[Federal Register Volume 69, Number 59 (Friday, March 26, 2004)]
[Rules and Regulations]
[Pages 16053-16146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6668]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411 and 424



Medicare Program; Physicians' Referrals to Health Care Entities With 
Which They Have Financial Relationships (Phase II); Interim Final Rule

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411 and 424

[CMS-1810-IFC]
RIN 0938-AK67


Medicare Program; Physicians' Referrals to Health Care Entities 
With Which They Have Financial Relationships (Phase II)

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period (Phase II of this 
rulemaking) incorporates into regulations the provisions concerning 
ownership and investment exceptions in paragraphs (c) and (d) and the 
compensation exceptions in paragraph (e) of section 1877 of the Social 
Security Act (the Act). Phase II also addresses comments concerning the 
reporting requirements in section 1877(f) of the Act.
    Phase I (as defined below) addressed the majority of issues in 
implementing section 1877 of the Act. Phase II both addresses the 
remaining issues not addressed in Phase I and responds to public 
comments. In general, in response to public comments, the Department 
has attempted to reduce regulatory burden by broadening exceptions 
using the Secretary's discretionary authority under the statute to 
create exceptions that pose no risk of fraud or abuse. For the 
convenience of affected parties, we have set out the entire rule as 
previously promulgated, including the changes made by this rulemaking.

DATES: Effective date: This interim final rule is effective on July 26, 
2004.
    Comment date: We will consider comments on Phase II issues if we 
receive them at the appropriate address, as provided below, no later 
than 5 p.m. on June 24, 2004. Late filed comments will be considered to 
the extent practicable.

ADDRESSES: In commenting, please refer to file code CMS-1810-IFC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    Submit electronic comments to http://www.cms.hhs.gov/regulations/ecomments or to www.regulations.gov. Mail written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1810-IFC, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and two copies) to one of the following 
addresses: Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201, or Room C5-14-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    All comments received before the close of the comment period are 
available for viewing by the public. After the close of the comment 
period, CMS posts all electronic comments received before the close of 
the comment period on its public Web site. To protect an individual's 
privacy and identity, a commenter may wish to omit his or her full name 
and address from the comment. We request that the commenter identify 
only his or her zip code. For information on viewing public comments, 
see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer, (410) 786-4620.

SUPPLEMENTARY INFORMATION: Submitting Comments: We welcome comments 
from the public on all issues set forth in this rule to assist us in 
fully considering issues and developing policies. You can assist us by 
referencing the file code CMS-1810-IFC and the specific ``issue 
identifier'' that precedes the section on which you choose to comment.
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone (410) 786-7197.
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at (202) 512-1800 (or toll-free at 1-888-293-
6498) or by faxing to (202) 512-2250. The cost for each copy is $10. As 
an alternative, you can view and photocopy the Federal Register 
document at most libraries designated as Federal Depository Libraries 
and at many other public and academic libraries throughout the country 
that receive the Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The Web site address is: http://www.access.gpo.gov/nara/index.html.
    To help readers locate information in this interim final rule, we 
are providing the following Table of Contents. The Table of Contents 
also indicates whether a subject was previously addressed in Phase I or 
is a Phase II issue.

I. Background
II. The General Prohibition under Section 1877 of the Act (Phase I)
    A. General Comments
    B. When Is There a Financial Relationship Between the Referring 
Physician and the Designated Health Service (DHS) Entity?
    C. When Does a Physician Make a Referral?
    D. Definition of ``Consultation''
III. Physician Compensation Under Section 1877 of the Act (Phase I)
IV. The ``Volume or Value'' Standards under Section 1877 of the Act 
(Phase I)
V. Exceptions Applicable to Ownership and Compensation Arrangements 
(Phase I)
    A. Physician Services Exception
    B. In-Office Ancillary Services Exception
    1. General Comments
    2. Covered Designated Health Services
    3. Direct Supervision
    4. The Building Requirements
    5. The Billing Requirement
    C. Group Practice Definition
    D. Prepaid Plans
VI. General Exception Related Only to Ownership or Investment in 
Publicly-Traded Securities and Mutual Funds (Phase II)
VII. Additional Exceptions Related Only to Ownership or Investment 
Prohibition (Phase II)
    A. Hospitals in Puerto Rico

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    B. Rural Providers
    C. Hospital Ownership
VIII. Exceptions Relating to Other Compensation Arrangements (Phase 
II)
    A. Rental of Office Space and Equipment
    B. Bona Fide Employment Relationships
    C. Personal Service Arrangements
    D. Remuneration Unrelated to the Provision of Designated Health 
Services
    E. Physician Recruitment
    F. Isolated Transactions
    G. Certain Group Practice Arrangements with Hospitals
    H. Payments Made by a Physician for Items and Services
IX. Reporting Requirements (Phase II)
X. Sanctions (Phase II)
XI. Definitions (Phase I)
    A. Designated Health Services General Principles
    B. 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 Services and Supplies
    H. Durable Medical Equipment and Supplies
    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 Area
    6. Employee
    7. Immediate Family Member
    8. Referral
    9. Remuneration and the Exceptions in Section 1877(h)(1)(C) of 
the Act
    10. Transaction and Isolated Transaction (Phase II)
XII. Regulatory Exceptions
    A. Academic Medical Centers (Phase I)
    B. Services Furnished Under Certain Payment Rates (Phase II)
    C. Implants in an ASC (Phase I)
    D. Fair Market Value Exception (Phase I)
    E. Non-Monetary Compensation up to $300 and Medical Staff 
Incidental Benefits (Phase I)
    F. Risk-sharing Arrangements (Phase I)
    G. Compliance Training (Phase I)
    H. Anti-Kickback Safe Harbors (Phase II)
    I. Professional Courtesy (Phase II)
    J. Charitable Donations by a Physician (Phase II)
    K. Preventive Screening Tests, Immunizations, and Vaccines 
(Phase I)
    L. EPO and Other Dialysis-Related Outpatient Prescription Drugs 
Furnished in or by an ESRD Facility (Phase I)
    M. Intra-family Rural Area Referrals (Phase II)
    N. Certain Arrangements Involving Temporary Noncompliance (Phase 
II)
    O. Retention Payments in Underserved Areas (Phase II)
    P. Community-wide Health Information Systems (Phase II)
XIII. Technical Corrections (Phase II)
XIV. Collection of Information Requirements
XV. Regulatory Impact Statement
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered
    D. Conclusion
XVI. Waiver of Proposed Rulemaking
Regulations Text
Attachment

I. Background

    Section 1877 of the Social Security Act (the Act), also known as 
the physician self-referral law: (1) Prohibits a physician from making 
referrals for certain ``designated health services'' (DHS) payable by 
Medicare to an entity with which he or she (or an immediate family 
member) has a financial relationship (ownership or compensation) unless 
an exception applies; and (2) prohibits the entity from filing claims 
with Medicare for those referred services, unless an exception applies. 
The statute establishes a number of specific exceptions and grants the 
Secretary the authority to create regulatory exceptions for financial 
relationships that pose no risk of fraud or abuse.
    In reviewing the public comments received, the Department has 
endeavored to reduce the burden and prescriptive nature of the rule 
while applying the statute and maintaining the integrity of the 
regulatory framework. The Phase II rule exercises the Secretary's 
authority to create exceptions to accomplish this goal. In particular, 
the Phase II rule creates a new exception for community-wide health 
information systems. It also creates limited exceptions to allow 
physicians to refer to immediate family members in rural areas in 
certain circumstances when no other physician is available, and to 
exempt hospital payments to retain a physician who would otherwise 
leave a health professional shortage area.
    This is Phase II of a bifurcated final rulemaking under section 
1877 of the Act. The current version of section 1877, which applies to 
referrals for eleven DHS, has been in effect and subject to enforcement 
since January 1, 1995. Proposed regulations were published in 1998 at 
63 FR 1659 (January 9, 1998) (the ``January 1998 proposed rule''). 
Phase I of the final rulemaking was published in the Federal Register 
on January 4, 2001 (66 FR 856) (``Phase I'') as a final rule with 
comment period.
    The reasons for bifurcation of the rulemaking are explained in the 
Phase I preamble (66 FR 859-860). With two exceptions, the regulations 
published in Phase I became effective on January 4, 2002. Section 
424.22(d), relating to home health services, became effective on April 
6, 2001 (see our Federal Register notice dated February 2, 2001 (66 FR 
8771)). We delayed the effective date of the final sentence of Sec.  
411.354(d)(1) relating to the definition of ``set in advance'' for one 
year from January 4, 2002 to January 6, 2003, in a Federal Register 
document published on December 3, 2001 (66 FR 60154). We further 
delayed the effective date of this sentence for an additional 6 months, 
until July 7, 2003, in a Federal Register document published on 
November 22, 2002 (67 FR 70322), and for an additional 6 months, until 
January 7, 2004, in a Federal Register document published on April 25, 
2003 (68 FR 20347). We published another delay notice on December 24, 
2003 (68 FR 74491), delaying that effective date until July 7, 2004.
    Phase I covered--
     Sections 1877(a) and 1877(b) of the Act (the 
general prohibition and the exceptions applicable to both ownership and 
compensation arrangements);
     The statutory definitions at section 1877(h) of 
the Act;
     Certain additional regulatory definitions; and
     A number of new regulatory exceptions 
promulgated under section 1877(b)(4) of the Act.
    Phase II covers--
     The remaining provisions of section 1877 of the 
Act;
     Additional regulatory definitions;
     Additional new regulatory exceptions promulgated 
under section 1877(b)(4) of the Act; and
     Responses to the public comments on the Phase I 
regulations.

    We had intended to address in this Phase II rulemaking section 
1903(s) of the Act, which applies section 1877 of the Act to referrals 
for Medicaid covered services and which we interpreted in the proposed 
rule at Sec.  435.1012 and Sec.  455.109. However, in the interest of 
expediting publication of these rules, we are reserving the Medicaid 
issue for a future rulemaking with one exception. In this rulemaking, 
we are amending the prepaid plans exception at Sec.  411.356(c) to 
cover Medicaid managed care plans.
    Phase II has a 90-day comment period and will become effective 120 
days after the date of publication. Comments received on the Phase II 
rulemaking will be addressed in a separate Federal Register notice.

