollar consequences, particularly if the same minor mistake were
repeated on numerous bills. This could easily happen because virtually
all bills are now computer-generated. The commenter stated that the
term ``minor'' should refer to the type of error, rather than the sum
of money that may be involved.
Response: We agree with the commenter's suggestion that a ``minor''
billing error could have large dollar consequences, particularly in
situations in which bills are computer generated. We also agree that
the term ``minor''
[[Page 947]]
should refer to the kind of billing error rather than the sum of money
involved. Therefore, we are interpreting ``minor billing errors'' to
cover isolated or infrequent instances in which an administrative
error, such as a typographic, keying, or other transcribing error,
results in an incorrect charge or bill. On the other hand, a pattern of
similar or consistent billing error ``corrections'' may suggest
improper remuneration and subject the business arrangement to scrutiny.
b. Medicare as an Insurer.
Section 1877(h)(1)(C)(iii) of the Act ``excepts'' from the
definition of a compensation arrangement situations involving payments
made by an insurer or self-insured plan to a physician. The payments
must satisfy a physician's fee-for-service claim for furnishing health
services to an individual who is covered by a policy with the insurer
or the self-insured plan.
Comment: One commenter asked whether the term ``insurer'' includes
the Medicare program. The commenter believes that Medicare is included
within the meaning of the term ``insurer,'' and cited for support
references in the preamble, as well as the designation of Medicare in
the Act as ``Health Insurance for the Aged and Disabled.''
Response: In the preamble to the January 1998 proposed rule at 63
FR 1694, we pointed out that we believed this provision was designed
for situations in which an insurer is also involved in the delivery of
health care services. If the insurer owns a health care facility, a
physician might otherwise be precluded from referring to that facility
just because the physician receives compensation from the insurer in
the form of payments that satisfy the physician's claims.
The Medicare program is not directly involved in the delivery of
services, but is simply a payer of services; that is, Medicare never
actually furnishes services to program patients but pays for claims
from providers and suppliers or makes payments to managed care
organizations. The physician self-referral law is only implicated if a
physician refers a patient to an entity for DHS and the physician has
an ownership or investment interest in the entity or receives direct or
indirect remuneration from the entity. Since a physician would never
refer a patient to the Medicare program to receive a designated health
service, these payments from Medicare to a physician are totally
irrelevant under this law.
c. Items, Devices, or Supplies Used Solely To Collect Specimens.
Comment: One commenter thought there was a possible inconsistency
in the preamble to the January 1998 proposed rule in the section
discussing whether biopsy needles are excluded from the definition of
remuneration under section 1877(h)(1)(C)(ii) of the Act. Section
1877(h)(1)(C)(ii) of the Act covers items, devices, or supplies that
are used solely to collect, transport, process, or store specimens for
the entity providing the items, devices, or supplies. First, the
commenter noted our conclusion at 63 FR 1693 through 1694 that biopsy
needles do not function solely as specimen collection devices and
therefore are categorically excluded from ``items, devices, or supplies
that are used solely'' for specimen collection purposes. In other
words, biopsy needles may constitute remuneration under section 1877 of
the Act. This discussion is followed in the preamble by a statement
that any items, supplies, or devices provided to a physician must be
used solely in connection with specimens sent by the physician to the
entity that supplied the items, devices, or supplies. Accordingly, the
preamble indicates that the number of items, supplies, or devices
furnished should not exceed the number of specimens sent to the
laboratory for processing. The commenter suggested that the proximity
and sequence of these discussions in the preamble has caused confusion
in the industry; some have concluded that, regardless of the first
discussion and conclusion, biopsy needles might not constitute
remuneration if the number of biopsy needles provided by a laboratory
were to correlate to the number of biopsy specimens sent to the
laboratory.
The commenter urged us to adopt the view that biopsy needles are
surgical or medical devices, rather than items, devices, or supplies
solely used for specimen collection purposes in all cases. The
commenter noted that this interpretation would be consistent with
statements made by the OIG that the free provision of biopsy needles
from a laboratory to a physician would be suspect under the anti-
kickback statute because the needles have independent value to the
physician as a surgical device used in surgical procedures. (See the
letter dated August 4, 1997, available on the OIG website at http://www.dhhs.oig/gov.) A second commenter concurred with this conclusion,
and suggested that the same analysis should apply to other surgical or
medical devices that may be used during a procedure to collect
specimens, but have independent value to physicians, such as snares and
reusable aspiration and injection needles.
Response: We agree with the first commenter that the proximity and
sequence of our discussion of this topic in the preamble might have
been confusing. We wish to clarify our views on the ``items, devices,
and supplies'' provision here. First, in enacting section
1877(h)(1)(C)(ii) of the Act, we believe that the Congress did not
intend to allow laboratories to supply physicians with surgical
instruments for free or below fair market value prices. Rather, we
believe the Congress intended to include in this section items,
supplies, and devices of low value, such as single use needles, vials,
and specimen cups, that are primarily provided by laboratories to
physicians to ensure proper collection of specimens for processing at
the laboratory and that have little, if any, independent economic value
to the physicians who receive them. In many cases, the cost of these
items may already be included in the practice expense portion of the
Medicare payment made to the physician. In addition, to the extent the
items are reusable, they may have value unrelated to the collection of
specimens for processing by the laboratory providing the items. The
provision of such items for free or below fair market value poses a
risk that the items may constitute compensation from the laboratories
for the physician's referrals and increase the risk of overutilization.
Accordingly, biopsy needles and like devices, such as snares and
reusable aspiration and injection needles, are categorically excluded
from the items, devices, and supplies covered by section
1877(h)(1)(C)(ii) of the Act, although arrangements for providing such
items may be structured to fit into the exception for payments by a
physician for items and services to an entity if the items or services
are furnished at a price that is consistent with fair market value.
(See section 1877(e)(7) of the Act and Sec. 411.357(i).) This view is
consistent with the guidance published by the OIG noted in the
preceding comment.
The discussion of the correlation of the number of supplies to the
number of specimens sent to the laboratory has no application to biopsy
needles and other devices that fall outside section 1877(h)(1)(C)(ii)
of the Act. As to those single use, low value items, devices, and
supplies that come within the scope of section 1877(h)(1)(C)(ii) of the
Act, the fact that the number of supplies provided to a physician
approximates the number of specimens sent by the physician to the
laboratory providing
[[Page 948]]
the supplies is merely one indicator that the supplies have been
provided in connection with specimen collection for the entity
providing the supplies. The numerical correlation is not a statutory or
regulatory requirement. However, the provision of an excessive number
of supplies creates an inference that the supplies are not provided
solely to collect, transport, process, or store specimens for the
entity providing them.
Comment: A commenter noted that certain supplies that are used in
connection with the collection of specimens, such as gloves, can also
be used by a physician for other purposes. Since the laboratory cannot
guarantee that the gloves it supplies are used by the physician only
for collecting specimens, the commenter recommended that the laboratory
monitor the volume of the items supplied. The commenter asserted that
if the number of gloves supplied equals, or is close to, the number
needed for the collection of specimens by this physician, we should
consider the conditions in the exception in section 1877(h)(1)(C)(ii)
of the Act to have been met.
Response: While we recognize that sterile gloves are essential to
the proper collection of specimens, we believe they are not items,
devices, or supplies used solely to collect, transport, process, or
store specimens. To be sure, sterile gloves are essential to the
specimen collection process, but their main function is to prevent
infection or contamination. Also, sterile gloves are fungible, general
purpose supplies typically found in a physician's office and used for a
wide range of examinations and procedures. We believe it would be
impractical for physicians' offices to monitor and regulate the use of
gloves so as to limit their use to the collection of specimens for the
laboratory that provided them. Accordingly, we believe the provision of
free gloves is remuneration subject to the general prohibition of
section 1877 of the Act, in the absence of an applicable exception.
Comment: A commenter questioned how a laboratory should measure the
volume of specimen collection supplies it provides to a new physician
or group client with whom it has no experience. In such a situation,
the commenter believes the laboratory should be allowed to rely on the
anticipated volume of services, until an actual pattern of referral can
be established, to meet the requirement that items furnished by the
laboratory be consistent with the number of tests referred to the
laboratory.
Response: As noted above, there is no explicit requirement in the
statute that the volume of supplies provided by a laboratory correlate
with the volume of specimens sent to the laboratory for processing.
Rather, a correlation is one indicator that the provision of the
supplies meets the requirement that they be used to collect, transport,
process, or store specimens for the laboratory that provided them and
that the supplies are not for the physician's general office use. We
understand that a laboratory may not have a pattern of referrals on
which to base the provision of items, devices, and supplies to a new
physician or group practice client. In these instances, the laboratory
may elect to provide supplies based on the number of tests typically
ordered by physicians or group practices of like type and size in that
community until the physician or group practice establishes a pattern
of referrals with the laboratory sufficient to determine the
appropriate number of supplies. The laboratory or physician should be
prepared to demonstrate that the items, devices, or supplies were
furnished based on a community standard and to describe the standard.
Comment: One commenter asked that we clarify how section 1877 of
the Act applies to a clinical laboratory's provision of a phlebotomist
to a physician, group practice, or ESRD facility without charge to the
physician, group, or ESRD facility.
Response: Under section 1877(h)(1)(B) of the Act, remuneration
includes ``any remuneration, directly or indirectly, overtly or
covertly, in cash or in kind,'' with the exception of certain items of
potential value listed in section 1877(h)(1)(C) of the Act. The
provision of personnel, such as a phlebotomist, does not fit in any
category listed in section 1877(h)(1)(C). Thus, the provision of a
phlebotomist, as described by the commenter, may constitute
remuneration, and therefore create a compensation arrangement, for
purposes of section 1877 of the Act. Whether a particular phlebotomist
arrangement confers a benefit on a physician or group practice depends
on the specific facts and circumstances. (The provision of a
phlebotomist to an ESRD facility would not implicate section 1877 of
the Act, unless the arrangement conferred a direct or indirect benefit
on a physician or physician group; such laboratory-ESRD facility
arrangements may implicate the anti-kickback statute.)
The OIG has issued a special fraud alert addressing the provision
of free goods and services to physicians under the anti-kickback
statute, 59 FR 242 (December 9, 1994). We believe the fraud alert is
instructive here. Discussing the issue of laboratory phlebotomists
placed in physicians' offices, it observes:
When permitted by State law, a laboratory may make available to
a physician's office a phlebotomist who collects specimens from
patients for testing by the outside laboratory. While the mere
placement of a laboratory employee in the physician's office would
not necessarily serve as an inducement prohibited by the anti-
kickback statute, the statute is implicated when the phlebotomist
performs additional tasks that are normally the responsibility of
the physician's office staff. These tasks can include taking vital
signs or other nursing functions, testing for the physician's office
laboratory, or performing clerical services. Where the phlebotomist
performs clerical or medical functions not directly related to the
collection or processing of laboratory specimens, a strong inference
arises that he or she is providing a benefit in return for the
physician's referrals to the laboratory. In such a case, the
physician, the phlebotomist, and the laboratory may have exposure
under the anti-kickback statute. This analysis applies equally to
the placement of phlebotomists in other health care settings,
including nursing homes, clinics and hospitals. Furthermore, the
mere existence of a contract between the laboratory and the health
care provider that prohibits the phlebotomist from performing
services unrelated to specimen collection does not eliminate the
OIG's concern, where the phlebotomist is not closely monitored by
his [or her] employer or where the contractual prohibition is not
rigorously enforced.
Like the OIG, we believe that if the phlebotomist is purely
performing laboratory functions for the laboratory that places the
phlebotomist, then there would be no remuneration to the physician or
group practice (that is, no compensation arrangement). Put another way,
there would be no services to the physician or group for which they
should pay. However, if the phlebotomist performs services that are not
directly related to the collection or processing of laboratory
specimens for the laboratory that has provided the phlebotomist, he or
she may be providing a benefit to the physician or group practice, thus
creating a compensation arrangement between the physician and the
clinical laboratory that furnished the phlebotomist. Such arrangements
may be structured to fit in an exception to section 1877 of the Act,
such as the personal service arrangements exception, the fair market
value exception, or the exception for payments by physicians for items
or services.
Comment: Another commenter asked that we establish a clear standard
governing the use by ESRD facilities of
[[Page 949]]
personnel from a clinical laboratory. The commenter recommended that
employees of clinical laboratories only be allowed to perform duties
directly associated with collecting and preparing specimens, and making
test results available to the ESRD facility. Activities involved in
ESRD facility administration, patient care, or handling of specimens or
data from other laboratories would not be allowed.
Response: As noted above, the provision of a phlebotomist to an
ESRD facility would not implicate section 1877 of the Act unless the
arrangement benefits a physician or physician group.
Comment: One commenter inquired whether a laboratory may provide
medical waste disposal supplies and services to physicians free of
charge. The commenter asserted that the services would be provided only
for medical waste generated in connection with the collection,
transportation, processing, or storage of specimens.
Response: Section 1877(h)(1)(C)(ii) of the Act excludes from the
definition of a compensation arrangement remuneration that consists of
``the provision of items, devices, or supplies that are used solely
to--(I) collect, transport, process, or store specimens for the entity
providing the item, device, or supply * * *. '' The provision does not
specifically allow laboratories to furnish physicians and group
practices with medical waste disposal supplies and services at no
charge. However, we believe that supplies and the disposal of items
used solely in connection with the collection of specimens for this
clinical laboratory are part of the process the laboratory engages in
when it collects, transports, and processes specimens. If a laboratory
can provide a needle for collection and it can take away the specimen,
we believe that the laboratory can also take away the needle and other
items that are used in the process. However, we do not believe this
exception covers the disposal of needles or other waste items that have
been used by the physician practice for other purposes.
