[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