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    Phase I and Phase II of this rulemaking are intended to be read 
together as a unified whole. Among other things, Phase I contains a 
complete legislative and regulatory history (66 FR 857-859), which is 
not repeated here. Modifications or revisions to Phase I are clearly 
indicated in this Phase II preamble and corresponding regulations text. 
Unless otherwise expressly noted, to the extent the preamble in Phase 
II uses different language to describe a concept addressed in Phase I, 
our intent is to better explain or clarify a Phase I discussion, not to 
change its scope or meaning. For clarity and ease of access of the 
general public to the entire set of issues raised by the statute, we 
are republishing the regulatory text in its entirety. This Department 
has consistently worked to clarify and simplify the Phase I rules in 
response to comments, as well as to reduce the burden of the entire set 
of rules by exercising the Secretary's authority to create additional 
exceptions for financial relationships that pose no risk of fraud and 
abuse when all of the conditions of an exception are met. The Phase I 
and the Phase II rules, together, supersede the 1995 final rule (60 FR 
41914), which has been applicable to referrals for clinical laboratory 
services.
    As with Phase I, in developing Phase II of this rulemaking, we have 
carefully reconsidered the January 1998 proposed rule (63 FR 1659), 
given both the history and structure of section 1877 of the Act and the 
extensive comments we received to the January 1998 proposed rule, as 
well as the considerably smaller number of comments to the Phase I 
final rule. As with Phase I, we believe that Phase II of this 
rulemaking addresses many of the industry's primary concerns with the 
January 1998 proposed rule, is consistent with the statute's goals and 
directives, and protects beneficiaries of Federal health care programs. 
In particular, we have attempted to preserve the core statutory 
prohibition while providing sufficient flexibility to minimize the 
impact of the rule on many common business arrangements. For more 
detailed discussion of the criteria we have applied in evaluating 
regulatory options for Phase II, see 66 FR 859-863 of the Phase I rule.
    This Phase II preamble is generally organized to track the statute. 
We first address the general prohibition, then the exceptions, then the 
definitions (although certain key definitions, such as ``group 
practice'' and ``isolated transaction'' are addressed in the 
discussions of the exceptions to which they mainly relate). Discussion 
of new regulatory exceptions follows (except that regulatory exceptions 
closely related to a statutory provision are discussed together with 
the statutory provision). Topics previously covered by Phase I are 
clearly indicated, along with cross-references to the relevant Phase I 
preamble pages and regulatory text. Topics new to Phase II are also 
clearly indicated, and, as in Phase I, each Phase II issue begins with 
summaries of the existing law, the January 1998 proposed rule, and the 
final rule. These summaries are intended to aid the reader in 
understanding the regulations. More detailed discussions of particular 
points are included in the responses to public comments for each topic.

II. The General Prohibition Under Section 1877 of the Act

(Section 1877(a) of the Act; Phase I--66 FR 863-875; Sec.  411.353 and 
Sec.  411.351)

    Overall, the commenters to the Phase I rulemaking welcomed the 
additional clarity provided with respect to the general statutory 
prohibition, particularly with respect to the treatment of indirect 
compensation arrangements. However, we received a number of comments 
with respect to various aspects of the general prohibition. As in Phase 
I, the summaries of the public comments and our responses are divided 
into four parts:

    A. General comments.
    B. Comments related to whether a financial relationship exists 
between a referring physician and a designated health services 
entity (``DHS entity'').
    C. Comments related to whether there has been a referral from a 
referring physician to a DHS entity.
    D. Comments regarding the definition of ``consultation.''

A. General Comments

    Comment: Many commenters praised the new regulations, particularly 
their clarity, flexibility, and focus on ``bright line'' rules. 
However, several stated that the regulations are still overly complex, 
lengthy, and burdensome. A physician organization asserted that the 
complexity discourages physicians from participating in the Medicare 
program.
    Response: A certain amount of regulatory complexity is inevitable 
under a statutory scheme that encompasses the full panoply of physician 
financial arrangements with providers of eleven different types of 
health care services. The Phase I preamble attempted to provide clear 
explanations of the rules and to respond to approximately 13,000 public 
comments. Accordingly, it is somewhat lengthy. However, the Phase I 
regulations themselves constitute only 13 of the 108 pages published in 
the Federal Register. Moreover, while certain aspects of the statute 
and regulations involve detailed tests or standards, the overall 
statutory and regulatory scheme is straightforward. Most physician 
ownership in DHS entities is prohibited. Most physician compensation 
must be fair market value. We believe that the rule, like the statute, 
provides clear guidance for providers to comply demonstrably with the 
law.
    Comment: The basic sanction under section 1877 of the Act is 
nonpayment for DHS referred by a physician with an improper financial 
relationship with the DHS entity. A home health agency commented that 
payment denial was not a sufficient deterrent to improper referrals and 
that referring physicians and hospitals that own or operate their own 
home health services need to be penalized.
    Response: Section 1877(g) of the Act provides for two types of 
sanctions: nonpayment of claims for all violations and civil monetary 
penalties (CMPs) for knowing violations. Nonpayment applies to any DHS 
furnished to any Medicare patient under a prohibited referral. We 
believe the combination of nonpayment and CMPs is a strong deterrent.
    Comment: A practicing physician objected to physicians being denied 
the right to own businesses to which they refer. The physician 
complained that the law compels referrals to businesses owned by 
persons who are not physicians and who do not have the skills or 
expertise to run them.
    Response: As we explained in Phase I (66 FR 859), in enacting 
section 1877 of the Act, the Congress responded in part to a number of 
studies showing that physician ownership of certain types of facilities 
resulted in significantly higher utilization of those facilities by the 
physician-owners. While in some cases physician-owners may have been 
actively involved in the businesses, in others they were merely passive 
investors. The Congress created exceptions for certain physician-owned 
DHS entities, including providers in rural areas (section 1877(d)(2) of 
the Act), and for DHS provided within a physician's own office practice 
to the physician's patients (the in-office ancillary services exception 
in section 1877(b)(2) of the Act and Sec.  411.355(b) of the 
regulations).
    Comment: Several commenters requested that we enact various 
``grace'' periods under the exceptions to accommodate situations in 
which parties to an arrangement: (1) Fall out of compliance with 
aspects of an exception

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through events outside their control; or (2) are unable to comply with 
an exception for temporary periods of time.
    Response: We are persuaded that a specified and limited exception 
for certain arrangements that have unavoidably and temporarily fallen 
out of compliance with other exceptions is warranted and consistent 
with the overall statutory scheme and the obligations the statute 
imposes on providers. Accordingly, using our authority at section 
1877(b)(4) of the Act, we have incorporated into these regulations an 
exception at Sec.  411.353(f) for certain arrangements that have fully 
satisfied another exception for at least 180 consecutive days, but have 
fallen out of compliance with the exception for reasons beyond the 
control of the DHS entity. Parties must take steps to rectify their 
noncompliance or otherwise comply with the statute as expeditiously as 
possible under the circumstances. The Sec.  411.353(f) exception lasts 
up to 90 days and applies to DHS furnished during the exception period. 
By the end of the 90-day exception period, parties must either comply 
with another exception or have terminated their otherwise prohibited 
arrangement. It is in the provider's interest to document 
contemporaneously the reasons for the temporary noncompliance and the 
steps taken to rectify it. For example, this exception will allow rural 
providers that fall out of compliance with Sec.  411.356(C)(2) through 
re-designation of a rural area as a non-rural area time to finish 
patients' existing courses of treatment or refer patients to other 
providers.
    This new exception, at Sec.  411.353(f), does not apply to 
arrangements that previously complied with the exceptions for non-
monetary compensation up to $300 or incidental medical staff benefits. 
To provide otherwise would effectively negate the limits set in those 
exceptions. (In the case of non-monetary compensation, it is, of 
course, possible to be compliant in the next year, since the exception 
permits non-monetary compensation up to $300 annually.)
    The new exception is not intended to allow DHS entities to file 
otherwise prohibited claims or bills when they purposefully take or 
omit to take actions or engage in conduct that causes their financial 
relationship to be noncompliant with an exception. The exception period 
is limited to 90 calendar days following the date of the initial event 
resulting in noncompliance with an exception and applies to DHS 
furnished during the exception period. The exception is intended to be 
used sparingly and may not be used by a DHS entity more often than once 
every three years with respect to referrals from the same referring 
physician. We believe this exception should address a number of 
situations that present special and temporary compliance problems, 
including conversion of publicly-traded companies to private ownership; 
loss of rural or health professional shortage areas (HPSA) 
designations; or delays in obtaining fully-signed copies of renewal 
agreements. As noted in section V.C below, we have also modified the 
group practice definition at Sec.  411.352(d)(5) to address problems 
faced by group practices that fall out of compliance with elements of 
the definition when they add new members to the group. We have also 
interpreted the lease exceptions to permit holdover month-to-month 
leases for up to six months.
    Comment: A commenter commended the Phase I regulations regarding 
referrals between physicians and their spouses, but submitted that the 
regulations did not go far enough in permitting certain cross-referrals 
between physicians who are family members. In the commenter's view, 
these referrals should be allowed whenever the referral arrangement 
would be permitted between non-family member physicians. For example, 
the commenter believed that if a physician could himself perform a 
designated health service under the in-office ancillary services 
exception, he should be permitted to refer to his spouse if she could 
also otherwise provide that service under the in-office ancillary 
services exception. According to the commenter, a physician would have 
no greater incentive to refer to his or her spouse if the physician 
could otherwise provide the designated health service under an 
exception. Thus, the commenter believes prohibiting cross-referrals 
unfairly penalizes two-physician families.
    Response: The statute clearly provides that a physician may not 
make a referral to a DHS entity with which the physician (or an 
immediate family member) has a financial relationship, unless an 
exception applies. The change suggested by the commenter would 
contradict this clear statutory directive. However, as discussed in 
section V.B below, we are creating a new regulatory exception for some 
intra-family referrals that meet specific conditions.

B. When Is There a Financial Relationship Between the Referring 
Physician and the DHS Entity? (Phase I--66 FR 864; Sec.  411.351, Sec.  
411.354, and Sec.  411.357(p))

    [If you choose to comment on issues in this section, please include 
the caption ``Financial Relationship Definition'' at the beginning of 
your comments.]