IX. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995 (PRA), agencies are
required to provide a 30-day notice in the Federal Register and solicit
public comment when a collection of information requirement is
submitted to the Office of Management and Budget (OMB) for review and
approval. To fairly evaluate whether an information collection should
be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we
solicit comments on the following issues:
Whether the information collection is necessary and useful
to carry out the proper functions of the agency;
The accuracy of the agency's estimate of the information
collection burden;
The quality, utility, and clarity of the information to be
collected; and
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Therefore, we are soliciting public comment on each of these issues for
the information collection requirements discussed below.
Section 411.352 Group Practice
Paragraph (d) requires that, except as provided in paragraphs
(d)(2) and (d)(3) of this section, substantially all of the patient
care services of the physicians who are members of the group (that is,
at least 75 percent of the total patient care services of the group
practice members) must be furnished through the group and billed under
a billing number assigned to the group; the amounts received must be
treated as receipts of the group; and ``patient care services'' must be
measured and documented by any reasonable means (including, but not
limited to, time cards, appointment schedules, or personal diaries) or
any alternative measure that is reasonable, fixed in advance of the
performance of the services being measured, uniformly applied over
time, verifiable, and documented.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5 CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
Paragraph (i) requires that supporting documentation verifying the
method used to calculate the profit shares or productivity bonus under
paragraphs (i)(2) and (i)(3) of this section, and the resulting amount
of compensation, must be made available to the Secretary upon request.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5 CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
Section 411.354 Financial Relationship, Compensation, and Ownership or
Investment Interest
Paragraph (d) requires that, when special rules are applied to
compensation under section 1877 of the Act and under these regulations
in subpart J of this part, the compensation will be considered ``set in
advance'' if the aggregate compensation or a time-based or per unit of
service-based (whether per-use or per-service) amount is set in advance
in the initial agreement, in writing, between the parties in sufficient
detail so that it can be objectively verified, and meets the terms and
conditions of this section.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5 CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
Section 411.355 General Exceptions to the Referral Prohibition Related
to Both Ownership/Investment and Compensation
Paragraph (e) requires that the relationship of the components of
the academic medical center must be set forth in a written agreement
that has been adopted by the governing body of each component.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5 CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
Section 411.357 Exceptions to the Referral Prohibition Related to
Compensation Arrangements
Paragraph (l) requires that compensation resulting from an
arrangement between an entity and a physician (or an immediate family
member) or any group of physicians (regardless of whether the group
meets the definition of a group practice set forth in Sec. 411.351) for
the provision of items or services by the physician (or an immediate
family member) or group practice to the entity, must be set forth in an
agreement, be in writing, and meet the conditions of the section.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5 CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
Paragraph (p) requires that, for indirect compensation
arrangements, as defined in Sec. 411.354(c)(2), the compensation
described in Sec. 411.354(c)(2)(ii) is part of an arrangement that is
set out in writing and meets all of the conditions and requirements set
forth in this section.
While this requirement is subject to the PRA, the burden associated
with it is exempt from the PRA because it meets the requirements set
forth in 5
[[Page 950]]
CFR 1320.3(b)(2) and/or (b)(3) and 5 CFR 1320.4(a).
We have submitted a copy of this final rule to OMB for its review
of the information collection requirements in Secs. 411.352, 411.354,
411.355, and 411.357. These requirements are not effective until they
have been approved by OMB.
If you have any comments on any of these information collection and
record keeping requirements, please mail the original and 3 copies
within 30 days of this publication date directly to the following:
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn: Allison Heron Eydt, HCFA Desk Officer; and
Health Care Financing Administration, Office of Information Services,
Information Technology Investment Management Group, Division of HCFA
Enterprise Standards, Room N2-14-26, 7500 Security Boulevard,
Baltimore, MD 21244-1850, Attn: John Burke HCFA-1809.
X. Regulatory Impact Statement
A. Overall Impact
We have examined the impacts of Phase I of this rulemaking as
required by Executive Order 12866 (September 1993, Regulatory Planning
and Review) and the Regulatory Flexibility Act (RFA) (Pub. L. 96-354,
enacted September 19, 1980). Executive Order 12866 directs agencies to
assess all costs and benefits of available regulatory alternatives and,
if regulation is necessary, to select regulatory approaches that
maximize net benefits (including potential economic, environmental,
public health and safety effects, distributive impacts, and equity). A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more annually). We do
not believe that Phase I of this rulemaking is a major rule that will
have an economically significant effect. We have no way of determining
with any certainty the aggregate amount of savings or costs Phase I of
this rulemaking will impose, but do not believe it will approach $100
million or more annually.
The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of the RFA, small entities include
small businesses, nonprofit organizations and government agencies. Most
hospitals and most other providers and suppliers are small entities,
either by nonprofit status or by having revenues of $5 million or less
annually. For purposes of the RFA, most physician practices are
considered to be small entities. Individuals and States are not
included in the definition of a small entity.
In addition, section 1102(b) of the Act requires us to prepare an
RIA if a rule may have a significant impact on the operations of a
substantial number of small rural hospitals. This analysis must conform
to the provisions of section 604 of the RFA. For purposes of section
1102(b) of the Act, we define a small rural hospital as a hospital that
is located outside of a Metropolitan Statistical Area and has fewer
than 50 beds. We do not believe Phase I of this rulemaking will have a
significant impact on the operations of a substantial number of small
rural hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule that may result in an expenditure in any 1 year by
State, local, or tribal governments, in the aggregate, or by the
private sector, of $100 million. Phase I of this rulemaking will not
have such an effect on the governments mentioned, and we do not believe
the private sector costs will meet the $100 million threshold.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. We do not anticipate that Phase I of this rulemaking will
have a substantial effect on State or local governments.
B. Anticipated Effects
We stated in the impact analysis in the January 1998 proposed rule
that any estimate of the individual or aggregate economic impact of the
provisions of the final rule would be purely speculative. We explained
that we could not gauge with any certainty the number of physicians and
entities that would be affected, or the extent of any changes they
would have to make to comply with the rule. As we noted in the January
1998 proposed rule at 63 FR 1716, various studies have indicated that
the degree of conflict of interest presented by a physician's
investment in entities to which he or she refers patients is unknown.
We pointed out that ownership information or information on the
compensation arrangements between physicians and all of their immediate
family members and the entities that furnish any of 11 DHS constitutes
an enormous amount of data that is continually subject to change. We
also expected that the American Medical Association's declaration that
self-referrals are unethical outside of a physician's practice, in
conjunction with State laws restricting or qualifying self-referrals
and the referral prohibition under section 1877 of the Act itself, have
already led to a decline in self-referral activity and financial
relationships between physicians and entities. However, we lack the
data necessary to either confirm or refute this supposition. We also
lack data that would tell us how many of the financial relationships
that physicians have with a furnishing entity would already be exempted
under the statute.
We stated that, although the provisions in the rule do not lend
themselves to a quantitative impact estimate, we did not anticipate
that they would have a significant economic impact on a substantial
number of small entities. We based this assessment on the many
exceptions in the rule (including a broad exception for ownership in
rural entities), as well as the actions parties can take to revise
their business arrangements to avoid the referral prohibition. We still
believe this to be the case. In fact, we expect that Phase I of this
rulemaking will have a much smaller impact than the provisions that we
proposed. However, because Phase I of this rulemaking may have
significant effects on some health care practitioners, or be viewed as
controversial, we wish to inform the public of what we regard as the
possible major effects of Phase I of this rulemaking.
We stated in the January 1998 proposed rule that we expected that
physicians who refer Medicare patients for DHS and entities that
furnish DHS, including hospitals, would be the parties that are
primarily affected by this rule. In response to comments on the January
1998 proposed rule, we have liberalized a wide variety of the
provisions that could affect these parties. We have tried to create a
more manageable regulation that includes ``bright line'' rules to help
the health care community determine more easily when a physician's
referrals are in compliance with the law. We have made numerous changes
to the rule to try to mold it around existing business practices, and
have attempted to reinterpret the law so that it has a more practical
and realistic effect on physicians and the entities that provide DHS.
The result, we believe, is an overall approach that should have far
less impact on the business relationships of individuals and entities
[[Page 951]]
than the provisions of the January 1998 proposed rule. We discuss below
some of the major issues affecting physicians and furnishing entities.
We also briefly discuss the effects of the rule on Medicare
beneficiaries.
1. Effects on Physicians
A physician can be financially related to an entity either through
an ownership or investment interest in the entity, or through a
compensation arrangement with the entity. A physician who has (or whose
immediate family member has) a financial relationship with an entity
that does not qualify for an exception is prohibited from referring
Medicare patients to that entity for the provision of DHS. Also, when a
physician with such a relationship makes a prohibited referral, there
is a risk that the entity will receive no Medicare payment for those
DHS. These provisions can have a significant effect on the business
arrangements in which a physician will participate and the manner in
which the physician will structure his or her practice.
The potential impact of the regulation on physicians and other
individual parties was revealed to us by the voluminous comments from
the public and health care community we received in response to the
January 1998 proposed rule. In addition to specific complaints and
objections, the commenters expressed a number of general concerns,
including that the proposed regulation inappropriately intruded into
the organization and delivery of medical care within physicians'
offices; that the regulation in many respects was counter to our other
longstanding policies on coverage and similar issues; that the rule was
unclear in many areas and that in light of the severe penalty (that is,
payment denial), ``bright line'' rules were essential; and that some
aspects of the proposed rule, such as its treatment of indirect
financial relationships, were administratively impractical or would
have been prohibitively costly in terms of monitoring compliance.
We believe Phase I of this rulemaking substantially addresses the
concerns raised by the commenters and yet is consistent with the
statute. Phase I of this rulemaking clarifies the definitions of DHS;
substantially broadens the in-office ancillary services exception
(which allows physicians to refer within their own practices) by easing
the criteria for qualifying as a group practice and conforming the
supervision requirements to our coverage and other payment policies;
permits shared facilities in the same building where physicians
routinely provide services that are neither Federal nor private pay
DHS; excludes from the definition of ``referral'' services personally
performed by the referring physician; expands the in-office ancillary
services exception to cover certain DME provided to patients in
physicians' offices; creates a new exception for compensation of
faculty in academic medical centers; and clarifies when a managed care
organization (MCO) is an entity furnishing DHS. All of these issues are
described in greater detail elsewhere in the preamble, along with a
number of lesser issues that could affect physicians.
2. Effects on Other Providers
As we stated above, Phase I of this rulemaking affects entities
that furnish DHS by preventing them from receiving payment for services
that they furnish as the result of a physician's prohibited referral.
Entities can also be subject to various other sanctions, including
fines and exclusion from Federal health care programs if they knowingly
submit a claim in violation of the prohibition. We lack the data to
determine the number of entities that could be affected by Phase I of
this rulemaking. However, we believe they will be fewer in number than
we had anticipated in the January 1998 proposed rule because, as we
described above, physicians will have far more leeway to refer.
3. Effects on the Medicare and Medicaid Programs
Section 1877 of the Act was enacted primarily to address
overutilization of health care services covered by Medicare. We have
tried to focus Phase I of this rulemaking on financial relationships
that may result in overutilization. We expect that Phase I of this
rulemaking will result in savings to the program by providing
physicians and entities with ``bright line'' rules on how to avoid the
prohibited referrals that can result in overutilization of covered
services. We cannot gauge with any certainty the extent of these
savings to the program at this time. (We will discuss the effects on
the Medicaid program in Phase II of this rulemaking.)
4. Effects on Beneficiaries
Some commenters thought the January 1998 proposed regulations
exceeded our statutory authority and imposed unnecessary and costly
burdens on physicians that would harm patient access to health care
facilities and services. In Phase I of this rulemaking, we have tried
to ensure that the rule will not adversely impact the medical care of
Federal health care beneficiaries or other patients. Where we have
determined that Phase I of this rulemaking may impact current
arrangements under which patients are receiving medical care, we have
attempted to verify that there are other ways available to structure
the arrangement, so that patients could continue to receive the care in
the same location. In almost all cases, we believe Phase I of this
rulemaking should not require substantial changes in delivery
arrangements, although it may affect the referring physician's or group
practice's ability to bill for the care.
In addition, we have significantly expanded the scope of services
potentially included in the in-office ancillary services exception and
thus readily available to a referring physician's patients by: (1)
Making clear that outpatient prescription drugs may be ``furnished'' in
the office, even if they are used by the patient at home; (2)
explicitly permitting external ambulatory infusion pumps that are DME
to be provided under the in-office ancillary services exception; (3)
making clear that chemotherapy infusion drugs may be provided under the
in-office ancillary services exception through the administration or
dispensing of the drugs to patients in the physician's office; and (4)
creating a new exception for certain items of DME furnished in a
physician's office for the convenience of the physician's patients.
C. Alternatives Considered
In drafting the January 1998 proposed rule covering a physician's
referrals for DHS, we attempted to interpret the statute strictly and
literally. After reviewing the voluminous number of comments we
received, we have considered many alternative ways to interpret the
statute to accommodate the practical problems that commenters raised,
while still fulfilling the intent of the law. For example, we revised
the ``same building'' requirements in the in-office ancillary services
exception to address commenters' concerns. Under section
1877(b)(2)(A)(ii)(I) of the Act, services qualify for the in-office
ancillary services exception if they are furnished ``in a building in
which the referring physician (or another physician who is a member of
the same group practice) furnishes physician services unrelated to the
furnishing of designated health services.'' In the January 1998
proposed rule, we made it clear that we regarded the building
requirement of the in-office ancillary services exception, in
combination with the supervision and billing requirements, as the
Congress's attempt to circumscribe the exception so that it applies
only to services provided within the referring physician's actual
sphere
[[Page 952]]
of practice. Without these requirements, physicians could refer to, and
profit from, almost any entity, with the claim that somehow the
referred services are ``in-office'' services that are being supervised
from some remote place.
Notwithstanding, we now realize that our proposed definition of a
``building'' that attempted to define a building in architectural terms
could cause practical problems for some physicians and that a clearer,
``bright line'' rule would be preferable. Accordingly, having
considered the various alternatives suggested by the commenters, we
concluded that for purposes of Phase I of this rulemaking, we would
define a ``building'' as a structure with, or combination of structures
that share, a single street address as assigned by the U.S. Postal
Service. A building would be considered as one building for all suites
or room numbers located inside that are required by the U.S. Postal
Service to use the same street address, regardless of the suite number.
Under Phase I of this rulemaking, suites used by the same group
practice or solo physician in buildings with separate street addresses
will be treated as separate buildings for the purposes of the in-office
ancillary services exception. While we recognize that this mailing
address rule may result in an occasional anomaly, we are persuaded that
it creates a ``bright line'' rule that will be easy to apply and will
produce fair results in the vast majority of cases.
We have also responded to the commenters' numerous concerns that
the space in the building in which the DHS are provided must be
adjacent to the space in which services that are not DHS are provided.
We have revised the regulation so that an adjacent space is no longer
necessary (subject to the dictates of any Medicare or Medicaid payment
or coverage supervision rules). Shared facilities in the same building
are now permitted to the extent they comply with the supervision,
location, and billing requirements of the in-office ancillary services
exception. However, because of the increased risk of abuse in this
expansion, we felt that we could not protect DHS provided by mobile
vans or other mobile facilities under the in-office ancillary services
exception, except in very limited circumstances.
As these examples demonstrate, our approach in Phase I of this
rulemaking was to address as many of the industry's concerns as
possible. We considered a variety of suggestions and alternatives,
selecting only those that were consistent with the statute's goals and
directives, and that would protect Federal health care program
beneficiaries' access to services.
D. Conclusion
For the reasons stated above, we are not preparing analyses for
either the RFA or section 1102(b) of the Act because we have
determined, and we certify, that Phase I of this rulemaking will not
have a significant economic impact on a substantial number of small
entities or a significant impact on the operations of a substantial
number of small rural hospitals.
In accordance with the provisions of Executive Order 12866, Phase I
of this rulemaking was reviewed by the Office of Management and Budget.
List of Subjects
42 CFR Part 411
Kidney diseases, Medicare, Physician referral, Reporting and
recordkeeping requirements.
42 CFR Part 424
Emergency medical services, Health facilities, Health professions,
Medicare.
For the reasons set forth in the preamble, HCFA amends 42 CFR
chapter IV as set forth below:
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT
A. Part 411 is amended as follows:
1. The authority citation for part 411 continues to read as
follows:
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
Subpart A--General Exclusions and Exclusions of Particular Services
2. In Sec. 411.1, paragraph (a) is revised to read as follows:
Sec. 411.1 Basis and scope.
(a) Statutory basis. Sections 1814(a) and 1835(a) of the Act
require that a physician certify or recertify a patient's need for home
health services but, in general, prohibit a physician from certifying
or recertifying the need for services if the services will be furnished
by an HHA in which the physician has a significant ownership interest,
or with which the physician has a significant financial or contractual
relationship. Sections 1814(c), 1835(d), and 1862 of the Act exclude
from Medicare payment certain specified services. The Act provides
special rules for payment of services furnished by the following:
Federal providers or agencies (sections 1814(c) and 1835(d)); hospitals
and physicians outside of the U.S. (sections 1814(f) and 1862(a)(4));
and hospitals and SNFs of the Indian Health Service (section 1880 of
the Act). Section 1877 of the Act sets forth limitations on referrals
and payment for designated health services furnished by entities with
which the referring physician (or an immediate family member of the
referring physician) has a financial relationship.
* * * * *
Subpart J--Physician Ownership of, and Referral of Patients or
Laboratory Specimens to, Entities Furnishing Clinical Laboratory or
Other Health Services
3. Section 411.350 is revised to read as follows:
Sec. 411.350 Scope of subpart.
(a) This subpart implements section 1877 of the Act, which
generally prohibits a physician from making a referral under Medicare
for designated health services to an entity with which the physician or
a member of the physician's immediate family has a financial
relationship.
(b) This subpart does not provide for exceptions or immunity from
civil or criminal prosecution or other sanctions applicable under any
State laws or under Federal law other than section 1877 of the Act. For
example, although a particular arrangement involving a physician's
financial relationship with an entity may not prohibit the physician
from making referrals to the entity under this subpart, the arrangement
may nevertheless violate another provision of the Act or other laws
administered by HHS, the Federal Trade Commission, the Securities and
Exchange Commission, the Internal Revenue Service, or any other Federal
or State agency.
(c) This subpart requires, with some exceptions, that certain
entities furnishing covered services under Medicare Part A or Part B
report information concerning their ownership, investment, or
compensation arrangements in the form, manner, and at the times
specified by HCFA.
4. Section 411.351 is revised to read as follows:
Sec. 411.351 Definitions.
As used in this subpart, unless the context indicates otherwise:
Centralized building means all or part of a building, including,
for purposes of this definition only, a mobile vehicle, van, or trailer
that is owned or leased on a full-time basis (that is, 24 hours per
day, 7 days per week, for a term of not less than 6 months) by a group
practice and that is used exclusively by the group practice. Space in a
building or a
[[Page 953]]
mobile vehicle, van, or trailer that is shared by more than one group
practice, by a group practice and one or more solo practitioners, or by
a group practice and another provider (for example, a diagnostic
imaging facility) is not a centralized building for purposes of this
rule. This provision does not preclude a group practice from providing
services to other providers (for example, purchased diagnostic tests)
in the group practice's centralized building. A group practice may have
more than one centralized building.
Clinical laboratory services means the biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings, including procedures to
determine, measure, or otherwise describe the presence or absence of
various substances or organisms in the body, as specifically identified
by the CPT and HCPCS codes posted on the HCFA web site, http://www.hcfa.gov, (and in annual updates published in the Federal Register
and posted on the HCFA web site), except as specifically excluded on
the HCFA web site and in annual updates. All services identified on the
HCFA web site and in annual updates are clinical laboratory services
for purposes of these regulations. Any service not specifically
identified on the HCFA web site, as amended from time to time and
published in the Federal Register, is not a clinical laboratory service
for purposes of these regulations.
Consultation means a professional service furnished to a patient by
a physician if the following conditions are satisfied:
(1) The physician's opinion or advice regarding evaluation and/or
management of a specific medical problem is requested by another
physician.
(2) The request and need for the consultation are documented in the
patient's medical record.
(3) After the consultation is provided, the physician prepares a
written report of his or her findings, which is provided to the
physician who requested the consultation.
(4) With respect to radiation therapy services provided by a
radiation oncologist, a course of radiation treatments over a period of
time will be considered to be pursuant to a consultation, provided the
radiation oncologist communicates with the referring physician on a
regular basis about the patient's course of treatment and progress.
Designated health services (DHS) means any of the following
services (other than those provided as emergency physician services
furnished outside of the U.S.), as they are defined in this section:
(1) Clinical laboratory services.
(2) Physical therapy, occupational therapy, and speech-language
pathology services.
(3) Radiology and certain other imaging services.
(4) Radiation therapy services and supplies.
(5) Durable medical equipment and supplies.
(6) Parenteral and enteral nutrients, equipment, and supplies.
(7) Prosthetics, orthotics, and prosthetic devices and supplies.
(8) Home health services.
(9) Outpatient prescription drugs.
(10) Inpatient and outpatient hospital services.
Except as otherwise noted in these regulations, the term
``designated health services (DHS)'' means only DHS payable, in whole
or in part, by Medicare. DHS do not include services that are
reimbursed by Medicare as part of a composite rate (for example,
ambulatory surgical center services or SNF Part A payments), except to
the extent the services listed in paragraphs (1) through (10) of this
definition are themselves payable through a composite rate (that is,
all services provided as home health services or inpatient and
outpatient hospital services are DHS).
Durable medical equipment (DME) and supplies has the meaning given
in section 1861(n) of the Act and Sec. 414.202 of this chapter.
Employee means any individual who, under the common law rules that
apply in determining the employer-employee relationship (as applied for
purposes of section 3121(d)(2) of the Internal Revenue Code of 1986),
is considered to be employed by, or an employee of, an entity.
(Application of these common law rules is discussed in 20 CFR 404.1007
and 26 CFR 31.3121(d)-1(c).)
Entity means a physician's sole practice or a practice of multiple
physicians or any other person, sole proprietorship, public or private
agency or trust, corporation, partnership, limited liability company,
foundation, not-for-profit corporation, or unincorporated association
that furnishes DHS. For purposes of this definition, an entity does not
include the referring physician himself or herself, but does include
his or her medical practice. A person or entity is considered to be
furnishing DHS if it is the person or entity to which HCFA makes
payment for the DHS, directly or upon assignment on the patient's
behalf, except that if the person or entity has reassigned its right to
payment to an employer pursuant to Sec. 424.80(b)(1) of this chapter; a
facility pursuant to Sec. 424.80(b)(2) of this chapter; or a health
care delivery system, including clinics, pursuant to Sec. 424.80(b)(3)
of this chapter (other than a health care delivery system that is a
health plan (as defined in Sec. 1000.952(l) of this title), and other
than any managed care organization (MCO), provider-sponsored
organization (PSO), or independent practice association (IPA) with
which a health plan contracts for services provided to plan enrollees),
the person or entity furnishing DHS is the person or entity to which
payment has been reassigned. Provided further, that a health plan, MCO,
PSO, or IPA that employs a supplier or operates a facility that could
accept reassignment from a supplier pursuant to Secs. 424.80(b)(1) and
(b)(2) of this chapter is the entity furnishing DHS for any services
provided by such supplier.
Fair market value means the value in arm's-length transactions,
consistent with the general market value. ``General market value''
means the price that an asset would bring, as the result of bona fide
bargaining between well-informed buyers and sellers who are not
otherwise in a position to generate business for the other party; or
the compensation that would be included in a service agreement, as the
result of bona fide bargaining between well-informed parties to the
agreement who are not otherwise in a position to generate business for
the other party, on the date of acquisition of the asset or at the time
of the service agreement. Usually, the fair market price is the price
at which bona fide sales have been consummated for assets of like type,
quality, and quantity in a particular market at the time of
acquisition, or the compensation that has been included in bona fide
service agreements with comparable terms at the time of the agreement.
With respect to the rentals and leases described in Sec. 411.357(a) and
(b), ``fair market value'' means the value of rental property for
general commercial purposes (not taking into account its intended use).
In the case of a lease of space, this value may not be adjusted to
reflect the additional value the prospective lessee or lessor would
attribute to the proximity or convenience to the lessor when the lessor
is a potential source of patient referrals to the lessee. For purposes
of
[[Page 954]]
this section, a rental payment does not take into account intended use
if it takes into account costs incurred by the lessor in developing or
upgrading the property or maintaining the property or its improvements.
Home health services means the services described in section
1861(m) of the Act and part 409, subpart E of this chapter.
Hospital means any entity that qualifies as a ``hospital'' under
section 1861(e) of the Act, as a ``psychiatric hospital'' under section
1861(f) of the Act, or as a ``rural primary care hospital'' under
section 1861(mm)(1) of the Act, and refers to any separate legally
organized operating entity plus any subsidiary, related entity, or
other entities that perform services for the hospital's patients and
for which the hospital bills. However, a ``hospital'' does not include
entities that perform services for hospital patients ``under
arrangements'' with the hospital.
HPSA means, for purposes of this subpart, an area designated as a
health professional shortage area under section 332(a)(1)(A) of the
Public Health Service Act for primary medical care professionals (in
accordance with the criteria specified in part 5 of this title).
Immediate family member or member of a physician's immediate family
means husband or wife; birth or adoptive parent, child, or sibling;
stepparent, stepchild, stepbrother, or stepsister; father-in-law,
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or
grandchild.
``Incident to'' services means those services that meet the
requirements of section 1861(s)(2)(A) of the Act and section 2050 of
the Medicare Carriers Manual (HCFA Pub. 14-3), Part 3--Claims Process.
(Those wishing to subscribe to program manuals should contact either
the Government Printing Office (GPO) or the National Technical
Information Service (NTIS) at the following addresses: Superintendent
of Documents, Government Printing Office, ATTN: New Orders, P.O. Box
371954, Pittsburgh, PA 15250-7954, Telephone (202) 512-1800, Fax number
(202) 512-2250 (for credit card orders); or National Technical
Information Service, Department of Commerce, 5825 Port Royal Road,
Springfield, VA 22161, Telephone (703) 487-4630. In addition,
individual manual transmittals and Program Memoranda can be purchased
from NTIS. Interested parties should identify the transmittal(s) they
want. GPO or NTIS can give complete details on how to obtain the
publications they sell. Additionally, all manuals are available at the
following Internet address: http://www.hcfa.gov/pubforms/progman.htm.)