    The existence of a financial relationship between the referring 
physician (or an immediate family member) and the entity furnishing DHS 
is the factual predicate 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 an 
immediate family member) in the DHS entity; or (2) a compensation 
arrangement between the referring physician (or an immediate family 
member) and the DHS entity. Any financial relationship between the 
referring physician and the DHS entity implicates the statute, even if 
the financial relationship is wholly unrelated to a designated health 
service payable by Medicare (for example, a financial relationship 
involving only private pay business). Unless the financial relationship 
fits into a statutory or regulatory exception, referrals and 
corresponding claims for DHS are prohibited. Section 411.354 addresses 
the circumstances under which a financial relationship exists.
    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 an immediate family member) with no person or entity 
interposed between them (Sec.  411.354(a)(1)(2)). ``Indirect'' 
financial relationships--whether ownership or investment or 
compensation--exist where one or more persons or entities are 
interposed between the referring physician and the DHS entity. For 
indirect compensation arrangements, Phase I established a three part, 
``bright line'' test that incorporated a knowledge element to protect 
DHS entities not in a position to know about or suspect an otherwise 
prohibited compensation arrangement with the referring physician. Phase 
I also established a corresponding new exception for indirect 
compensation arrangements. By

[[Page 16058]]

(1) defining the universe of ``indirect compensation arrangements'' 
that potentially triggers disallowance of claims and penalties; and (2) 
creating an exception for the subset of ``indirect compensation 
arrangements'' that will not trigger disallowance or penalties, we have 
structured the treatment of indirect compensation arrangements under 
section 1877 of the Act to parallel the treatment of direct 
compensation arrangements.
    Most commenters were pleased with the specificity of Sec.  411.354, 
which sets out rules for determining whether a financial relationship 
exists, and the accompanying discussion in the Phase I preamble (66 FR 
864). While Sec.  411.354 establishes rules for both direct and 
indirect financial relationships, very few comments addressed the rules 
for direct financial relationships. Rather, most comments addressed the 
definition of an indirect compensation arrangement at Sec.  
411.354(c)(2) and the interplay between that definition and the 
exception at Sec.  411.357(p).
    As discussed below, we are modifying the language of Sec.  411.354 
to address some of the concerns expressed by the commenters. These 
modifications include--
     Clarifying the meaning of direct and indirect 
ownership and affirming that common ownership of an entity does not 
create an ownership interest by one common investor in another;
     Clarifying the relationship between the 
``indirect compensation arrangements'' definition and the ``volume or 
value'' and ``other business generated'' standards;
     Clarifying that a referring physician may be 
treated as ``standing in the shoes'' of his or her wholly-owned 
professional corporation (PC).
    Summaries of the comments and our responses follow.
    Comment: One commenter asked us to clarify that remuneration 
received as a result of an arrangement that does not fit in the 
definition of a ``financial relationship'' under Sec.  411.354(a) does 
not implicate section 1877 of the Act.
    Response: The commenter did not provide any specific examples of 
remuneration that would not result in a financial relationship. As a 
matter of law, section 1877 of the Act does not apply in the absence of 
a financial relationship as defined in Sec.  411.354(a), but in the 
absence of specific examples, we find it difficult to identify any 
remuneration not covered by that definition.
    Comment: A number of commenters found the definition of ``indirect 
compensation arrangement'' at Sec.  411.354(c)(2) to be very 
complicated. One commenter stated that the definition was too broad and 
covered many arrangements that had not previously been subject to the 
statute. A national physician association emphasized that the physician 
community would need education as to the scope and application of the 
definition.
    Response: The definition of ``indirect compensation arrangement'' 
at Sec.  411.354(c)(2) requires three elements:
     Paragraph (c)(2)(i)--an unbroken chain of 
financial relationships (ownership or compensation) linking the 
referring physician to the DHS entity;
     Paragraph (c)(2)(ii)--aggregate compensation 
paid to the referring physician that varies with, or otherwise takes 
into account, the volume or value of referrals to, or other business 
generated for, the DHS entity; and
     Paragraph (c)(2)(iii)--knowledge by the DHS 
entity that the physician receives aggregate compensation that varies 
with, or otherwise takes into account, the volume or value of referrals 
to, or other business generated for, the DHS entity (using the same 
knowledge standard that applies under the False Claims Act (31 U.S.C. 
Sec.  3729) and the Civil Monetary Penalties Law (section 1128A of the 
Act)).
    With education and experience, we think DHS entities and referring 
physicians will be able to apply the test without difficulty. (We 
discuss further the application of the various elements in response to 
specific comments below.) We have made several technical revisions to 
clarify the intent of the exception.
    We agree that the definition encompasses many arrangements that 
physicians and DHS entities claim not to have thought were covered by 
the statute. As we discussed in the Phase I preamble (66 FR 864), we 
believe that the knowledge element sufficiently and equitably sets the 
boundaries for the potential universe of prohibited arrangements.
    Comment: Many commenters expressed confusion at the interplay 
between (1) the definition of ``indirect compensation arrangement'' at 
Sec.  411.354(c)(2), which looks at whether the referring physician's 
aggregate compensation varies with, or otherwise takes into account 
``the volume or value of referrals'' generated by the referring 
physician, and (2) Sec.  411.354(d)(2), which describes when certain 
compensation (such as time-based and unit-of-service based payments) 
will be deemed not to take into account ``the volume or value of 
referrals,'' even though aggregate per unit compensation will always 
vary with the volume or value of referrals. (We received similar 
comments regarding Sec.  411.354(d)(3) with respect to when 
compensation does not take into account ``other business generated 
between the parties.'') These provisions were discussed in the Phase I 
preamble (66 FR 876).
    Specifically, under Sec.  411.354(d)(2) and Sec.  411.354(d)(3), 
time-based and unit-of-service based compensation is deemed not to take 
into account the volume or value of referrals or other business 
generated if the unit-based compensation: (i) Is fair market value for 
items or services actually provided; and (ii) does not vary over the 
term of the agreement in any manner that takes into account DHS 
referrals or other business generated by the referring physician. Some 
commenters questioned whether an indirect compensation arrangement 
exists at all if a referring physician receives time-based or unit-of-
service based compensation that is fair market value and does not vary 
over the term of the agreement, that is, compensation that, by 
definition, does not take into account the volume or value of referrals 
or other business generated according to Sec.  411.354(d)(2) and Sec.  
411.354(d)(3).
    Similarly, the new exception for indirect compensation arrangements 
at Sec.  411.357(p), like Sec.  411.354(d)(2) and Sec.  411.354(d)(3), 
does not look to aggregate compensation and incorporates a fair market 
value test. Given this, several commenters pointed out that the 
ultimate result would be the same whether time and unit-of-service 
based compensation arrangements are initially excluded from the 
definition of ``indirect compensation arrangement'' in Sec.  
411.354(c)(2) or included in the definition and then excepted by the 
new exception. One commenter proposed three options: (1) Retaining the 
indirect compensation arrangement definition in the final regulation 
and deleting the indirect compensation exception; (2) revising the 
indirect compensation arrangement definition by deleting the volume and 
value language; or (3) revising Sec.  411.354(d)(2) and Sec.  
411.354(d)(3) to make clear that those provisions do not apply to the 
indirect compensation arrangements definition.
    Response: An ``indirect compensation arrangement'' exists under 
Sec.  411.354(c)(2) if the referring physician's aggregate compensation 
varies with, or otherwise takes into account, the volume or value of 
referrals or other business generated by the referring physician. Since 
time-based or unit-of-service based compensation will always vary with 
the volume or value of services when considered in the

[[Page 16059]]

aggregate, these compensation arrangements can constitute ``indirect 
compensation arrangements'' under Sec.  411.354(c)(2), even if the 
individual time or unit-of-service based compensation is fair market 
value and otherwise complies with the language of Sec.  411.354(d)(2) 
and Sec.  411.354(d)(3).
    We agree that the close similarity in the regulatory language 
between Sec.  411.354(c)(2) and Sec.  411.354(d)(2) and Sec.  
411.354(d)(3) can be clarified. We are modifying Sec.  
411.354(c)(2)(ii) to do so. Our intent is two-fold. First, we intend to 
include in the definition of ``indirect compensation arrangement'' any 
compensation arrangements (including time-based or unit-of-service 
based compensation arrangements) where the aggregate compensation 
received by the referring physician varies with, or otherwise takes 
into account, the volume or value of referrals or other business 
generated between the parties, regardless of whether the individual 
unit of compensation qualifies under Sec.  411.354(d)(2) and Sec.  
411.354(d)(3). Second, we intend to exclude under the indirect 
compensation arrangement exception at Sec.  411.357(p) that subset of 
indirect compensation arrangements where the compensation is fair 
market value and does not reflect the volume or value of referrals or 
other business generated and the other conditions of the exception are 
satisfied. Per unit compensation will meet this test if it complies 
with Sec.  411.354(d)(2) and Sec.  411.354(d)(3). While we agree that 
the ultimate result may be the same--time, unit-of-service, or other 
``per click'' based arrangements are generally permitted if they are at 
fair market value without reference to referrals--we believe this 
construct more closely corresponds to the statutory treatment of direct 
compensation arrangements. Accordingly, we are clarifying Sec.  
411.354(c)(2)(ii).
    It is important to bear in mind that, depending on the 
circumstances, fixed aggregate compensation can form the basis for a 
prohibited direct or indirect compensation arrangement. This will be 
the case if such fixed aggregate compensation takes into account the 
volume or value of referrals (for example, the fixed compensation 
exceeds fair market value for the items or services provided or is 
inflated to reflect the volume or value of a physician's referrals or 
other business generated). Section 411.354(d)(2) and Sec.  
411.354(d)(3) were not intended to remove the existing prohibition on 
fixed compensation arrangements that take into account the volume or 
value of referrals or other business generated between the parties. We 
have clarified the language in these sections to reflect the 
distinction.
    Comment: The first element of an ``indirect compensation 
arrangement'' is an unbroken chain of financial relationships between 
the DHS entity and the referring physician. In Phase I, we explained 
that the links in the chain could be any form of financial 
relationship, whether excepted or not. Several commenters believe that 
there should be no indirect compensation arrangement if any financial 
relationship in the chain qualifies for an exception. One commenter 
pointed out that under section 1877(a)(2) of the Act, the definition of 
``financial relationship'' excludes any financial relationship that 
fits in an exception. Thus, according to this commenter, the inclusion 
of an excepted financial relationship in a chain of financial 
relationships necessarily ``breaks'' the chain and precludes an 
indirect compensation arrangement. The commenter explained further that 
this result would make the application of the indirect compensation 
rules easier for DHS entities, especially hospitals, that have 
arrangements with group practices that employ, or contract with, 
referring physicians using compensation arrangements that fit in the 
employment, personal services contracts, or fair market value 
exceptions. Finally, the commenter suggested that, at a minimum, there 
should be no indirect financial relationship if every link in the chain 
qualifies for an exception.
    Response: Section 1877(a)(2) of the Act excludes from the 
definition of ``financial relationship'' any ownership or compensation 
arrangement that fits in an exception. While the regulations are 
structured somewhat differently, they achieve the same result. The 
regulations define ``financial relationship'' in Sec.  411.354(a) 
without limiting the term to unexcepted financial relationships. 
Exceptions are set forth in separate provisions of the regulations. 
Thus, the reference in the definition of ``indirect compensation 
arrangement'' to an unbroken chain of ``financial relationships'' as 
defined in Sec.  411.354(a) includes both excepted and unexcepted 
relationships. A direct financial relationship can form a link in a 
chain of financial arrangements that creates an indirect compensation 
arrangement, even if the direct financial relationship qualifies for an 
exception. While it is very unlikely, we believe that a chain 
consisting entirely of excepted financial relationships could 
theoretically create an indirect compensation arrangement, if the 
remuneration paid to the referring physician is not fair market value 
or varies with, or otherwise takes into account, the volume or value of 
referrals or other business generated for the DHS entity by the 
referring physician. A more likely scenario is that the chain would 
either involve fair market value compensation that would qualify the 
relationship under the indirect compensation arrangement exception. We 
address the special issue of contracts with group practices in a 
subsequent response below.
    Comment: A commenter asserted that ``indirect'' compensation under 
section 1877 of the Act means only non-monetary benefits that are 
incidental to a direct financial relationship, and that the Secretary 
exceeded his statutory authority by extending the regulations to other 
indirect compensation arrangements.
    Response: The commenter provided no statutory support for its 
interpretation of section 1877 of the Act. Nor does the plain meaning 
of the term ``indirect'' support the commenter's view. The 
interpretation offered by the commenter would permit wholesale 
circumvention of section 1877 of the Act through the formal 
interposition of another person or entity between the referring 
physician and the DHS entity. The Congress clearly intended to prevent 
such schemes by including indirect compensation in the definition of 
remuneration in section 1877(b)(1)(B) of the Act. The Secretary has 
broad authority under sections 1102 and 1871 of the Act to promulgate 
regulations implementing any provision of the Act.
    Comment: One commenter asked how far an indirect compensation 
arrangement could be traced along a chain of financial relationships 
created through common ownership.
    Response: As with any indirect compensation arrangement, the chain 
of financial relationships can be of any length. As we discussed in the 
preamble to the Phase I rule (66 FR 864), the knowledge element in 
Sec.  411.354(c)(2)(iii) limits the potential liability of a DHS entity 
involved in a distant, indirect compensation arrangement.
    Comment: A number of commenters expressed the view that an indirect 
compensation arrangement should be excepted if any link in the chain 
fits in one of the exceptions for direct compensation arrangements. 
This issue was raised by group practices that contract to provide 
services to hospitals (or other DHS entities) or to lease space or 
equipment from DHS entities. For example, in the case of a services 
agreement between a hospital and a group practice, an indirect 
compensation arrangement is created