Inpatient hospital services means those services as defined in
section 1861(b) of the Act and Sec. 409.10(a) and (b) of this chapter
and includes inpatient psychiatric hospital services listed in section
1861(c) of the Act and inpatient rural primary care hospital services,
as defined in section 1861(mm)(2) of the Act. ``Inpatient hospital
services'' do not include emergency inpatient services provided by a
hospital located outside of the U.S. and covered under the authority in
section 1814(f)(2) of the Act and part 424, subpart H of this chapter,
or emergency inpatient services provided by a nonparticipating hospital
within the U.S., as authorized by section 1814(d) of the Act and
described in part 424, subpart G of this chapter. These services also
do not include dialysis furnished by a hospital that is not certified
to provide end-stage renal dialysis (ESRD) services under subpart U of
part 405 of this chapter. Inpatient hospital services include services
that a hospital provides for its patients that are furnished either by
the hospital or by others under arrangements with the hospital.
``Inpatient hospital services'' do not include professional services
performed by physicians, physician assistants, nurse practitioners,
clinical nurse specialists, certified nurse midwives, and certified
registered nurse anesthetists and qualified psychologists if Medicare
reimburses the services independently and not as part of the inpatient
hospital service (even if they are billed by a hospital under an
assignment or reassignment).
Laboratory means an entity furnishing biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Entities only collecting or preparing specimens (or both) or only
serving as a mailing service and not performing testing are not
considered laboratories.
List of CPT/HCPCS Codes Used to Describe Certain Designated Health
Services Under the Physician Referral Provisions (Section 1877 of the
Social Security Act) means the list of certain designated health
services under section 1877 of the Act initially posted on the HCFA web
site and updated annually thereafter in an addendum to the physician
fee schedule final rule and on the HCFA web site.
Member of the group means, for purposes of this rule, a direct or
indirect physician owner of a group practice (including a physician
whose interest is held by his or her individual professional
corporation or by another entity), a physician employee of the group
practice (including a physician employed by his or her individual
professional corporation that has an equity interest in the group
practice), a locum tenens physician (as defined in this section), or an
on-call physician while the physician is providing on-call services for
members of the group practice. A physician is a member of the group
during the time he or she furnishes ``patient care services'' to the
group as defined in this section. An independent contractor or a leased
employee is not a member of the group. ``Locum tenens physician'' means
a physician who substitutes (that is, ``stands in the shoes'') in
exigent circumstances for a regular physician who is a member of the
group, in accordance with applicable reassignment rules and
regulations, including section 3060.7 of the Medicare Carriers Manual
(HCFA Pub. 14-3), Part 3--Claims Process.
Outpatient hospital services means the therapeutic, diagnostic, and
partial hospitalization services listed under sections 1861(s)(2)(B)
and (C) of the Act; outpatient services furnished by a psychiatric
hospital, as defined in section 1861(f) of the Act; and outpatient
rural primary care hospital services, as defined in section 1861(mm)(3)
of the Act. Emergency services covered in nonparticipating hospitals
are excluded under the conditions described in section 1835(b) of the
Act and subpart G of part 424 of this chapter. ``Outpatient hospital
services'' includes services that a hospital provides for its patients
that are furnished either by the hospital or by others under
arrangements with the hospital. ``Outpatient hospital services'' do not
include professional services performed by physicians, physician
assistants, nurse practitioners, clinical nurse specialists, certified
nurse midwives, certified registered nurse anesthetists, and qualified
psychologists if Medicare reimburses the services independently and not
as part of the outpatient hospital service (even if they are billed by
a hospital under an assignment or reassignment).
[[Page 955]]
Outpatient prescription drugs means all prescription drugs covered
by Medicare Part B.
Parenteral and enteral nutrients, equipment, and supplies means the
following services (including all HCPCS level 2 codes for these
services):
(1) Parenteral nutrients, equipment, and supplies, meaning those
items and supplies needed to provide nutriment to a patient with
permanent, severe pathology of the alimentary tract that does not allow
absorption of sufficient nutrients to maintain strength commensurate
with the patient's general condition, as described in section 65-10 of
the Medicare Coverage Issues Manual (HCFA Pub. 6); and
(2) Enteral nutrients, equipment, and supplies, meaning items and
supplies needed to provide enteral nutrition to a patient with a
functioning gastrointestinal tract who, due to pathology to or
nonfunction of the structures that normally permit food to reach the
digestive tract, cannot maintain weight and strength commensurate with
his or her general condition, as described in section 65-10 of the
Medicare Coverage Issues Manual (HCFA Pub. 6).
Patient care services means any tasks performed by a physician in
the group practice that address the medical needs of specific patients
or patients in general, regardless of whether they involve direct
patient encounters; or generally benefit a particular practice. Patient
care services can include, for example, the services of physicians who
do not directly treat patients, such as time spent by a physician
consulting with other physicians or reviewing laboratory tests, or time
spent training staff members, arranging for equipment, or performing
administrative or management tasks.
Physical therapy, occupational therapy, and speech-language
pathology services means those particular services identified by the
CPT and HCPCS codes on the HCFA web site (and in annual updates
published in the Federal Register). All services identified on the HCFA
web site and in annual updates are physical therapy, occupational
therapy, and speech-language pathology services for purposes of these
regulations. Any service not specifically identified on the HCFA web
site, as amended from time to time and published in the Federal
Register, is not a physical therapy, occupational therapy, or speech-
language pathology service for purposes of these regulations. The list
of codes identifying physical therapy, occupational therapy, and
speech-language pathology services for purposes of these regulations
includes the following:
(1) Physical therapy services, meaning those outpatient physical
therapy services (including speech-language pathology services)
described at section 1861(p) of the Act that are covered under Medicare
Part A or Part B, regardless of who provides them, if the services
include--
(i) Assessments, function tests and measurements of strength,
balance, endurance, range of motion, and activities of daily living;
(ii) Therapeutic exercises, massage, and use of physical medicine
modalities, assistive devices, and adaptive equipment;
(iii) Establishment of a maintenance therapy program for an
individual whose restoration potential has been reached; however,
maintenance therapy itself is not covered as part of these services; or
(iv) Speech-language pathology services that are for the diagnosis
and treatment of speech, language, and cognitive disorders that include
swallowing and other oral-motor dysfunctions.
(2) Occupational therapy services, meaning those services described
at section 1861(g) of the Act that are covered under Medicare Part A or
Part B, regardless of who provides them, if the services include--
(i) Teaching of compensatory techniques to permit an individual
with a physical or cognitive impairment or limitation to engage in
daily activities;
(ii) Evaluation of an individual's level of independent
functioning;
(iii) Selection and teaching of task-oriented therapeutic
activities to restore sensory-integrative function; or
(iv) Assessment of an individual's vocational potential, except
when the assessment is related solely to vocational rehabilitation.
Physician means a doctor of medicine or osteopathy, a doctor of
dental surgery or dental medicine, a doctor of podiatric medicine, a
doctor of optometry, or a chiropractor, as defined in section 1861(r)
of the Act.
Physician in the group practice means a member of the group
practice, as well as an independent contractor physician, during the
time the independent contractor is furnishing patient care services (as
defined in this section) to the group practice under a contractual
arrangement with the group practice to provide services to the group
practice's patients in the group practice's facilities. The contract
must contain the same restrictions on compensation that apply to
members of the group practice under Sec. 411.352(g) (or the contract
fits in the personal services exception in Sec. 411.357(d)), and the
independent contractor's arrangement with the group practice must
comply with the reassignment rules at Sec. 424.80(b)(3) of this chapter
(see also section 3060.3 of the Medicare Carriers Manual (HCFA Pub. 14-
3), Part 3--Claims Process). Referrals from an independent contractor
who is a physician in the group are subject to the prohibition on
referrals in Sec. 411.353(a), and the group practice is subject to the
limitation on billing for those referrals in Sec. 411.353(b).
Physician incentive plan means any compensation arrangement between
an entity and a physician or physician group that may directly or
indirectly have the effect of reducing or limiting services furnished
with respect to individuals enrolled with the entity.
Plan of care means the establishment by a physician of a course of
diagnosis or treatment (or both) for a particular patient, including
the ordering of services.
Prosthetics, Orthotics, and Prosthetic Devices and Supplies means
the following services (including all HCPCS level 2 codes for these
services that are covered by Medicare):
(1) Orthotics, meaning leg, arm, back, and neck braces, as listed
in section 1861(s)(9) of the Act.
(2) Prosthetics, meaning artificial legs, arms, and eyes, as
described in section 1861(s)(9) of the Act.
(3) Prosthetic devices, meaning devices (other than a dental
device) listed in section 1861(s)(8) of the Act that replace all or
part of an internal body organ, including colostomy bags, and one pair
of conventional eyeglasses or contact lenses furnished subsequent to
each cataract surgery with insertion of an intraocular lens.
(4) Prosthetic supplies, meaning supplies that are necessary for
the effective use of a prosthetic device (including supplies directly
related to colostomy care).
Radiation therapy services and supplies means those particular
services and supplies identified by the CPT and HCPCS codes on the HCFA
web site and in annual updates published in the Federal Register. All
services identified on the HCFA web site and in annual updates are
radiation therapy services and supplies for purposes of these
regulations. Any service not specifically identified on the HCFA web
site, as amended from time to time and published in the Federal
Register, is not a radiation therapy service or supply for purposes of
these regulations. The list of codes for radiation therapy services and
supplies identified on the HCFA web site and in annual updates is based
on
[[Page 956]]
section 1861(s)(4) of the Act and Sec. 410.35 of this chapter but does
not include nuclear medicine procedures.
Radiology and certain other imaging services means those particular
services identified by the CPT and HCPCS codes on the HCFA web site and
in annual updates published in the Federal Register (except as
otherwise specifically excluded on the HCFA web site and in annual
updates). All services identified on the HCFA web site and in annual
updates are radiology and certain other imaging services for purposes
of these regulations. Any service not specifically identified on the
HCFA web site, as amended from time to time and published in the
Federal Register, is not a radiology or certain other imaging service
for purposes of these regulations. The list of radiology and certain
other imaging services set forth on the HCFA web site and in annual
updates includes the professional and technical components of any
diagnostic test or procedure using x-rays, ultrasound, or other imaging
services, computerized axial tomography, or magnetic resonance imaging,
as covered under section 1861(s)(3) of the Act and Secs. 410.32 and
410.34 of this chapter but does not include--
(1) X-ray, fluoroscopy, or ultrasonic procedures that require the
insertion of a needle, catheter, tube, or probe through the skin or
into a body orifice;
(2) Radiology procedures that are integral to the performance of,
and performed during, nonradiological medical procedures; and
(3) Nuclear medicine procedures.
Referral--
(1) Means either of the following:
(i) Except as provided in paragraph (2) of this definition, the
request by a physician for, or ordering of, or the certifying or
recertifying of the need for, any designated health service for which
payment may be made under Medicare Part B, including a request for a
consultation with another physician and any test or procedure ordered
by or to be performed by (or under the supervision of) that other
physician, but not including any designated health service personally
performed or provided by the referring physician. A designated health
service is not personally performed or provided by the referring
physician if it is performed or provided by any other person,
including, but not limited to, the referring physician's employees,
independent contractors, or group practice members.
(ii) Except as provided in paragraph (2) of this definition, a
request by a physician that includes the provision of any designated
health service for which payment may be made under Medicare, the
establishment of a plan of care by a physician that includes the
provision of such a designated health service, or the certifying or
recertifying of the need for such a designated health service, but not
including any designated health service personally performed or
provided by the referring physician. A designated health service is not
personally performed or provided by the referring physician if it is
performed or provided by any other person including, but not limited
to, the referring physician's employees, independent contractors, or
group practice members.
(2) Does not include a request by a pathologist for clinical
diagnostic laboratory tests and pathological examination services, by a
radiologist for diagnostic radiology services, and by a radiation
oncologist for radiation therapy, if--
(i) The request results from a consultation initiated by another
physician (whether the request for a consultation was made to a
particular physician or to an entity with which the physician is
affiliated); and
(ii) The tests or services are furnished by or under the
supervision of the pathologist, radiologist, or radiation oncologist.
(3) Can be in any form, including, but not limited to, written,
oral, or electronic.
Referring physician means a physician who makes a referral as
defined in this section or who directs another person or entity to make
a referral or who controls referrals made by another person or entity.
Remuneration means any payment or other benefit made directly or
indirectly, overtly or covertly, in cash or in kind, except that the
following are not considered remuneration for purposes of this section:
(1) The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
(2) The furnishing of items, devices, or supplies (not including
surgical items, devices, or supplies) that are used solely to collect,
transport, process, or store specimens for the entity furnishing the
items, devices, or supplies or are used solely to order or communicate
the results of tests or procedures for the entity.
(3) A payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual
who is covered by a policy with the insurer or by the self-insured
plan, if--
(i) The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
plan and the physician;
(ii) The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual; and
(iii) The amount of the payment is set in advance, does not exceed
fair market value, and is not determined in a manner that takes into
account directly or indirectly the volume or value of any referrals.
Same building means a structure with, or combination of structures
that share, a single street address as assigned by the U.S. Postal
Service, excluding all exterior spaces (for example, lawns, courtyards,
driveways, parking lots) and interior parking garages. For purposes of
this rule, the ``same building'' does not include a mobile vehicle,
van, or trailer.