[[Page 16060]]

between the hospital and the contracting group practice's employee or 
investor physicians (that is, the referring physicians). Instead of 
looking to the indirect compensation exception in such circumstances, 
commenters proposed that the test be whether the compensation 
arrangement between the hospital and the group practice fits in a 
direct compensation exception. Commenters suggested that we use a 
similar rule for other indirect compensation arrangements involving 
referring physicians who are members of group practices, where the link 
in the chain closest to the referring physician is his or her 
compensation arrangement with his or her group practice. Commenters 
requested comparable relief with respect to physician-owned PCs. In the 
commenter's view, the fact that a physician practices through a wholly-
owned PC should not convert a direct financial relationship with a DHS 
entity into an indirect relationship (that is, physician--PC--DHS 
entity).
    Response: We do not agree that an indirect compensation arrangement 
should be excepted if any link in the chain complies with a direct 
compensation exception. As we explained in the Phase I preamble (66 FR 
867), we are concerned that, in some situations, such a test would 
permit a middle entity to redirect compensation to referring physicians 
based upon the volume or value of referrals or other business generated 
by the physicians to the DHS entity (which is not the middle entity).
    We recognize that it is not necessary to treat a referring 
physician as separate from his or her wholly-owned PC. We have revised 
the definition of referring physician in Sec.  411.351 to reflect this 
clarification.
    By way of example, under the Phase I regulations, if a hospital 
contracted with a referring physician's PC for the provision of 
services, the hospital would potentially have an indirect compensation 
arrangement with the referring physician for which the only available 
exception would be the indirect compensation arrangements exception. 
Under the revised regulations, the contract would create a direct 
compensation arrangement between the hospital and the referring 
physician.
    We believe the revised regulations should make it simpler for 
physicians and others to evaluate their financial relationships and the 
application of exceptions under section 1877 of the Act.
    We are not making any changes to the Phase I rule with respect to 
the issue of indirect compensation arrangements that are created when a 
group practice is an intervening entity in the chain between the DHS 
entity and referring physicians who are members of the group (for 
example, a hospital contracts with a group practice for services). The 
commenters' proposal that the regulations permit physicians to stand in 
the shoes of their group practices, thereby converting indirect 
arrangements to direct arrangements, is inconsistent with the 
compensation exceptions as drafted. We believe that the knowledge 
standard in the indirect compensation arrangements definition and 
exception adequately protects DHS entities. We solicit comments on this 
issue.
    Comment: One commenter asked us to clarify the application of the 
indirect compensation arrangement rules to the situation in which a 
referring physician owns an interest in a hospital and the hospital 
contracts for services with a clinical laboratory to which the 
physician refers. In the preamble to the Phase I rule (66 FR 866), we 
indicated that there would be a chain of entities (referring 
physician--hospital--clinical lab). The commenter asked us whether that 
arrangement would fit in the indirect compensation arrangement 
definition and, if necessary, the indirect compensation exception.
    Response: As commonly structured, the example would not create an 
indirect compensation arrangement. There would be an unbroken chain of 
financial relationships between the referring physician and the 
clinical laboratory (the DHS entity) via the hospital. However, an 
unbroken chain is only one of three elements required under the 
definition of indirect compensation arrangement. Section 
411.354(c)(2)(ii) requires that the referring physician receives 
aggregate compensation that varies with, or otherwise takes into 
account, the volume or value of DHS referrals or other business 
generated by the referring physician for the DHS entity. Under Sec.  
411.354(c)(2)(ii), we look to the non-ownership or non-investment 
interest closest to the referring physician in the unbroken chain. That 
means that in the commenter's scenario, we would look to the 
contractual relationship between the hospital and the clinical 
laboratory. Absent unusual circumstances, the hospital would not 
receive aggregate compensation that reflects the volume or value of 
referrals, since the hospital would not be receiving any compensation 
from the clinical laboratory (assuming the contracted charges for 
laboratory services are fair market value). If, however, the contracted 
laboratory charges were less than fair market value, the arrangement 
could qualify as an indirect compensation arrangement between the 
referring physician and the clinical laboratory, provided the 
laboratory knew of, or had reason to suspect, the referring physician's 
ownership interest in the hospital. Because the payments would not be 
fair market value, the arrangement could not fit in the indirect 
compensation arrangements exception.
    Comment: A commenter questioned whether the payment of a royalty by 
an equipment manufacturer to a physician inventor for a device 
implanted during surgeries performed by the physician inventor is 
permitted or whether that arrangement would create an indirect 
compensation relationship with the hospital that purchased the device. 
The commenter did not think that parties would be able to establish a 
fair market value for a unique invention.
    Response: In the scenario described, the physician inventor would 
have an indirect compensation arrangement with the hospital in which 
the surgeries are performed (that is, the DHS entity (hospital) buys 
the invention from the manufacturer (the intermediary link in the 
chain), which pays the referring physician a royalty). However, as long 
as the royalty payment (the compensation link in the chain nearest the 
physician) is fair market value, the relationship should satisfy the 
indirect compensation exception at Sec.  411.357(p). We see no reason 
that one cannot establish a fair market value for royalties, even on 
unique inventions.
    Comment: A number of commenters questioned the discussion in the 
Phase I preamble that relates to ownership interests and indirect 
compensation arrangements (66 FR 867 and 870). Specifically, commenters 
questioned the statement that common ownership of an entity may create 
an indirect financial relationship between or among the common owners 
(66 FR 867). One commenter asked us to explain what type of financial 
relationship was created and when. Other commenters complained that the 
statement was inconsistent with other statements that common ownership 
did not create an indirect ownership interest in the common owners (66 
FR 870). Several commenters stated that co-ownership of a non-DHS 
entity should not create any financial relationship between the owners.
    Many commenters objected to the statement in the Phase I preamble 
that the direct compensation exceptions in section 1877 of the Act did 
not apply to indirect compensation arrangements. According to the 
commenters, all exceptions should be available,

[[Page 16061]]

regardless of whether the financial relationship is direct or indirect, 
and a DHS entity should be able to take advantage of any exception. A 
commenter asked whether a prohibited indirect ownership arrangement 
could be excepted if it satisfied the indirect compensation arrangement 
exception.
    Response: An ownership or investment interest in an entity creates 
a financial relationship between the investor and the entity (if the 
entity has an ownership or investment interest in another entity, the 
investor may have an indirect ownership or investment interest in that 
further entity, and so on). Absent unusual circumstances, common owners 
of an entity will not, by virtue of their common ownership, have 
ownership or investment interests in each other. However, an indirect 
compensation arrangement may arise from their common ownership. Since 
an indirect compensation arrangement requires an unbroken chain of any 
financial relationships between the referring physician and the DHS 
entity, ownership or investment interests in a common entity count as 
links. In other words, common ownership does not itself create an 
indirect compensation arrangement as defined in Sec.  411.354(c)(2) 
between co-owners; rather, the ownership or investment interests of the 
individual investors can satisfy the unbroken chain element of the 
three-part indirect compensation arrangement definition at Sec.  
411.354(c)(2). For example, if a DHS entity and a referring physician 
jointly own an entity, such co-ownership creates a chain of financial 
relationships linking the DHS entity to the referring physician: DHS 
entity--[ownership relationship]--owned entity--[ownership 
relationship]--referring physician. This chain is created regardless of 
the nature of the jointly owned entity.
    However, even if an unbroken chain exists, the other elements of 
the definition at Sec.  411.354(c)(2) still need to be satisfied to 
establish an indirect compensation arrangement (which could then be 
excepted under the indirect compensation exception, if applicable). In 
the preceding example, as long as the physician's aggregate return on 
his investment in the co-owned entity (including capital appreciation) 
did not vary or otherwise take into account the volume or value of 
referrals to, or other business generated for, the DHS entity (not the 
common venture), there would be no indirect compensation arrangement. 
We would expect this to be the case for most joint ownership of non-DHS 
entities. However, if the jointly owned entity is, for example, an 
imaging equipment leasing company co-owned by a hospital (the DHS 
entity) and a referring physician, the co-ownership may create an 
indirect compensation arrangement, since the physician's aggregate 
payout from the leasing company may vary with, or otherwise take into 
account, the volume of imaging business he or she generates for the 
hospital, assuming that the hospital contracts with the leasing 
company. Sufficient knowledge of the co-ownership is likely to exist in 
this circumstance to satisfy the knowledge standard at Sec.  
411.354(c)(2)(iii). If an indirect compensation arrangement exists, the 
relevant inquiry is whether the arrangement fits in the indirect 
compensation exception. In general, if the rental payment (frequently a 
``per click'' payment) by the hospital to the leasing company is fair 
market value (and the ``per click'' fee does not vary over the term of 
the agreement) and does not otherwise reflect the volume or value of 
referrals, the indirect compensation arrangement would be excepted. 
Such arrangements could still violate the anti-kickback statute.
    To address the commenters' concern, we are modifying Sec.  
411.354(b)(5)(i) and establishing new Sec.  411.354(b)(5)(iii) and 
(b)(5)(iv) to make clear that common ownership does not establish an 
ownership or investment interest by one common investor in another 
common investor. An indirect ownership or investment interest requires 
an unbroken chain of direct ownership interests between the referring 
physician and the DHS entity such that the referring physician can be 
said to have an indirect ownership or investment interest in the DHS 
entity. In the preceding example, the referring physician has an 
ownership interest in the leasing company, but not in the hospital. 
(If, however, the leasing company owned an interest in a DHS entity, 
the physician would have an indirect ownership interest in that DHS 
entity).
    If an indirect ownership or investment interest exists, it cannot 
be excepted under the indirect compensation exception in Sec.  
411.357(p). The Phase I preamble may have inadvertently suggested 
otherwise. We created a new exception for indirect compensation 
arrangements because none of the statutory compensation exceptions 
apply by their terms to these arrangements, and we believe that the 
Congress did not intend a wholesale prohibition on indirect 
compensation arrangements. The new indirect compensation arrangements 
exception conceptually follows the statutory exceptions applicable to 
direct compensation arrangements; in other words, we attempted to make 
the indirect compensation exception analogous to the existing 
exceptions. By contrast, the Congress clearly included indirect 
ownership or investment interests in the definition of ownership or 
investment interests to which the statute applies (section 1877(a)(2) 
of the Act) and created exceptions that can apply to those indirect 
interests. Thus, we have not created a separate exception for indirect 
ownership or investment interests. However, the definition of an 
``indirect ownership or investment interest'' in Sec.  
411.354(b)(5)(i)(B) incorporates a knowledge element that should 
sufficiently limit the universe of prohibited ownership and investment 
interests so that most remote ownership or investment interests should 
not trigger the prohibition.
    Comment: The indirect compensation exception includes a requirement 
that the compensation arrangement not violate the anti-kickback 
statute, section 1128B(b) of the Act (Sec.  411.357(p)(3)). One 
commenter wanted clarification as to which arrangement in the indirect 
compensation arrangement chain this provision referred.
    Response: The relevant subject of the inquiry would be the entire 
arrangement, including all sources of remuneration, between the DHS 
entity and the referring physician (or group practice where 
applicable). This would include each link in the chain as well as the 
overall arrangement viewed as a whole.
    Comment: One commenter asked us to clarify that compensation need 
not be ``set in advance'' under the indirect compensation exception.
    Response: The indirect compensation exception does not include a 
``set in advance'' requirement.
    Comment: One commenter asked that the regulatory text be modified 
to expressly state that a DHS entity can rely on a certification from a 
physician that a known indirect compensation arrangement between the 
physician and another entity is at fair market value not taking into 
account the volume or value of referrals.
    Response: While obtaining a certification may be an appropriate 
practice in some circumstances, we are not prepared to provide a 
blanket exception for reliance on certifications.
    Comment: While most commenters welcomed the knowledge requirement 
in the definition of an indirect compensation arrangement in Sec.  
411.354(c)(2)(iii), a number of commenters had questions about the 
conditions under which a DHS entity

[[Page 16062]]

has a duty to inquire as to the existence of an indirect compensation 
arrangement with a referring physician (66 FR 865, 868). One commenter 
asserted that the knowledge element in the False Claims Act, 31 U.S.C. 
3729, did not impose any duty to inquire. According to that same 
commenter, the preamble discussion seemed to impose a simple negligence 
standard. Others believed that the ``reason to suspect'' language was 
inconsistent with other statements that there was no duty to inquire on 
the part of the DHS entity (66 FR 865).
    Response: The knowledge element used in Sec.  411.354(c)(2)(iii) is 
the same as in the False Claims Act and the Civil Monetary Penalty Law 
(section 1128A of the Act): actual knowledge or reckless disregard or 
deliberate ignorance. As we explained in the Phase I preamble (66 FR 
864), the phrase ``reason to suspect'' was simply intended as a 
convention to avoid repetition of the wordier ``actual knowledge or 
reckless disregard or deliberate ignorance'' standard. There is 
extensive case law applying the standard in the context of False Claims 
Act and the Civil Monetary Penalties Law. As stated in the Phase I 
preamble (66 FR 865), a DHS entity has no duty to inquire whether a 
referring physician receives aggregate compensation that varies with, 
or otherwise takes into account, referrals to, or other business 
generated for, the DHS entity unless facts or circumstances exist such 
that a failure to follow up with an inquiry would constitute deliberate 
ignorance or reckless disregard.
    Comment: One commenter asked how the knowledge element in the 
definition of indirect compensation arrangements in Sec.  
411.354(c)(2)(iii) relates to the knowledge element in the sanctions 
sections 1877(g)(3) and (g)(4) of the Act (civil money penalties and 
exclusions).
    Response: The standards are identical. However, the standard would 
be applied separately for each inquiry. In other words, whether an 
indirect compensation arrangement exists is a separate inquiry from 
whether a person has knowingly presented or caused to be presented an 
improper claim or bill for services or has knowingly entered into a 
circumvention arrangement. It is likely, however, that some facts would 
be relevant to both inquiries.
    Comment: Several commenters, including a national physician 
professional association, questioned why the regulations only consider 
the DHS entity's knowledge. These commenters urged that physicians be 
protected under section 1877 of the Act if they do not have knowledge 
of the existence of a prohibited financial relationship.
    Response: The statutory scheme already protects physicians from any 
liability in the absence of actual knowledge, reckless disregard, or 
deliberate ignorance. The basic statutory sanction is disallowance of 
claims or bills, which affects the DHS entity, not the referring 
physician. The new knowledge standards in Sec.  411.354(c)(2)(iii) and 
Sec.  411.354(b)(5)(i)(B) protect against this otherwise strict 
liability aspect of section 1877 of the Act. Under section 1877 of the 
Act, physicians are only subject to sanction under the civil monetary 
provisions of section 1877(g) of the Act. Those provisions already 
contain a comparable knowledge element.
    Comment: One commenter asked that we clarify the statement in the 
Phase I preamble at 66 FR 866 that a distribution from an excepted 
ownership or investment interest is also excepted (and thus does not 
require recourse to a compensation exception), unless the distribution 
is a ``sham''. As an example, we posited a limited liability company 
that was losing money, but nonetheless made a distribution to physician 
investors after borrowing funds from a bank. The commenter suggested 
that the appropriate test should be whether the borrowing and 
distribution were lawful under applicable State law.
    Response: We do not believe it is possible to establish a ``bright 
line'' test for determining whether a particular distribution is a 
``sham'' in all cases. Rather, it will depend on the circumstances. The 
reference to possible ``sham'' distributions was intended to make clear 
that an excepted ownership or investment interest may not be used to 
shield payments that are not legitimately related to the ownership or 
investment interest (such as funneling additional remuneration to 
physicians as ostensible ``returns'' from an investment entity).
    Comment: A physician organization questioned why a referring 
physician's investment interest in a subsidiary company should be 
considered an indirect ownership interest in the parent company if the 
subsidiary has any investment interest in the parent. The commenter 
thought the test should also require that the referring physician know 
that the investment interest exists.
    Response: Our treatment of investment interests in subsidiaries 
that, in turn, have investment interests in parent companies is 
consistent with the general definition of indirect ownership and 
investment interests, described above. In short, in those 
circumstances, a physician investor in the subsidiary has an indirect 
investment interest in the parent. If the parent is a DHS entity, the 
physician may not refer patients to the parent for DHS and the parent 
may not file claims for those DHS, unless an exception applies. With 
respect to indirect ownership or investment interests, however, Sec.  
411.354(b)(5)(B) limits liability to those DHS entities that have 
actual knowledge of, or act in reckless disregard or deliberate 
ignorance of, the existence of an indirect ownership or investment 
interest by the referring physician in the DHS entity. In other words, 
although the physician need not have knowledge to trigger the 
prohibition, the DHS entity must have some reason to suspect the 
existence of the indirect ownership or investment interest. This 
regulatory scheme does not adversely impact physicians who do not have 
knowledge; non-payment of claims affects only the DHS entity, and 
imposition of CMPs (the sanction applicable to physicians under section 
1877 of the Act) only applies to knowing violations.
    Comment: One commenter asked us to clarify that, if a referring 
physician's direct ownership or investment interest in a DHS entity 
would be protected under an exception, then a similar indirect 
ownership or investment interest of the physician in that same DHS 
entity would be excepted.
    Response: The commenter is correct. For example, if a physician has 
an investment interest in a company that, in turn, owns an interest in 
a hospital in Puerto Rico, the physician's indirect investment interest 
in the Puerto Rico hospital is excepted under Sec.  411.356(c)(3).
    Comment: One commenter questioned our conclusion that stock options 
and convertible securities create a compensation arrangement, rather 
than an ownership or investment interest (Sec.  411.354(b)(3)(ii)). The 
commenter pointed out that options and securities can be purchased on 
the open market and are not just received pursuant to employment.
    Response: We are persuaded that the commenter is correct and are 
modifying the definition of ownership or investment interest. The 
determination as to whether stock options and convertible securities 
create ownership or investment interests or compensation arrangements 
depends on the method of acquisition. If the options or securities are 
originally purchased or received for money or in return for a capital 
contribution in whole or in part, they will be considered ownership or 
investment interests. If they are received

[[Page 16063]]

as compensation for services, they will be considered compensation 
until the time that they are exercised, at which time they become an 
ownership or investment interest.
    Comment: One commenter objected to treating loans secured by the 
property of an entity as an ownership interest in the entity (Sec.  
411.354(b)(1)).
    Response: Section 1877(a)(2) of the Act states that an ownership or 
investment interest may be through equity, debt, or other means. The 
rule adopted in Phase I for secured loans accommodated the industry's 
desire for a ``bright line'' rule in this area. However, we agree with 
the commenter that loans or bonds that are secured by, or otherwise 
linked to, a particular piece of equipment or the revenue of a 
department or other discrete hospital operations should not be 
considered an ownership interest in the whole hospital, but only in a 
part or subdivision of the hospital. Therefore, the whole hospital 
exception would not apply.