5. Section 411.352 is added to read as follows:
Sec. 411.352 Group practice.
For purposes of this subpart, a group practice is a physician
practice that meets the following conditions:
(a) Single legal entity. The group practice must consist of a
single legal entity formed primarily for the purpose of being a
physician group practice in any organizational form recognized by the
State in which the group practice achieves its legal status, including,
but not limited to, a partnership, professional corporation, limited
liability company, foundation, not-for-profit corporation, faculty
practice plan, or similar association. The single legal entity may be
organized by any party or parties, including, but not limited to,
physicians, health care facilities, or other persons or entities
(including, but not limited to, physicians individually incorporated as
professional corporations). The single legal entity may not be
organized or owned (in whole or in part) by another medical practice
that is an operating physician practice (regardless of whether the
medical practice meets the conditions for a group practice under this
section). For purposes of this rule, a single legal entity does not
include informal affiliations of physicians formed substantially to
share profits from referrals, or separate group practices under common
ownership or control through a physician practice management company,
hospital, health system, or other entity or organization. A group
practice that is otherwise a
[[Page 957]]
single legal entity may itself own subsidiary entities.
(b) Physicians. The group practice must have at least two
physicians who are members of the group (whether employees or direct or
indirect owners), as defined in this section.
(c) Range of care. Each physician who is a member of the group, as
defined in Sec. 411.351, must furnish substantially the full range of
patient care services that the physician routinely furnishes, including
medical care, consultation, diagnosis, and treatment, through the joint
use of shared office space, facilities, equipment, and personnel.
(d) Services furnished by group practice members. (1) Except as
provided in paragraphs (d)(2) and (d)(3) of this section, substantially
all of the patient care services of the physicians who are members of
the group (that is, at least 75 percent of the total patient care
services of the group practice members) must be furnished through the
group and billed under a billing number assigned to the group, and the
amounts received must be treated as receipts of the group. ``Patient
care services'' must be measured by one of the following:
(i) The total time each member spends on patient care services
documented by any reasonable means (including, but not limited to, time
cards, appointment schedules, or personal diaries). (For example, if a
physician practices 40 hours a week and spends 30 hours on patient care
services for a group practice, the physician has spent 75 percent of
his or her time providing patient care services for the group.)
(ii) Any alternative measure that is reasonable, fixed in advance
of the performance of the services being measured, uniformly applied
over time, verifiable, and documented.
(2) The data used to calculate compliance with this ``substantially
all test'' and related supportive documentation must be made available
to the Secretary upon request.
(3) The ``substantially all test'' does not apply to any group
practice that is located solely in an HPSA, as defined in Sec. 411.351.
(4) For a group practice located outside of an HPSA (as defined in
Sec. 411.351), any time spent by a group practice member providing
services in an HPSA should not be used to calculate whether the group
practice has met the ``substantially all test,'' regardless of whether
the member's time in the HPSA is spent in a group practice, clinic, or
office setting.
(5) During the ``start up'' period (not to exceed 12 months) that
begins on the date of the initial formation of a new group practice, a
group practice must make a reasonable, good faith effort to ensure that
the group practice complies with the requirement set forth in paragraph
(d)(1) of this section as soon as practicable, but no later than 12
months from the date of the initial formation of the group practice.
This paragraph (d)(5) does not apply when an existing group practice
admits a new member or when an existing group practice reorganizes.
(e) Distribution of expenses and income. The overhead expenses of,
and income from, the practice must be distributed according to methods
that are determined before the receipt of payment for the services
giving rise to the overhead expense or producing the income. Nothing in
this rule prevents a group practice from adjusting its compensation
methodology prospectively, subject to restrictions on the distribution
of revenue from DHS under paragraph (i) of this section.
(f) Unified business. (1) The group practice must be a unified
business having at least the following features:
(i) Centralized decision-making by a body representative of the
group practice that maintains effective control over the group's assets
and liabilities (including, but not limited to, budgets, compensation,
and salaries).
(ii) Consolidated billing, accounting, and financial reporting.
(iii) Centralized utilization review.
(2) Location and specialty-based compensation practices are
permitted with respect to revenues derived from services that are not
DHS and may be permitted with respect to revenues derived from DHS
under paragraph (i) of this section.
(g) Volume or value of referrals. No physician who is a member of
the group practice directly or indirectly receives compensation based
on the volume or value of referrals by the physician, except as
provided in paragraph (i) of this section.
(h) Physician-patient encounters. Members of the group must
personally conduct no less than 75 percent of the physician-patient
encounters of the group practice.
(i) Special rule for productivity bonuses and profit shares. (1) A
physician in a group practice may be paid a share of overall profits of
the group, or a productivity bonus based on services that he or she has
personally performed (including services ``incident to'' those
personally performed services as defined in Sec. 411.351), provided
that the share or bonus is not determined in any manner that is
directly related to the volume or value of referrals of DHS by the
physician.
(2) ``Overall profits'' means the group's entire profits derived
from DHS payable by Medicare or Medicaid or the profits derived from
DHS payable by Medicare or Medicaid of any component of the group
practice that consists of at least five physicians. The share of
overall profits will be deemed not to relate directly to the volume or
value of referrals if one of the following conditions is met:
(i) The group's profits are divided per capita (for example, per
member of the group or per physician in the group).
(ii) Revenues derived from DHS are distributed based on the
distribution of the group practice's revenues attributed to services
that are not DHS payable by any Federal health care program or private
payer.
(iii) Revenues derived from DHS constitute less than 5 percent of
the group practice's total revenues, and the allocated portion of those
revenues to each physician in the group practice constitutes 5 percent
or less of his or her total compensation from the group.
(iv) Overall profits are divided in a reasonable and verifiable
manner that is not directly related to the volume or value of the
physician's referrals of DHS.
(3) A productivity bonus for personally performed services
(including services ``incident to'' those personally performed services
as defined in Sec. 411.351) will be deemed not to relate directly to
the volume or value of referrals of DHS if one of the following
conditions is met:
(i) The bonus is based on the physician's total patient encounters
or relative value units (RVUs). The methodology for establishing RVUs
is set forth in Sec. 414.22 of this chapter.
(ii) The bonus is based on the allocation of the physician's
compensation attributable to services that are not DHS payable by any
Federal health care program or private payer.
(iii) Revenues derived from DHS are less than 5 percent of the
group practice's total revenues, and the allocated portion of those
revenues to each physician in the group practice constitutes 5 percent
or less of his or her total compensation from the group practice.
(iv) The bonus is calculated in a reasonable and verifiable manner
that is not directly related to the volume or value of the physician's
referrals of DHS.
(4) Supporting documentation verifying the method used to calculate
the profit shares or productivity bonus under paragraphs (i)(2) and
(i)(3) of this section, and the resulting amount of
[[Page 958]]
compensation, must be made available to the Secretary upon request.
6. Section 411.353 is revised to read as follows:
Sec. 411.353 Prohibition on certain referrals by physicians and
limitations on billing.
(a) Prohibition on referrals. Except as provided in this subpart, a
physician who has a direct or indirect financial relationship with an
entity, or who has an immediate family member who has a direct or
indirect financial relationship with the entity, may not make a
referral to that entity for the furnishing of DHS for which payment
otherwise may be made under Medicare. A physician's prohibited
financial relationship with an entity that furnishes DHS is not imputed
to his or her group practice or its members or its staff; however, a
referral made by a physician's group practice, its members, or its
staff may be imputed to the physician, if the physician directs the
group practice, its members, or its staff to make the referral or if
the physician controls referrals made by his or her group practice, its
members, or its staff.
(b) Limitations on billing. An entity that furnishes DHS pursuant
to a referral that is prohibited by paragraph (a) of this section may
not present or cause to be presented a claim or bill to the Medicare
program or to any individual, third party payer, or other entity for
the DHS performed pursuant to the prohibited referral.
(c) Denial of payment. Except as provided in paragraph (e) of this
section, no Medicare payment may be made for a designated health
service that is furnished pursuant to a prohibited referral.
(d) Refunds. An entity that collects payment for a designated
health service that was performed under a prohibited referral must
refund all collected amounts on a timely basis, as defined in
Sec. 1003.101 of this title.
(e) Exception for certain entities. Payment may be made to an
entity that submits a claim for a designated health service if--
(1) The entity did not have actual knowledge of, and did not act in
reckless disregard or deliberate ignorance of, the identity of the
physician who made the referral of the designated health service to the
entity; and
(2) The claim otherwise complies with all applicable Federal laws,
rules, and regulations.
7. Section 411.354 is added to read as follows:
Sec. 411.354 Financial relationship, compensation, and ownership or
investment interest.
(a) Financial relationships. (1) Financial relationship means--
(i) A direct or indirect ownership or investment interest (as
defined in paragraph (b) of this section) in any entity that furnishes
DHS; or
(ii) A direct or indirect compensation arrangement (as defined in
paragraph (c) of this section) with an entity that furnishes DHS.
(2) A direct financial relationship exists if remuneration passes
between the referring physician (or a member of his or her immediate
family) and the entity furnishing DHS without any intervening persons
or entities (not including an agent of the physician, the immediate
family member, or the entity furnishing DHS).
(3) An indirect financial relationship exists under the conditions
described in paragraphs (b)(5) and (c)(2) of this section.
(b) Ownership or investment interest. An ownership or investment
interest may be through equity, debt, or other means, and includes an
interest in an entity that holds an ownership or investment interest in
any entity that furnishes DHS.
(1) An ownership or investment interest includes, but is not
limited to, stock, partnership shares, limited liability company
memberships, as well as loans, bonds, or other financial instruments
that are secured with an entity's property or revenue or a portion of
that property or revenue.
(2) An ownership or investment interest in a subsidiary company is
neither an ownership or investment interest in the parent company, nor
in any other subsidiary of the parent, unless the subsidiary company
itself has an ownership or investment interest in the parent or such
other subsidiaries. It may, however, be part of an indirect financial
relationship.
(3) Ownership and investment interests do not include, among other
things--
(i) An interest in a retirement plan;
(ii) Stock options and convertible securities until the stock
options are exercised or the convertible securities are converted to
equity (before this time they are compensation arrangements as defined
in paragraph (c) of this section);
(iii) An unsecured loan subordinated to a credit facility (which is
a compensation arrangement as defined in paragraph (c) of this
section); or
(iv) An ``under arrangements'' contract between a hospital and an
entity owned by one or more physicians (or a group of physicians)
providing DHS ``under arrangements'' to the hospital.
(4) An ownership or investment interest that meets an exception set
forth in Secs. 411.355 or 411.356 need not also meet an exception for
compensation arrangements set forth in Sec. 411.357 with respect to
profit distributions, dividends, interest payments on secured
obligations, or the like.
(5) Indirect ownership or investment interest. (i) An indirect
ownership or investment interest exists if--
(A) Between the referring physician (or immediate family member)
and the entity furnishing DHS there exists an unbroken chain of any
number (but no fewer than one) of persons or entities having ownership
or investment interests between them; and
(B) The entity furnishing DHS has actual knowledge of, or acts in
reckless disregard or deliberate ignorance of, the fact that the
referring physician (or immediate family member) has some ownership or
investment interest (through any number of intermediary ownership or
investment interests) in the entity furnishing the DHS.
(ii) The entity furnishing DHS need not know, or act in reckless
disregard or deliberate ignorance of, the precise composition of the
unbroken chain or the specific terms of the ownership or investment
interests that form the links in the chain.
(c) Compensation arrangement. A compensation arrangement can be any
arrangement involving remuneration, direct or indirect, between a
physician (or a member of a physician's immediate family) and an
entity. An ``under arrangements'' contract between a hospital and an
entity providing DHS ``under arrangements'' to the hospital creates a
compensation arrangement for purposes of these regulations.
(1) A compensation arrangement does not include any of the
following:
(i) The portion of any business arrangement that consists solely of
the remuneration described in section 1877(h)(1)(C) of the Act and in
paragraphs (1) through (3) of the definition of the term
``remuneration'' in Sec. 411.351. (However, any other portion of the
arrangement may still constitute a compensation arrangement.)
(ii) Payments made by a consultant to a referring physician under
Sec. 414.65(e) of this chapter.
(2) Indirect compensation arrangement. An indirect compensation
arrangement exists if--
(i) Between the referring physician (or a member of his or her
immediate family) and the entity furnishing DHS there exists an
unbroken chain of any number (but not fewer than one) of
[[Page 959]]
persons or entities that have financial relationships (as defined in
paragraph (a) of this section) between them (that is, each link in the
chain has either an ownership or investment interest or a compensation
arrangement with the preceding link);
(ii) The referring physician (or immediate family member) receives
aggregate compensation from the person or entity in the chain with
which the physician (or immediate family member) has a direct financial
relationship that varies with, or otherwise reflects, the volume or
value of referrals or other business generated by the referring
physician for the entity furnishing the DHS. If the financial
relationship between the physician (or immediate family member) and the
person or entity in the chain with which the referring physician (or
immediate family member) has a direct financial relationship is an
ownership or investment interest, the determination whether the
aggregate compensation varies with, or otherwise reflects, the volume
or value of referrals or other business generated by the referring
physician for the entity furnishing the DHS will be measured by the
nonownership or noninvestment interest closest to the referring
physician (or immediate family member). (For example, if a referring
physician has an ownership interest in company A, which owns company B,
which has a compensation arrangement with company C, which has a
compensation arrangement with entity D that furnishes DHS, we would
look to the aggregate compensation between company B and company C for
purposes of this paragraph (c)(2)(ii)); and
(iii) The entity furnishing DHS has actual knowledge of, or acts in
reckless disregard or deliberate ignorance of, the fact that the
referring physician (or immediate family member) receives aggregate
compensation that varies with, or otherwise reflects, the value or
volume of referrals or other business generated by the referring
physician for the entity furnishing the DHS.