C. When Does a Physician Make a Referral? (Section 1877(h)(5) of the 
Act; Phase I--66 FR 871; Sec.  411.351)

    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. The regulations define ``referral'' in Sec.  
411.351.
    In Phase I, we excluded from the definition of ``referral'' 
services performed personally by the referring physician, but included 
services provided by a physician's employees, co-workers, or 
independent contractors. We made clear that referrals can occur in a 
wide variety of formats--written, oral, or electronic--depending on the 
particular service. Moreover, referrals can be direct or indirect. 
Phase I also added a new regulatory exception at Sec.  411.353(e) 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). Under this exception, a claim by a DHS entity may be paid 
for purposes of section 1877 of the Act if the entity did not know of, 
or have reason to suspect, the identity of the physician making the 
indirect or oral referral.
    Comments to the Phase I rule on referrals and our responses follow. 
We are making no major changes to the final rule in this area.
    Comment: A number of commenters urged that the definition of 
referral exclude services that are performed ``incident to'' a 
physician's personally performed services or that are performed by a 
physician's employees. According to the commenters, such services are 
integral to the physician's services. Another commenter suggested that 
services by licensed professionals that are separately billable should 
be considered referrals, but services that are only billable as part of 
a physician's service should not be considered referrals. One commenter 
suggested the appropriate test should be whether there is significant 
physician involvement in the provision of a service.
    Response: This is an issue about which we specifically solicited 
comments in the Phase I rulemaking. After careful consideration of the 
comments and the issues raised, we are adhering to our original 
determination that ``incident to'' services performed by others, as 
well as services performed by a physician's employees, are referrals 
within the meaning of section 1877 of the Act. As discussed in the 
Phase I preamble (66 FR 871-872), this interpretation is consistent 
with the statute as a whole. A blanket exclusion for services that are 
``incident to'' a physician's services or are performed by a 
physician's employees would, for example, substantially swallow the in-
office ancillary services exception. As a practical matter, although 
``incident to'' services and employee services are included in the 
definition of ``referrals'' for purposes of section 1877 of the Act, 
many of those referrals will fit in the in-office ancillary services or 
another exception. This approach to the definition of ``referral'' is 
consistent with the statutory scheme, which allows productivity bonuses 
for ``incident to'' services under the in-office ancillary services 
exception, but not under other exceptions. A ``substantial 
involvement'' test would be vague and impracticable.
    Comment: A group representing allergists and immunologists 
requested clarification that no referral occurs when a physician 
prepares an antigen and furnishes it to a patient. Another commenter 
requested clarification that there is no referral if a physician 
personally refills an implantable pump. Yet another commenter requested 
clarification that there is no referral if a physician personally 
provides durable medical equipment (DME) to a patient.
    Response: The commenters are correct. There is no ``referral'' if a 
physician personally performs a designated health service. However, as 
noted above, there is a referral if the designated health service is 
provided by someone else. In many cases, these referrals will qualify 
for an exception.
    Comment: A commenter sought clarification that no referral occurs 
when a physician personally performs services in a hospital, even if 
the hospital bills for the services pursuant to an assignment.
    Response: If a physician personally performs the services, there is 
no referral, regardless of whether the physician bills the program 
directly or another entity bills pursuant to an assignment. However, 
technical components associated with a physician's personally performed 
services in a hospital are referrals to which section 1877 of the Act 
applies (66 FR 871).
    Comment: One commenter suggested that the application of section 
1877 of the Act to referrals within a physician's medical practice is 
inconsistent with the Office of the Inspector General's interpretation 
of the anti-kickback statute, section 1128B(b) of the Act. The 
commenter suggested that there exists a blanket exception for such 
referrals under the anti-kickback statute.
    Response: As we discussed more thoroughly in the Phase I preamble 
(66 FR 863), section 1877 of the Act is a separate statute from the 
anti-kickback statute and must be applied separately. We do not 
perceive any inconsistency, however, in the treatment of referrals 
within a physician's medical practice. Like section 1877 of the Act, 
the anti-kickback statute contains no blanket exception for such 
referrals (contrary to the commenter's suggestion). Some arrangements 
may be protected by a statutory or regulatory safe harbor under the 
anti-kickback statute. (42 CFR 1001.952)
    Comment: One commenter requested clarification as to whether 
services ordered by a nurse practitioner or other licensed professional 
will be considered to have been referred by a physician in the same 
group practice.
    Response: In determining whether an independent health 
professional's referral to a DHS entity should be attributed to the 
physician, all the facts

[[Page 16064]]

and circumstances surrounding the referral and the relationship of the 
independent health professional and the physician must be considered. 
As we indicated in the Phase I preamble (66 FR 872), our concern is 
that physicians could attempt to circumvent section 1877 of the Act by 
funneling referrals through nonphysician practitioners. The relevant 
inquiry is whether the physician has controlled or influenced the 
nonphysician's referral such that the referral should properly be 
considered the physician's referral. We are changing the regulation 
text accordingly to reflect Phase I preamble language.
    Comment: An imaging center commented that physicians do not refer 
patients to imaging centers, but only order tests. The commenter also 
stated that many radiology procedures have similar sounding names, and 
a patient may not know the difference between procedures if he or she 
is given an oral referral and may unwittingly request a designated 
health service rather than a service that is not a designated health 
service. The commenter also stated that, if a patient self-referred to 
an imaging center, a report would usually be sent to the patient's 
physician, whether the physician made the referral or not.
    Response: Contrary to the commenter's assertion, in many instances 
physicians do refer patients to entities that furnish imaging services. 
The determination whether a particular patient has been referred by a 
particular physician for a designated health service within the meaning 
of section 1877 of the Act would depend on the facts and circumstances. 
While we are unclear about the commenter's statement concerning 
patients, we note that imaging centers are in a position to ensure 
compliance with section 1877 of the Act by structuring any financial 
arrangement with a referring physician or immediate family member (or 
potential referring physician or immediate family member) to fit in an 
exception.
    Comment: A commenter objected to the application of section 1877 of 
the Act to referrals for hospital and other Medicare Part A services. 
According to the commenter, the statutory definition of ``referral'' in 
section 1877 of the Act only applies to items or services ``for which 
payment may be made under Part B.''
    Response: As we discussed in the January 1998 proposed rule (63 FR 
1691-1692), section 1877(h)(5) of the Act contains two parts defining 
``referral''. The first part, section 1877(h)(5)(A) of the Act, defines 
a referral to include the request by a physician for an item or service 
for which payment may be made under Part B, including the request for a 
consultation with another physician (and any test or procedure ordered 
by, or to be performed by, or under the supervision of, that other 
physician). The second part, section 1877(h)(5)(B) of the Act, covers 
the request or establishment of a plan of care by a physician that 
includes the provision of a designated health service. Although this 
second part is not drafted in Medicare-specific terms and could be 
interpreted to include any designated health service, we interpreted it 
to cover only DHS that may be covered under Medicare. This would 
include DHS, such as hospital and home health care services, that are 
covered under Medicare Part A. We noted in 1998 that we were aware of 
no rationale for the broader reach of ``referral'' under the first part 
(a request for any Part B item or service) than the second (a request 
for a designated health service). We therefore took the position--which 
we affirm here--that the first part relating to Part B items and 
services should be limited to referrals for DHS.
    Comment: An association for nursing facilities objected to the 
concept of imputed or oral referrals. According to the association, the 
regulations will inhibit communications between physicians and patients 
by restricting a physician's ability to share information about DHS 
entities freely with patients. The association suggested that the 
regulations protect any physician who provides patients with accurate 
information about all appropriate DHS entities and discloses his or her 
financial relationships with any of those DHS entities.
    Response: Section 1877 of the Act embodies a congressional 
determination to discourage physicians from having financial 
relationships with DHS entities to which they refer Medicare patients. 
Neither the statute nor the regulations burdens any physician-patient 
communications except those communications in which the physician 
refers to those DHS entities with which the physician has a prohibited 
financial relationship. Although disclosure of financial interests to 
patients informs patients of the potential conflict of interest, we do 
not believe, nor does the statute contemplate, that such disclosure 
adequately protects against improper referrals or overutilization. If 
DHS entities and physicians insist on entering into financial 
relationships, they can protect themselves by structuring the 
relationships to fit in one of the exceptions. The commenter's proposed 
exception would swallow the statute and inhibit enforcement.
    Comment: A hospital association requested that the ``innocent 
entity'' exception at Sec.  411.353(e), which protects DHS entities 
that do not have knowledge of the identity of the referring physician, 
be expanded to protect DHS entities that do not have knowledge of the 
existence of a financial relationship with the referring physician. In 
particular, the commenter was concerned that it may be difficult for 
DHS entities to know if they have financial relationships with 
immediate family members of referring physicians.
    Response: Knowledge of the existence of a financial relationship is 
an element of the definition of an ``indirect compensation 
arrangement''. (66 FR 864) Absent the requisite knowledge, no indirect 
compensation arrangement is established. This aspect of the definition 
should address many of the commenter's concerns. We recognize that no 
comparable knowledge limitation applies to direct financial 
relationships, including direct financial relationships with referring 
physicians' family members. The statute clearly contemplates a strict 
liability bar on direct financial relationships with immediate family 
members. The exception proposed by the commenter would effectively 
negate the statutory prohibition.
    Comment: A number of commenters asked that we expand the protection 
of the ``innocent entity'' exception at Sec.  411.353(e) to referring 
physicians.
    Response: As discussed above, referring physicians have no 
liability under section 1877 of the Act unless they knowingly cause an 
improper claim or bill to be submitted or knowingly engage in a 
circumvention scheme.