(d) Special rules on compensation. The following special rules
apply only to compensation under section 1877 of the Act and these
regulations in subpart J of this part.
(1) Compensation will be considered ``set in advance'' if the
aggregate compensation or a time-based or per unit of service-based
(whether per-use or per-service) amount is set in advance in the
initial agreement between the parties in sufficient detail so that it
can be objectively verified. The payment amount must be fair market
value compensation for services or items actually provided, not taking
into account the volume or value of referrals or other business
generated by the referring physician at the time of the initial
agreement or during the term of the agreement. Percentage compensation
arrangements do not constitute compensation that is ``set in advance''
in which the percentage compensation is based on fluctuating or
indeterminate measures or in which the arrangement results in the
seller receiving different payment amounts for the same service from
the same purchaser.
(2) Compensation (including time-based or per unit of service-based
compensation) will be deemed not to take into account ``the volume or
value of referrals'' if the compensation is fair market value for
services or items actually provided and does not vary during the course
of the compensation agreement in any manner that takes into account
referrals of DHS.
(3) Compensation (including time-based or per unit of service-based
compensation) will be deemed to not take into account ``other business
generated between the parties'' so long as the compensation is fair
market value and does not vary during the term of the agreement in any
manner that takes into account referrals or other business generated by
the referring physician, including private pay health care business.
(4) A physician's compensation may be conditioned on the
physician's referrals to a particular provider, practitioner, or
supplier, so long as the compensation arrangement--
(i) Is fixed in advance for the term of the agreement;
(ii) Is consistent with fair market value for services performed
(that is, the payment does not take into account the volume or value of
anticipated or required referrals);
(iii) Complies with an applicable exception under Secs. 411.355 or
411.357; and
(iv) Complies with the following conditions:
(A) The requirement to make referrals to a particular provider,
practitioner, or supplier is set forth in a written agreement signed by
the parties.
(B) The requirement to make referrals to a particular provider,
practitioner, or supplier does not apply if the patient expresses a
preference for a different provider, practitioner, or supplier; the
patient's insurer determines the provider, practitioner, or supplier;
or the referral is not in the patient's best medical interests in the
physician's judgement.
8. Section 411.355 is revised to read as follows:
Sec. 411.355 General exceptions to the referral prohibition related to
both ownership/investment and compensation.
The prohibition on referrals set forth in Sec. 411.353 does not
apply to the following types of services:
(a) Physician services. (1) Physician services as defined in
Sec. 410.20(a) of this chapter that are furnished--
(i) Personally by another physician who is a member of the
referring physician's group practice or is a physician in the same
group practice (as defined in Sec. 411.351) as the referring physician;
or
(ii) Under the supervision of another physician who is a member of
the referring physician's group practice or is a physician in the same
group practice (as defined at Sec. 411.351) as the referring physician,
provided that the supervision complies with all other applicable
Medicare payment and coverage rules for the physician services.
(2) For purposes of paragraph (a) of this section, ``physician
services'' includes only those ``incident to'' services (as defined in
Sec. 411.351) that are physician services under Sec. 410.20(a) of this
chapter.
(3) All other ``incident to'' services (for example, diagnostic
tests, physical therapy) are outside the scope of paragraph (a) of this
section.
(b) In-office ancillary services. Services (including certain items
of durable medical equipment (DME), as defined in paragraph (b)(4) of
this section, and infusion pumps that are DME (including external
ambulatory infusion pumps), but excluding all other DME and parenteral
and enteral nutrients, equipment, and supplies (such as infusion pumps
used for PEN), that meet the following conditions:
(1) They are furnished personally by one of the following
individuals:
(i) The referring physician.
(ii) A physician who is a member of the same group practice as the
referring physician.
(iii) An individual who is supervised by the referring physician or
by another physician in the group practice, provided the supervision
complies with all other applicable Medicare payment and coverage rules
for the services.
(2) They are furnished in one of the following locations:
(i) The same building (as defined in Sec. 411.351), but not
necessarily in the same space or part of the building, in which--
(A) The referring physician (or another physician who is a member
of the same group practice) furnishes substantial physician services
that are unrelated to the furnishing of DHS payable by Medicare, any
other Federal
[[Page 960]]
health care payer, or a private payer, even though the unrelated
services may lead to the ordering of DHS;
(B) The physician services that are unrelated to the furnishing of
DHS in paragraph (b)(2)(i)(A) of this section must represent
substantially the full range of physician services unrelated to the
furnishing of DHS that the referring physician routinely provides (or,
in the case of a referring physician who is a member of a group
practice, the full range of physician services that the physician
routinely provides for the group practice); and
(C) The receipt of DHS (whether payable by a Federal health care
program or a private payer) is not the primary reason the patient comes
in contact with the referring physician or his or her group practice.
(ii) A centralized building (as defined in Sec. 411.351) that is
used by the group practice for the provision of some or all of the
group practice's clinical laboratory services.
(iii) A centralized building (as defined in Sec. 411.351) that is
used by the group practice for the provision of some or all of the
group practice's DHS (other than clinical laboratory services).
(3) They must be billed by one of the following:
(i) The physician performing or supervising the service.
(ii) The group practice of which the performing or supervising
physician is a member under a billing number assigned to the group
practice.
(iii) The group practice if the supervising physician is a
``physician in the group'' (as defined at Sec. 411.351) under a billing
number assigned to the group practice.
(iv) An entity that is wholly owned by the performing or
supervising physician or by that physician's group practice under the
entity's own billing number or under a billing number assigned to the
physician or group practice.
(v) An independent third party billing company acting as an agent
of the physician, group practice, or entity specified in paragraphs
(b)(3)(i) through (b)(3)(iv) of this section under a billing number
assigned to the physician, group practice, or entity, provided the
billing arrangement meets the requirements of Sec. 424.80(b)(6) of this
chapter. For purposes of this paragraph (b)(3), a group practice may
have, and bill under, more than one Medicare billing number, subject to
any applicable Medicare program restrictions.
(4) For purposes of paragraph (b) of this section, DME covered by
the in-office ancillary services exception means canes, crutches,
walkers and folding manual wheelchairs, and blood glucose monitors,
that meet the following conditions:
(i) The item is one that a patient requires for the purposes of
ambulating, uses in order to depart from the physician's office, or is
a blood glucose monitor (including one starter set of test strips and
lancets, consisting of no more than 100 of each). A blood glucose
monitor may be furnished only by a physician or employee of a physician
or group practice that also furnishes outpatient diabetes self-
management training to the patient.
(ii) The item is furnished in a building that meets the ``same
building'' requirements in the in-office ancillary services exception
as part of the treatment for the specific condition for which the
patient-physician encounter occurred.
(iii) The item is furnished personally by the physician who ordered
the DME, by another physician in the group practice, or by an employee
of the physician or the group practice.
(iv) A physician or group practice that furnishes the DME meets all
DME supplier standards located in Sec. 424.57(c) of this chapter.
(v) The arrangement does not violate the anti-kickback statute,
section 1128B(b) of the Act, or any law or regulation governing billing
or claims submission.
(vi) All other requirements of the in-office ancillary services
exception in paragraph (b) of this section are met.
(5) A designated health service is ``furnished'' for purposes of
paragraph (b) of this section in the location where the service is
actually performed upon a patient or where an item is dispensed to a
patient in a manner that is sufficient to meet the applicable Medicare
payment and coverage rules.
(6) Special rule for home care physicians. In the case of a
referring physician whose principal medical practice consists of
treating patients in their private homes, the ``same building''
requirements of paragraph (b)(2)(i) of this section are met if the
referring physician (or a qualified person accompanying the physician,
such as a nurse or technician) provides the DHS contemporaneously with
a physician service that is not a designated health service provided by
the referring physician to the patient in the patient's private home.
For purposes of paragraph (b)(5) of this section, a private home does
not include a nursing, long-term care, or other facility or
institution.
(c) Services furnished by an organization (or its contractors or
subcontractors) to enrollees. Services furnished by an organization (or
its contractors or subcontractors) to enrollees of one of the following
prepaid health plans (not including services provided to enrollees in
any other plan or line of business offered or administered by the same
organization):
(1) An HMO or a CMP in accordance with a contract with HCFA under
section 1876 of the Act and part 417, subparts J through M of this
chapter, which set forth qualifying conditions for Medicare contracts;
enrollment, entitlement, and disenrollment under Medicare contracts;
Medicare contract requirements; and change of ownership and leasing of
facilities: effect on Medicare contracts.
(2) A health care prepayment plan in accordance with an agreement
with HCFA under section 1833(a)(1)(A) of the Act and part 417, subpart
U of this chapter.
(3) An organization that is receiving payments on a prepaid basis
for Medicare enrollees through a demonstration project under section
402(a) of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or
under section 222(a) of the Social Security Amendments of 1972 (42
U.S.C. 1395b--1 note).
(4) A qualified HMO (within the meaning of section 1310(d) of the
Public Health Service Act).
(5) A coordinated care plan (within the meaning of section
1851(a)(2)(A) of the Act) offered by an organization in accordance with
a contract with HCFA under section 1857 of the Act and part 422 of this
chapter.
(d) Clinical laboratory services furnished in an ambulatory
surgical center (ASC) or end-stage renal disease (ESRD) facility, or by
a hospice if payment for those services is included in the ASC rate,
the ESRD composite rate, or as part of the per diem hospice charge,
respectively.
(e) Academic medical centers. (1) Services provided by an academic
medical center if all of the following conditions are met:
(i) The referring physician--
(A) Is a bona fide employee of a component of the academic medical
center on a full-time or substantial part-time basis. (``Components''
of an academic medical center means an affiliated medical school,
faculty practice plan, hospital, teaching facility, institution of
higher education, or departmental professional corporation.);
(B) Is licensed to practice medicine in the State;
(C) Has a bona fide faculty appointment at the affiliated medical
school; and
(D) Provides either substantial academic or substantial clinical
[[Page 961]]
teaching services for which the faculty member receives compensation as
part of his or her employment relationship with the academic medical
center.
(ii) The total compensation paid for the previous 12-month period
(or fiscal year or calendar year) from all academic medical center
components to the referring physician is set in advance and, in the
aggregate, does not exceed fair market value for the services provided,
and is not determined in a manner that takes into account the volume or
value of any referrals or other business generated by the referring
physician within the academic medical center.
(iii) The academic medical center must meet all of the following
conditions:
(A) All transfers of money between components of the academic
medical center must directly or indirectly support the missions of
teaching, indigent care, research, or community service.
(B) The relationship of the components of the academic medical
center must be set forth in a written agreement that has been adopted
by the governing body of each component.
(C) All money paid to a referring physician for research must be
used solely to support bona fide research.
(iv) The referring physician's compensation arrangement does not
violate the anti-kickback statute, section 1128B(b) of the Act.
(2) The ``academic medical center'' for purposes of this section
consists of--
(i) An accredited medical school (including a university, when
appropriate);
(ii) An affiliated faculty practice plan that is a 501(c)(3) or
(c)(4) of the Internal Revenue Code nonprofit, tax-exempt organization
under IRS regulations (or is a part of such an organization under an
umbrella designation); and
(iii) One or more affiliated hospital(s) in which a majority of the
hospital medical staff consists of physicians who are faculty members
and a majority of all hospital admissions are made by physicians who
are faculty members.
(f) Implants in an ASC. Implants, including, but not limited to,
cochlear implants, intraocular lenses, and other implanted prosthetics,
implanted prosthetic devices and implanted DME that meet the following
conditions:
(1) The implant is furnished by the referring physician or a member
of the referring physician's group practice in a Medicare-certified ASC
(under part 416 of this chapter) with which the referring physician has
a financial relationship.
(2) The implant is implanted in the patient during a surgical
procedure performed in the same ASC where the implant is furnished.
(3) The arrangement for the furnishing of the implant does not
violate the Federal anti-kickback statute, section 1128B(b) of the Act.
(4) Billing and claims submission for the implants complies with
all Federal and State laws and regulations.
(5) The exception set forth in this paragraph (f) does not apply to
any financial relationships between the referring physician and any
entity other than the ASC in which the implant is furnished to and
implanted in the patient.
(g) EPO and other dialysis-related outpatient prescription drugs
furnished in or by an ESRD facility. EPO and other dialysis-related
outpatient prescription drugs that are identified by the CPT and HCPCS
codes on the HCFA web site, http://www.hcfa.gov, and in annual updates
published in the Federal Register and that meet the following
conditions:
(1) The EPO and other dialysis-related drugs are furnished in or by
an ESRD facility. For purposes of this paragraph, ``furnished'' means
that the EPO or drugs are either administered or dispensed to a patient
in or by the ESRD facility, even if the EPO or drugs are furnished to
the patient at home. ``Dialysis-related drugs'' means certain drugs
required for the efficacy of dialysis, as identified on the HCFA web
site and in annual updates.
(2) The arrangement for the furnishing of the EPO and other
dialysis-related drugs does not violate the Federal anti-kickback
statute, section 1128B(b) of the Act.
(3) Billing and claims submission for the EPO and other dialysis
related drugs complies with all Federal and State laws and regulations.
(4) The exception set forth in this paragraph (g) does not apply to
any financial relationships between the referring physician and any
entity other than the ESRD facility that furnishes the EPO and other
dialysis-related drugs to the patient.
(h) Preventive screening tests, immunizations, and vaccines.
Preventive screening tests, immunizations, and vaccines that are
covered by Medicare and identified by the CPT and HCPCS codes included
on the HCFA web site and in annual updates published in the Federal
Register and that meet the following conditions:
(1) The preventive screening tests, immunizations, and vaccines are
subject to HCFA-mandated frequency limits.
(2) The preventive screening tests, immunizations, and vaccines are
reimbursed by Medicare based on a fee schedule.
(3) The arrangement for the provision of the preventive screening
tests, immunizations, and vaccines does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act.
(4) Billing and claims submission for the preventive screening
tests, immunizations, and vaccines complies with all Federal and State
laws and regulations.
(5) To qualify under this exception, the preventive screening
tests, immunizations, and vaccines must be covered by Medicare and must
be listed on the HCFA web site and in annual updates.
(i) Eyeglasses and contact lenses following cataract surgery.
Eyeglasses and contact lenses that are covered by Medicare when
furnished to patients following cataract surgery that meet the
following conditions:
(1) The eyeglasses or contact lenses are provided in accordance
with the coverage and payment provisions set forth in
Sec. 410.36(a)(2)(ii) and Sec. 414.228 of this chapter, respectively.
(2) The arrangement for the furnishing of the eyeglasses or contact
lenses does not violate the Federal anti-kickback statute, section
1128B(b) of the Act.
(3) Billing and claims submission for the eyeglasses or contact
lenses complies with all Federal and State laws and regulations.
9. In Sec. 411.357, paragraph (j) is added and reserved, and
paragraphs (k), (l), (m), (n), (o), and (p) are added to read as
follows:
Sec. 411.357 Exceptions to the referral prohibition related to
compensation arrangements.
* * * * *
(j) [Reserved]
(k) Non-monetary compensation up to $300. Compensation from an
entity in the form of items or services (not including cash or cash
equivalents) that does not exceed an aggregate of $300 per year, if all
of the following conditions are satisfied:
(1) The compensation is not determined in any manner that takes
into account the volume or value of referrals or other business
generated by the referring physician.
(2) The compensation may not be solicited by the physician or the
physician's practice (including employees and staff members).
(3) The compensation arrangement does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act.
(l) Fair market value compensation. Compensation resulting from an
[[Page 962]]
arrangement between an entity and a physician (or an immediate family
member) or any group of physicians (regardless of whether the group
meets the definition of a group practice set forth in Sec. 411.351) for
the provision of items or services by the physician (or an immediate
family member) or group practice to the entity, if the arrangement is
set forth in an agreement that meets the following conditions:
(1) It is in writing, signed by the parties, and covers only
identifiable items or services, all of which are specified in the
agreement.
(2) It specifies the timeframe for the arrangement, which can be
for any period of time and contain a termination clause, provided the
parties enter into only one arrangement for the same items or services
during the course of a year. An arrangement made for less than 1 year
may be renewed any number of times if the terms of the arrangement and
the compensation for the same items or services do not change.
(3) It specifies the compensation that will be provided under the
arrangement. The compensation must be set in advance, be consistent
with fair market value, and not be determined in a manner that takes
into account the volume or value of any referrals or any other business
generated by the referring physician.
(4) It involves a transaction that is commercially reasonable
(taking into account the nature and scope of the transaction) and
furthers the legitimate business purposes of the parties.
(5) It meets a safe harbor under the anti-kickback statute in
Sec. 1001.952 of this title, has been approved by the OIG under a
favorable advisory opinion issued in accordance with part 1008 of this
title, or does not violate the anti-kickback provisions in section
1128B(b) of the Act.
(6) The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates a State or Federal law.
(m) Medical staff incidental benefits. Compensation in the form of
items or services (not including cash or cash equivalents) from a
hospital to a member of its medical staff when the item or service is
used on the hospital's campus, if all of the following conditions are
met:
(1) The compensation is offered to all members of the medical staff
without regard to the volume or value of referrals or other business
generated between the parties.
(2) The compensation is offered only during periods when the
medical staff members are making rounds or performing other duties that
benefit the hospital or its patients.
(3) The compensation is provided by the hospital and used by the
medical staff members only on the hospital's campus.
(4) The compensation is reasonably related to the provision of, or
designed to facilitate directly or indirectly the delivery of, medical
services at the hospital.
(5) The compensation is consistent with the types of benefits
offered to medical staff members--
(i) By other hospitals within the same local region; or
(ii) If no such hospitals exist within the same local region, by
comparable hospitals in comparable regions.
(6) The compensation is of low value (that is, less than $25) with
respect to each occurrence of the benefit (for example, each meal given
to a physician while he or she is serving patients who are hospitalized
must be of low value).
(7) The compensation is not determined in any manner that takes
into account the volume or value of referrals or other business
generated between the parties.
(8) The compensation arrangement does not violate the Federal anti-
kickback provisions in section 1128B(b) of the Act.
(n) Risk sharing arrangements. Compensation pursuant to a risk-
sharing arrangement (including, but not limited to, withholds, bonuses,
and risk pools) between a managed care organization or an independent
physicians association and a physician (either directly or indirectly
through a subcontractor) for services provided to enrollees of a health
plan, provided that the arrangement does not violate the Federal anti-
kickback statute, section 1128B(b) of the Act, or any law or regulation
governing billing or claims submission. For purposes of this paragraph
(n), ``health plan'' and ``enrollees'' have the meanings ascribed to
those terms in Sec. 1001.952(l) of this title.
(o) Compliance training. Compliance training provided by a hospital
to a physician (or the physician's immediate family member) who
practices in the hospital's local community or service area, provided
the training is held in the local community or service area. For
purposes of this paragraph (o), ``compliance training'' means training
regarding the basic elements of a compliance program (for example,
establishing policies and procedures, training of staff, internal
monitoring, reporting) or specific training regarding the requirements
of Federal health care programs (for example, billing, coding,
reasonable and necessary services, documentation, unlawful referral
arrangements).
(p) Indirect compensation arrangements. Indirect compensation
arrangements, as defined in Sec. 411.354(c)(2), if all of the following
conditions are satisfied:
(1) The compensation received by the referring physician (or
immediate family member) described in Sec. 411.354(c)(2)(ii) is fair
market value for services and items actually provided not taking into
account the value or volume of referrals or other business generated by
the referring physician for the entity furnishing DHS.
(2) The compensation arrangement described in
Sec. 411.354(c)(2)(ii) is set out in writing, signed by the parties,
and specifies the services covered by the arrangement, except in the
case of a bona fide employment relationship between an employer and an
employee, in which case the arrangement need not be set out in a
written contract, but must be for identifiable services and be
commercially reasonable even if no referrals are made to the employer.
(3) The compensation arrangement does not violate the anti-kickback
statute or any laws or regulations governing billing or claims
submission.
PART 424--CONDITIONS FOR MEDICARE PAYMENT
B. Part 424 is amended as follows:
1. The authority citation for part 424 continues to read as
follows:
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
Subpart B--Certification and Plan of Treatment Requirements
2. In Sec. 424.22, paragraph (d) is revised to read as set forth
below, and paragraphs (e), (f), and (g) are removed.
Sec. 424.22 Requirements for home health services.
* * * * *
(d) Limitation on the performance of certification and plan of
treatment functions. The need for home health services to be provided
by an HHA may not be certified or recertified, and a plan of treatment
may not be established and reviewed, by any physician who has a
financial relationship, as defined in Sec. 411.351 of this chapter,
with that HHA, unless the physician's relationship meets one of the
exceptions in section 1877 of the Act, which sets forth general
exceptions to the referral prohibition related to both ownership/
investment and compensation; exceptions to the referral prohibition
[[Page 963]]
related to ownership or investment interests; and exceptions to the
referral prohibition related to compensation arrangements.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare-Hospital Insurance; Program No. 93.774, Medicare-
Supplementary Medical Insurance Program; and Program No. 93.778,
Medical Assistance Program)
Dated: October 6, 2000.
Michael M. Hash,
Acting Administrator, Health Care Financing Administration.
Dated: October 16, 2000.
Donna E. Shalala,
Secretary.
Note: The following attachment will not appear in the Code of
Federal Regulations.
Attachment
List of CPT \1\/HCPCS Codes Used To Describe Certain Designated
Health Services Under the Physician Referral Provisions (Section
1877 of the Social Security Act)
---------------------------------------------------------------------------
\1\ CPT codes, descriptions and other data only are copyright
2000 American Medical Association. All Rights Reserved. Applicable
FARS/DFARS Clauses Apply.
---------------------------------------------------------------------------
Clinical Laboratory Services
Include CPT codes for all clinical laboratory services in the 80000
series, except Exclude CPT codes for the following blood component
collection services:
86890 Autologous blood process
86891 Autologous blood, op salvage
86915 Bone marrow/stem cell prep
86927 Plasma, fresh frozen
86930 Frozen blood prep
86931 Frozen blood thaw
86932 Frozen blood freeze/thaw
86945 Blood product/irradiation
86950 Leukacyte transfusion
86965 Pooling blood platelets
86985 Split blood or products
Include HCPCS level 2 codes for other clinical laboratory services:
G0001 Drawing blood for specimen
G0026 Fecal leukocyte examination
G0027 Semen analysis
G0103 Psa, total screening
G0107 CA screen; fecal blood test
G0123 Screen cerv/vag thin layer
G0124 Screen c/v thin layer by MD
G0141 Scr c/v cyto,autosys and md
G0143-G0145 Scr c/v cyto, thinlayer, rescr
G0147 Scr c/v cyto, automated sys
G0148 Scr c/v cyto, autosys, rescr
P2028 Cephalin floculation test
P2029 Congo red blood test
P2031 Hair analysis
P2033 Blood thymol turbidity
P2038 Blood mucoprotein
P3000 Screen pap by tech w md supv
P3001 Screening pap smear by phys
P7001 Culture bacterial urine
P9612 Catheterize for urine spec
P9615 Urine specimen collect mult
Q0111 Wet mounts/w preparations
Q0112 Potassium hydroxide preps
Q0113 Pinworm examinations
Q0114 Fern test
Q0115 Post-coital mucous exam
Physical Therapy/Occupational Therapy/Speech-Language Pathology
Include the following CPT codes for the physical therapy/
occupational therapy/speech-language pathology services in the 97000
series:
97001 Pt evaluation
97002 Pt re-evaluation
97003 Ot evaluation
97004 Ot re-evaluation
97010 Hot or cold packs therapy
97012 Mechanical traction therapy
97014 Electric stimulation therapy
97016 Vasopneumatic device therapy
97018 Paraffin bath therapy
97020 Microwave therapy
97022 Whirlpool therapy
97024 Diathermy treatment
97026 Infrared therapy
97028 Ultraviolet therapy
97032 Electrical stimulation
97033 Electric current therapy
97034 Contrast bath therapy
97035 Ultrasound therapy