D. Definition of ``Consultation'' (Section 1877(h)(5) of the Act; Phase 
I--66 FR 873; Sec.  411.351)

    The definition of a ``referral'' at section 1877(h)(5) of the Act 
includes DHS provided in accordance with a consultation with another 
physician, including DHS performed or supervised by the consulting 
physician or any DHS ordered by the consulting physician. Section 
1877(h)(5)(c) of the Act creates a narrow exception for a small subset 
of services provided or ordered by certain specialists in accordance 
with a consultation requested by another physician. These include 
requests by a pathologist for clinical laboratory services or 
pathological examination services; a radiologist for diagnostic 
radiology services; or a radiation oncologist for radiation therapy. To 
qualify, the services must be furnished by, or under the supervision 
of, the

[[Page 16065]]

pathologist, radiologist, or radiation oncologist in accordance with a 
consultation requested by another physician.
    In Phase I, we broadly interpreted a ``consultation'' for purposes 
of determining when an entity with which a pathologist, diagnostic 
radiologist, or radiation oncologist has an otherwise prohibited 
financial relationship will be permitted to submit a claim to Medicare 
for DHS ordered by those physicians (66 FR 873). The ``consultation'' 
definition in this rule is not intended to, nor does it, apply to other 
Medicare coverage or payment rules relating to consultations. Moreover, 
neither section 1877(h)(5)(C) of the Act, nor the definition of 
``consultation'' at Sec.  411.351, protects referrals from the 
physician requesting the consultation to a DHS entity with which the 
requesting physician has a prohibited financial relationship (66 FR 875 
of Phase I preamble).
    The Phase I rule adopted the following criteria to identify a 
consultation for purposes of section 1877 of the Act:
     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.
     The request and need for the consultation is 
documented in the patient's medical record.
     After the consultation is provided, the 
consulting physician prepares a written report of his or her findings, 
which is provided to the physician who requested the consultation.
     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 furnished 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.

We have modified the final rule slightly to accommodate concerns raised 
by consulting physicians in group practices and by radiation 
oncologists who furnish services that are ancillary and integral to 
radiation therapy services. Otherwise, we have made no major changes to 
the Phase I rule. Comments to the Phase I definition of 
``consultation'' and our responses are related below.
    Comment: Several commenters questioned the level of supervision 
required for radiological procedures. Another asked us to affirm that 
it is sufficient to provide the level of supervision required by the 
Clinical Laboratory Improvement Amendments of 1988 (CLIA) (Pub. L. 100-
578, October 31, 1988). One professional association asked us to 
clarify that the services need not be supervised by the consulting 
radiologist, but could be supervised by another physician in the 
consulting radiologist's group practice.
    Response: Nothing in this rulemaking establishes any particular 
level of supervision for any particular services. The supervision 
necessary to come within the various exceptions that include a 
supervision requirement, as well as the definition of ``consultation'' 
in section 1877(h)(5)(C) of the Act, is the level of supervision 
otherwise required by the applicable Medicare payment and coverage 
rules for the specific service (66 FR 872). In Sec.  411.351, the 
definition of ``referral'' in paragraph (2)(ii) provides that the DHS 
must be furnished ``by or under the supervision of the pathologist, 
radiologist, or radiation oncologist.'' We agree that supervision by a 
pathologist, radiologist, or radiation oncologist in the same group 
practice as the consulting pathologist, radiologist, or radiation 
oncologist, respectively, would be appropriate and consistent with the 
overall statutory scheme and structure. We have modified the regulation 
accordingly. Where applicable Medicare payment and coverage rules 
permit, the supervision required under section 1877(h)(5)(C) of the Act 
may be provided by a physician in the same group practice.
    Comment: Section 1877(h)(5)(C) of the Act applies to requests by 
radiation oncologists for ``radiation therapy.'' Several professional 
associations representing radiologists and imaging centers requested 
that we interpret ``radiation therapy'' to include other DHS performed 
as part of the radiation therapy treatment. According to the 
commenters, computerized axial tomography (CT), magnetic resonance 
imaging (MRI) and ultrasound services are often integral and necessary 
to the provision of radiation therapy. The commenters indicated that in 
many cases the in-office ancillary services exception at section 
1877(b)(2) of the Act and Sec.  411.355(b) will not cover these 
ancillary services.
    Response: We agree with the commenters that the exception for 
radiation oncologists who request radiation therapy services would fail 
its intended purpose if it did not also protect necessary and integral 
ancillary services requested, and appropriately supervised, by the 
radiation oncologist. We have modified the regulations accordingly. We 
believe this interpretation effectuates the statutory intent. Moreover, 
it is consistent with the existing exception in section 1877(h)(5)(C) 
of the Act for diagnostic radiology services (including CT, MRI, and 
ultrasound) requested by a radiologist.
    Comment: One commenter objected that the consultation definition at 
Sec.  411.351 requires the consulting physician to produce a written 
report. According to the commenter, most consulting physicians do not 
prepare written reports.
    Response: Current Medicare rules governing payment and coverage for 
consultation services require a written report. Moreover, no other 
commenter, including the many physician associations, objected to the 
requirement. Since we believe that preparation of a written report is 
the general practice and consistent with Medicare program rules, and 
the commenter provided no evidence to support his assertion, we are 
retaining the written report requirement.
    Comment: One commenter requested that we expand section 
1877(h)(5)(C) of the Act to cover cardiologists who interpret 
echocardiograms under financial arrangements that are comparable to 
those that exist when a radiologist interprets a radiological 
ultrasound.
    Response: An echocardiogram ordered and read by a cardiologist is 
not a service integral to a consultation by a specialist within the 
meaning of section 1877(h)(5)(C) of the Act. Under section 
1877(h)(5)(C) of the Act, the Congress specifically excepted three 
narrow categories of physicians who provide specific services pursuant 
to consultations. The statutory language is very specific and reflects 
congressional intent that the exception be narrow. We do not have the 
authority to extend this exception to other specialists. Moreover, 
there is a substantial difference between a radiologist ordering 
diagnostic radiology tests pursuant to a request for a consultation and 
a cardiologist ordering an echocardiogram. In the former situation, the 
ordering and interpretation of the procedure is the physician's primary 
specialty; in the latter, the echocardiogram is ancillary to the 
cardiologist's primary medical practice, the treatment of the heart. In 
other words, an echocardiogram ordered by a cardiologist is no 
different from any other designated health service test ordered by 
other physicians who are not pathologists, radiologists, and radiation 
oncologists; if the physician has a financial interest in the 
furnishing of the test, section 1877 of the Act is implicated.

[[Page 16066]]

    Comment: One commenter stated that some patients self-refer to 
radiation oncologists for brachytherapy, which is then provided by an 
entity with which the radiation oncologist has a financial 
relationship. Since there is no referral from another physician, the 
consultation exception in section 1877(5)(C) of the Act is not 
available. Moreover, according to the commenters, the in-office 
ancillary services exception in section 1877(b)(2) of the Act and Sec.  
411.355(b) is often unavailable for these referred services, because 
patients primarily come to the radiation oncologist or his or her 
entity only for radiation therapy services. Thus, the services cannot 
meet Sec.  411.355(b)(2)(i) of the in-office ancillary services 
exception in Phase I, which required that excepted services be provided 
in a building where the referring physician (or another member of the 
referring physician's group practice) furnishes substantial physician 
services unrelated to the furnishing of DHS or in a centralized 
building owned or operated by the physician's group practice on a full-
time basis. The commenter wondered whether, in these circumstances, it 
would be appropriate for the radiation oncologist to refer the patient 
to a urologist who might then refer the patient back to the radiation 
oncologist.
    Response: While we recognize the problem identified by the 
commenter, the proposed solution would be an inappropriate 
circumvention. Rather, we believe the changes to the in-office 
ancillary services exception described in this Phase II preamble in 
section V.B.4 address the commenter's concerns. These changes should 
enable most radiation oncologists to provide radiation therapy services 
to self-referred patients under the in-office ancillary services 
exception.

III. Physician Compensation Under Section 1877 of the Act (Phase I--66 
FR 875)

    Section 1877 of the Act provides different exceptions for core 
physician compensation based on whether the physicians are physicians 
in a group practice (in connection with the in-office ancillary 
services and physician services exceptions), employees, or independent 
contractors. The terms of the statutory exceptions vary. In addition, 
the Phase I regulations implemented new regulatory exceptions for fair 
market value compensation paid to employees or independent contractors 
and compensation for certain academic physicians.
    Many comments addressed the issue of physician compensation under 
section 1877 of the Act. We have provided detailed responses to these 
comments in the relevant sections of this preamble. However, some 
issues relate to more than one exception. We summarize those aspects of 
physician compensation here. This discussion supplements the discussion 
of physician compensation in section IV of the Phase I preamble (66 FR 
875).
    A common thread in many of the comments was the observation that 
physician compensation arrangements are structured in various ways for 
legitimate reasons and that the form of the arrangement (for example, 
employment or personal services contract) should not constrain the 
structure of the compensation (for example, percentage-based 
compensation, productivity bonuses, or physician incentive plans). In 
short, many commenters thought that there should be only one set of 
conditions applicable to physician compensation, and that the same 
rules should apply to group practices, employees, and independent 
contractors, as well as under the fair market value and academic 
medical center exceptions. As explained below, we have tried to 
minimize the differences, consistent with the statute.
    First, the statute permits group practices to divide revenues among 
their physicians in ways that are very different from the ways other 
DHS entities are permitted to share revenues with employed or 
independent contractor physicians. The statute recognizes the 
differences between physicians in a group dividing income derived from 
their own joint practice and a hospital (or other entity) paying a 
physician employee or contractor who generates substantial income for 
the facility that would not ordinarily be available to a physician 
group. In effect, group practices receive favored treatment with 
respect to physician compensation: they are permitted to compensate 
physicians in the group, regardless of status as owner, employee, or 
independent contractor, for ``incident to'' services and indirectly for 
other DHS referrals. This preference is statutory.
    Second, outside of the group practice/in-office ancillary services 
context, we have tried to equalize the most important conditions in the 
other main physician compensation exceptions (employment, personal 
services, fair market value, and academic medical centers). Under these 
exceptions in the regulations, physicians can be paid on a percentage 
of revenues or collections for personally performed services; receive a 
productivity bonus on any personally performed services; and 
participate in a physician incentive plan related to health plan 
enrollees. These issues are explained in more detail below and in the 
discussions of the relevant exceptions.
     Percentage compensation arrangements. Commenters 
representing independent contractors argued that the statute and 
regulations unfairly restrict the kinds of compensation that 
independent contractor physicians can receive when compared to the 
compensation permitted for group practice physicians and employed 
physicians. In particular, the personal service arrangements and the 
fair market value exceptions (key exceptions for independent 
contractors) both contain a ``set in advance'' requirement not present 
in the statutory group practice definition or employment exception.
    In Phase I, we interpreted ``set in advance'' to preclude most 
percentage compensation arrangements. As discussed below in section IV, 
we have modified our interpretation of ``set in advance'' to permit 
some percentage compensation if the methodology for calculating the 
compensation is set in advance and does not change over the course of 
the arrangement in any manner that reflects the volume or value of 
referrals or other business generated by the referring physician. As a 
result, like their group practice and employee counterparts, 
independent contractor physicians can receive certain limited forms of 
percentage compensation under section 1877 of the Act. The same is true 
for academic physicians under the academic medical centers exception, 
which also contains the ``set in advance'' requirement.
     Productivity bonuses. A second concern for 
independent contractors is the availability of productivity bonuses 
under section 1877 of the Act. While the personal service arrangements, 
employment, fair market value, and academic medical centers exceptions 
all restrict compensation that is determined based on the volume or 
value of DHS referrals, the personal service arrangements, fair market 
value, and academic medical centers exceptions further restrict 
compensation that is determined based on the volume or value of ``other 
business generated.'' Moreover, the employment exception contains a 
provision that expressly permits productivity bonuses to be paid to 
employed physicians for services they personally perform. Independent 
contractor physicians have noted that the statute and regulations make 
no comparable provision for productivity bonuses for work personally 
performed by independent contractors.