97036 Hydrotherapy
97039 Physical therapy treatment
97110 Therapeutic exercises
97112 Neuromuscular reeducation
97113 Aquatic therapy/exercises
97116 Gait training therapy
97124 Massage therapy
97139 Physical medicine procedure
97140 Manual therapy
97150 Group therapeutic procedures
97504 Orthotic training
97520 Prosthetic training
97530 Therapeutic activities
97532 Cognitive skills development
97533 Sensory integration
97535 Self care mngment training
97537 Community/work reintegration
97542 Wheelchair mngment training
97545 Work hardening
97546 Work hardening add-on
97703 Prosthetic checkout
97750 Physical performance test
97799 Physical medicine procedure
Include CPT codes for physical therapy/occupational therapy/speech-
language pathology services not in the 97000 series:
64550 Apply neurostimulator
90901 Biofeedback train, any meth
90911 Biofeedback peri/uro/rectal
92506 Speech/hearing evaluation
92507-92508 Speech/hearing therapy
92510 Rehab for ear implant
92526 Oral function therapy
93797 Cardiac rehab
93798 Cardiac rehab/monitor
94667-94668 Chest wall manipulation
94762 Measure blood oxygen level
95831 Limb muscle testing, manual
95832 Hand muscle testing, manual
95833-95834 Body muscle testing, manual
95851-95852 Range of motion measurements
96105 Assessment of aphasia
96110 Developmental test, lim
96111 Developmental test, extend
96115 Neurobehavior status exam
Include HCPCS level 2 codes for the following physical therapy/
occupational therapy/speech-language pathology services:
G0193 Endoscopic study swallow functn
G0194 Sensory testing endoscopic stud
G0195 Clinical eval swallowing funct
G0196 Eval of swallowing with radioopa
G0197 Eval of pt for prescip speech devi
G0198 Patient adapation & train for spe
G0199 Reevaluation of patient use spec
G0200 Eval of patient prescip of voice p
G0201 Modi for training in use voice pro
Q0086 Physical therapy evaluation/
Radiology
Include the following radiology and certain other imaging services
in the CPT 70000 series:
70100-70110 X-ray exam of jaw
70120-70130 X-ray exam of mastoids
70134 X-ray exam of middle ear
70140-70150 X-ray exam of facial bones
70160 X-ray exam of nasal bones
70190-70200 X-ray exam of eye sockets
70210-70220 X-ray exam of sinuses
70240 X-ray exam, pituitary saddle
70250-70260 X-ray exam of skull
70300-70310 X-ray exam of teeth
70320 Full mouth x-ray of teeth
70328 X-ray exam of jaw joint
70330 X-ray exam of jaw joints
70336 Magnetic image, jaw joint
70350 X-ray head for orthodontia
70355 Panoramic x-ray of jaws
70360 X-ray exam of neck
70370 Throat x-ray & fluoroscopy
70371 Speech evaluation, complex
70380 X-ray exam of salivary gland
70450 CT head/brain w/o dye
70460 CT head/brain w/dye
70470 CT head/brain w/o&w dye
70480 CT orbit/ear/fossa w/o dye
70481 CT orbit/ear/fossa w/dye
70482 CT orbit/ear/fossa w/o&w dye
[[Page 964]]
70486 CT maxillofacial w/o dye
70487 CT maxillofacial w/dye
70488 CT maxillofacial w/o&w dye
70490 CT soft tissue neck w/o dye
70491 CT soft tissue neck w/dye
70492 CT sft tsue nck w/o & w/dye
70496 CT angiography, head
70498 CT angiography, neck
70540 MRI orbit/face/neck w/o dye
70542 MRI orbit/face/neck w/dye
70543 MRI orbt/fac/nck w/o&w dye
70544 MR angiography head w/o dye
70545 MR angiography head w/dye
70546 MR angiograph head w/o&w dye
70547 MR angiography neck w/o dye
70548 MR angiography neck w/dye
70549 MR angiograph neck w/o&w dye
70551 MRI brain w/o dye
70552 MRI brain w/dye
70553 MRI brain w/o&w dye
71010-71022 Chest x-ray
71023 Chest x-ray and fluoroscopy
71030 Chest x-ray
71034 Chest x-ray and fluoroscopy
71035 Chest x-ray
71100 X-ray exam of ribs
71101 X-ray exam of ribs/chest
71110 X-ray exam of ribs
71111 X-ray exam of ribs/chest
71120-71130 X-ray exam of breastbone
71250 CT thorax w/o dye
71260 CT thorax w/dye
71270 CT thorax w/o&w dye
71275 CT angiography, chest
71550 MRI chest w/o dye
71551 MRI chest w/dye
71552 MRI chest w/o&w dye
71555 MRI angio chest w or w/o dye
72010-72020 X-ray exam of spine
72040-72052 X-ray exam of neck spine
72069 X-ray exam of trunk spine
72070-72074 X-ray exam of thoracic spine
72080-72090 X-ray exam of trunk spine
72100-72120 X-ray exam of lower spine
72125 CT neck spine w/o dye
72126 CT neck spine w/dye
72127 CT neck spine w/o&w dye
72128 CT chest spine w/o dye
72129 CT chest spine w/dye
72130 CT chest spine w/o&w dye
72131 CT lumbar spine w/o dye
72132 CT lumbar spine w/dye
72133 CT lumbar spine w/o&w dye
72141 MRI neck spine w/o dye
72142 MRI neck spine w/dye
72146 MRI chest spine w/o dye
72147 MRI chest spine w/dye
72148 MRI lumbar spine w/o dye
72149 MRI lumbar spine w/dye
72156 MRI neck spine w/o&w dye
72157 MRI chest spine w/o&w dye
72158 MRI lumbar spine w/o&w dye
72170-72190 X-ray exam of pelvis
72191 CT angiograph pelv w/o&w dye
72192 CT pelvis w/o dye
72193 CT pelvis w/dye
72194 CT pelvis w/o&w dye
72195 MRI pelvis w/o dye
72196 MRI pelvis w/dye
72197 MRI pelvis w/o&w dye
72200-72202 X-ray exam sacroiliac joints
72220 X-ray exam of tailbone
73000 X-ray exam of collar bone
73010 X-ray exam of shoulder blade
73020-73030 X-ray exam of shoulder
73050 X-ray exam of shoulders
73060 X-ray exam of humerus
73070-73080 X-ray exam of elbow
73090 X-ray exam of forearm
73092 X-ray exam of arm, infant
73100-73110 X-ray exam of wrist
73120-73130 X-ray exam of hand
73140 X-ray exam of finger(s)
73200 CT upper extremity w/o dye
73201 CT upper extremity w/dye
73202 CT uppr extremity w/o&w dye
73206 CT angio upr extrm w/o&w dye
73218 MRI upper extremity w/o dye
73219 MRI upper extremity w/dye
73220 MRI uppr extremity w/o&w dye
73221 MRI joint upr extrem w/o dye
73222 MRI joint upr extrem w/ dye
73223 MRI joint upr extr w/o&w dye
73500-73510 X-ray exam of hip
73520 X-ray exam of hips
73540 X-ray exam of pelvis & hips
73550 X-ray exam of thigh
73560 X-ray exam of knee, 1 or 2
73562 X-ray exam of knee, 3
73564 X-ray exam, knee, 4 or more
73565 X-ray exam of knees
73590 X-ray exam of lower leg
73592 X-ray exam of leg, infant
73600-73610 X-ray exam of ankle
73620-73630 X-ray exam of foot
73650 X-ray exam of heel
73660 X-ray exam of toe(s)
73700 CT lower extremity w/o dye
73701 CT lower extremity w/dye
73702 CT lwr extremity w/o&w dye
73706 CT angio lwr extr w/o&w dye
73718 MRI lower extremity w/o dye
73719 MRI lower extremity w/dye
73720 MRI lwr extremity w/o&w dye
73721 MRI joint of lwr extre w/o d
73722 MRI joint of lwr extr w/dye
73723 MRI joint lwr extr w/o&w dye
73725 MR ang lwr ext w or w/o dye
74000-74020 X-ray exam of abdomen
74022 X-ray exam series, abdomen
74150 CT abdomen w/o dye
74160 CT abdomen w/dye
74170 CT abdomen w/o&w dye
74175 CT angio abdom w/o&w dye
74181 MRI abdomen w/o dye
74182 MRI abdomen w/dye
74183 MRI abdomen w/o&w dye
74185 MRI angio, abdom w or w/o dy
74210 Contrst x-ray exam of throat
74220 Contrast x-ray, esophagus
74230 Cinema x-ray, throat/esoph
74240-74245 X-ray exam, upper gi tract
74246-74249 Contrst x-ray uppr gi tract
74250 X-ray exam of small bowel
74290 Contrast x-ray, gallbladder
74291 Contrast x-rays, gallbladder
74710 X-ray measurement of pelvis
75552 Heart MRI for morph w/o dye
75553 Heart MRI for morph w/dye
75554 Cardiac MRI/function
75555 Cardiac MRI/limited study
75635 CT angio abdominal arteries
76000 Fluoroscope examination
76006 X-ray stress view
76010 X-ray, nose to rectum
76020 X-rays for bone age
76040 X-rays, bone evaluation
76061-76062 X-rays, bone survey
76065 X-rays, bone evaluation
76066 Joint(s) survey, single film
76090 Mammogram, one breast
76091 Mammogram, both breasts
76092 Mammogram, screening
76093 Magnetic image, breast
76094 Magnetic image, both breasts
76100 X-ray exam of body section
76101 Complex body section x-ray
76102 Complex body section x-rays
76120 Cinematic x-rays
76125 Cinematic x-rays add-on
76150 X-ray exam, dry process
76370 CAT scan for therapy guide
76375 3d/holograph reconstr add-on
76380 CAT scan follow-up study
76390 Mr spectroscopy
76400 Magnetic image, bone marrow
76499 Radiographic procedure
76506 Echo exam of head
76511-76512 Echo exam of eye
76513 Echo exam of eye, water bath
76516-76519 Echo exam of eye
76536 Echo exam of head and neck
76604 Echo exam of chest
76645 Echo exam of breast(s)
76700-76705 Echo exam of abdomen
76770-76775 Echo exam abdomen back wall
76778 Echo exam kidney transplant
76800 Echo exam spinal canal
76805-76815 Echo exam of pregnant uterus
76816 Echo exam follow-up/repeat
76818 Fetl biophys profil w/stress
76819 Fetl biophys profil w/o strs
76825-76828 Echo exam of fetal heart
76830 Echo exam, transvaginal
76831 Echo exam, uterus
76856-76857 Echo exam of pelvis
76870 Echo exam of scrotum
76872 Echo exam, transrectal
76873 Echograp trans r, pros study
76880 Echo exam of extremity
76885-76886 Echo exam, infant hips
76970 Ultrasound exam follow-up
76977 Us bone density measure
76999 Echo examination procedure
Include the following CPT codes for echocardiography and vascular
ultrasound:
[[Page 965]]
93303-93304 Echo transthoracic
93307-93308 Echo exam of heart
93320-93321 Doppler echo exam, heart, if used in conjunction with
93303-93308
93325 Doppler color flow add-on, if used in conjunction with 93303-
93308
93875-93882 Extracranial study
93886-93888 Intracranial study
93922-93924 Extremity study
93925-93926 Lower extremity study
93930-93931 Upper extremity study
93965-93971 Extremity study
93975-93979 Vascular study
93980-93981 Penile vascular study
93990 Doppler flow testing
Include miscellaneous other HCPCS level 2 codes for radiology and
certain other imaging services:
G0050 Residual urine by ultrasound
G0131-132 CT scan, bone density study
G0188 Xray lwr extrmty-full lngth
R0070 Transport portable x-ray
R0075 Transport port x-ray multipl
Radiation Therapy Services and Supplies
Include CPT codes for all radiation therapy services and supplies
in the CPT 70000 series:
77261-77263 Radiation therapy planning
77280-77295 Set radiation therapy field
77299 Radiation therapy planning
77300-77315 Radiation therapy dose plan
77321 Radiation therapy port plan
77326-77328 Radiation therapy dose plan
77331 Special radiation dosimetry
77332-77334 Radiation treatment aid(s)
77336-77370 Radiation physics consult
77399 External radiation dosimetry
77401-77416 Radiation treatment delivery
77417 Radiology port film(s)
77427 Radiation tx management, x5
77431 Radiation therapy management
77432 Stereotactic radiation trmt
77470 Special radiation treatment
77499 Radiation therapy management
77520 Proton trmt, simple w/o comp
77522 Proton trmt, simple w/comp
77523 Proton trmt, intermediate
77525 Proton treatment, complex
77600-77620 Hyperthermia treatment
77750 Infuse radioactive materials
77761 Apply intrcav radiat simple
77762 Apply intrcav radiat interm
77763 Apply intrcav radiat compl
77776 Apply interstit radiat simpl
77777 Apply interstit radiat inter
77778 Apply iterstit radiat compl
77781-77784 High intensity brachytherapy
77789 Apply surface radiation
77790 Radiation handling
77799 Radium/radioisotope therapy
Include CPT codes for radiation therapy classified elsewhere:
31643 Diag bronchoscope/catheter
50559 Renal endoscopy/radiotracer
55859 Percut/needle insert, pros
61770 Incise skull for treatment
61793 Focus radiation beam
Preventive Screening Tests, Immunizations and Vaccines
The following CPT and HCPCS codes are excluded under
Sec. 411.355(h) as screening tests:
76092 Mammogram, screening
76977 Us bone density measure
G0103 Psa, total screening
G0107 CA screen; fecal blood test
G0123 Screen cerv/vag thin layer
G0124 Screen c/v thin layer by MD
G0141 Scr c/v cyto,autosys and md
G0143-G0145 Scr c/v cyto, thin layer, rescr
G0147 Scr c/v cyto, automated sys
G0148 Scr c/v cyto, autosys, rescr
P3000 Screen pap by tech w md supv
P3001 Screening pap smear by phys
The following CPT codes are excluded under Sec. 411.355(h) as
vaccines:
90657 Flu vaccine, 6-35 mo, im
90658 Flu vaccine, 3 yrs, im
90659 Flu vacine, whole, im
90732 Pneumococcal vacc, adult/ill
90744 Hepb vacc ped/adol 3 dose im
90746 Hep b vaccine, adult, im
90747 Hepb vacc, ill pat 4 dose im
90748 Hep b/hib vaccine, im
Drugs Used by Patients Undergoing Dialysis
The following HCPCS codes are excluded under Sec. 411.355(g) as EPO
and other dialysis related outpatient prescription drugs furnished in
or by an ESRD facility:
J0635 Calcitriol injection
J0895 Deferoxamine meslyate inj
J1750 Iron dextran
J2915 NA Ferric Gluconate Complex
J2997 Alteplase recombinant
Q9920 Epoetin with hct =20
Q9921 Epoetin with hct = 21
Q9922 Epoetin with hct = 22
Q9923 Epoetin with hct = 23
Q9924 Epoetin with hct = 24
Q9925 Epoetin with hct = 25
Q9926 Epoetin with hct = 26
Q9927 Epoetin with hct = 27
Q9928 Epoetin with hct = 28
Q9929 Epoetin with hct = 29
Q9930 Epoetin with hct = 30
Q9931 Epoetin with hct = 31
Q9932 Epoetin with hct = 32
Q9933 Epoetin with hct = 33
Q9934 Epoetin with hct = 34
Q9935 Epoetin with hct = 35
Q9936 Epoetin with hct = 36
Q9937 Epoetin with hct = 37
Q9938 Epoetin with hct = 38
Q9939 Epoetin with hct = 39
Q9940 Epoetin with hct >= 40
[FR Doc. 01-4 Filed 1-3-01; 8:45 am]
BILLING CODE 4120-03-P