[[Page 16067]]

    We partially addressed this issue in the Phase I rulemaking. There, 
we defined ``referral'' under the statute to include only DHS referrals 
and to exclude personally performed DHS. In short, personally performed 
work -DHS or otherwise--is not considered a ``referral'' under section 
1877 of the Act. (See Sec.  411.351.) Thus, a productivity bonus based 
on personally performed work would not be based on the volume or value 
of ``referrals.''
    The personal service arrangements, fair market value, and academic 
medical centers exceptions bar compensation that takes into account 
``other business generated'' by the referring physician. (In the 
January 1998 proposed rule, we had proposed adding by regulation a 
similar restriction to the employment exception, but we are not 
adopting that proposal.) In Phase I, we interpreted ``other business 
generated'' to include any health care business, including private pay 
business (See Sec.  411.354(d)(3)). Many commenters construed this 
definition to encompass personally performed services, including a 
physician's professional services. That was not our intent, nor do we 
believe it to have been the intent of the Congress. We have clarified 
the regulations at Sec.  411.354(d)(3) to reflect that ``other business 
generated'' does not include personally performed services. It does, 
however, include any corresponding technical component of a service 
that is billed by the DHS entity.
    The result of these interpretations is that all physicians, whether 
employees, independent contractors, or academic medical center 
physicians, can be paid productivity bonuses based on work they 
personally perform. As discussed above, consistent with the statutory 
scheme, group practices also may pay physicians in the group, whether 
independent contractors or employees, productivity bonuses based on 
``incident to'' services, as well as indirect bonuses and profit shares 
that may include DHS revenues, provided the distribution methodology 
meets certain conditions. As noted above, this additional latitude for 
group practices is statutory.
     Physician incentive plans and other risk-sharing 
arrangements. A further perceived inconsistency raised by some 
commenters involves payments to physicians under risk-sharing 
arrangements. The statutory personal service arrangements exception 
contains an express provision allowing independent contractor 
physicians to be compensated under a physician incentive plan with 
respect to services provided to individuals enrolled with the entity 
making the payments. The group practice, employee, fair market value, 
and academic medical center exceptions do not contain comparable 
language. Notwithstanding, in Phase I, we established a new regulatory 
exception at Sec.  411.357(n) for compensation under a risk-sharing 
arrangement for services furnished to enrollees of a commercial or 
employer-provided health plan. The new exception applies to payments 
made directly or through a subcontractor. The new exception is 
available for all qualifying risk-sharing arrangements, whether the 
physician is a member of a group practice, employed, an independent 
contractor physician, or an academic medical center physician. (The 
prepaid plans exception at Sec.  411.355(c) protects referrals of DHS 
furnished to enrollees of Medicare and Medicaid managed care plans.) 
The risk sharing arrangements exception is discussed in Phase I at 66 
FR 912 through 914. Also, in this Phase II, we have clarified that 
payments made by downstream subcontractors may be protected under the 
physician incentive plan provision of the personal service arrangements 
exception.
    In sum, we have modified the regulations to clarify that 
independent contractor and academic medical center physicians, like 
their group practice and employed counterparts, can be paid using 
certain forms of percentage compensation and can receive productivity 
bonuses based on personally performed services. Moreover, the 
regulations permit group practice, employed, and academic medical 
center physicians, like independent contractors, to be paid under risk-
sharing arrangements. We believe these changes substantially address 
the concerns raised by the commenters.
    Despite these modifications, the terms and conditions of the 
statutory and regulatory exceptions differ with respect to physician 
compensation. For the convenience of the public, we are providing the 
following chart briefly summarizing key provisions. Readers are 
cautioned that the exceptions contain additional conditions not 
summarized here. (In the chart below, those sections referred to as 
1877 refer to section 1877 of the Social Security Act; those sections 
referred to as 411 refer to Sec.  411 of the Code of Federal 
Regulations.)

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Personal service
                                         Group practice       Bona Fide employment        arrangements        Fair market value       Academic medical
         Terms of exception                physicians             [1877(e)(2);            [1877(e)(3);           [411.357(1)]       centers [411.355(e)]
                                      [1877(h)(4); 411.352]        411.357(c)]            411.357(d)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Must compensation be ``fair market   No....................  Yes--1877(e)(2)(B)(i).  Yes--1877(e)(3)(A)(v)  Yes--411.357(1)(3)...  Yes--411.355(e)(1)(ii
 value''?                                                                                                                           ).
Must compensation be ``set in        No....................  No....................  Yes--1877(e)(3)(A)(v)  Yes--411.357(1)(3)...  Yes--411.355(e)(1)(ii
 advance''?                                                                                                                         ).
Scope of ``volume or value''         DHS referrals--         DHS referrals--         DHS referrals or       DHS referrals or       DHS referrals or
 restriction.                         1877(h)(4)(A)(iv).      1877(e)(2)(B)(ii).      other business--       other business--       other business--
                                                                                      1877(e)(3)(A)(v).      411.357(1)(3).         411.355(e)(1)(ii).
Scope of productivity bonuses        Personally performed    Personally performed    Personally performed   Personally performed   Personally performed
 allowed.                             services and            services--1877(e)(2).   services--411.351      services--411.351      services--411.351
                                      ``incident to'', plus                           (``referral'') and     (``referral'') and     (``referral'') and
                                      indirect--1877(h)(4)(                           411.354(d)(3).         411.354(d)(3).         411.354(d)(3).
                                      B)(i).
Are overall profit shares allowed?   Yes--1877(h)(4)(B)(i).  No....................  No...................  No...................  No.
Written agreement required?          No....................  No....................  Yes, minimum 1 year    Yes (except for        Yes, written
                                                                                      term.                  employment), no        agreement(s) or
                                                                                                             minimum term.          other document(s).

[[Page 16068]]

 
Physician incentive plan (PIP)       No, but risk-sharing    No, but risk-sharing    Yes, and risk-sharing  No, but risk-sharing   No, but risk sharing
 exception for services to plan       arrangement exception   arrangement exception   arrangement            arrangement            arrangement
 enrollees?                           at 411.357(n) may       at 411.357(n) may       exception at 411.357   exception at           exception at
                                      apply.                  apply.                  may also apply.        411.357(n) may apply.  411.357(n) may
                                                                                                                                    apply.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    General comments on physician compensation and our responses 
follow.
    Comment: Several commenters asked whether a physician's personally 
performed services would be included as ``other business generated 
between the parties.''
    Response: Personally performed services are not considered ``other 
business generated'' for purposes of these regulations. This 
interpretation is consistent with the exclusion of personally performed 
services from the definition of ``referral'' at Sec.  411.351. The 
regulations have been revised to clarify that personally performed 
services do not count as other business generated for the DHS entity. 
However, the technical component corresponding to a physician's 
personally performed service would be considered other business 
generated for the entity.
    Comment: A number of exceptions, including the personal service 
arrangements, office and equipment rental, fair market value, and 
academic medical center exceptions, require that compensation be ``set 
in advance.'' Many commenters urged us to abandon our position that 
percentage compensation arrangements based on fluctuating or 
indeterminate measures or which result in the seller receiving 
different payment amounts for the same services from the same purchaser 
are not ``set in advance'' for purposes of section 1877 of the Act. 
This was of particular concern to academic medical centers and 
hospitals, which argued that percentage compensation is commonplace in 
their physician compensation arrangements. They also pointed out that, 
under the statute, group practices are not subject to the ``set in 
advance'' restriction when paying profit shares or productivity bonuses 
to group practice physicians, nor are employers so restricted in their 
payments to employed physicians under the employee exception.
    Response: As noted in section I above, we delayed until January 7, 
2004, the effective date of the last sentence of Sec.  411.354(d)(1), 
which contained the percentage compensation limitation, so we could 
reconsider our position without unduly upsetting existing percentage 
compensation arrangements. Upon further consideration, we are persuaded 
that our original position was overly restrictive. We are deleting the 
last sentence of Sec.  411.354(d)(1) as promulgated in the Phase I 
final rule. Instead, we are modifying the ``set in advance'' definition 
at Sec.  411.354(d)(1) to clarify that the formula for calculating 
percentage compensation must be established with specificity 
prospectively, must be objectively verifiable, and may not be changed 
over the course of the agreement between the parties based on the 
volume or value of referrals or other business generated by the 
referring physician. We are clarifying the regulations text to make 
clear that compensation is ``set in advance'' if it is set in an 
agreement before the services for which payment is being made are 
rendered. As explained above, the different treatment of group practice 
physicians is part of the statutory scheme. We address the specific 
circumstances of academic medical centers further in section XII.A 
below.
    Comment: One commenter requested clarification that the set in 
advance and fair market value tests in Sec.  411.354(d)(1) are separate 
tests.
    Response: The commenter is correct. Compensation must be both ``set 
in advance'' and ``fair market value.'' We have clarified the 
regulation by deleting the second sentence of Sec.  411.354(d)(1), 
which states that a ``set in advance'' payment must be fair market 
value not taking referrals or other business into account. This concept 
is already contained in Sec.  411.354(d)(2) and (d)(3), as well as in 
the individual exceptions.

IV. The ``Volume or Value'' Standards Under Section 1877 of the Act 
(Phase I--66 FR 876; Sec.  411.354)

    Many of the exceptions in section 1877 of the Act include a 
requirement that 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 Phase I (66 FR 876), we interpreted 
the statute as permitting time-based or unit-of-service based payments, 
even when the physician receiving the payment has generated the payment 
through a DHS referral, as long as the individual payment is set at 
fair market value at the inception of the arrangement and does not 
subsequently change during the term of the arrangement in any manner 
that takes into account DHS referrals. For those exceptions that also 
restrict payments that take into account ``other business generated 
between the parties,'' we interpreted the language to mean that the 
payments also may not take into account any other business, including 
non-Federal health care business, generated by the referring physician. 
We interpreted the phrase ``generated between the parties'' to mean 
business generated by the referring physician. As discussed in the 
preceding section, we have interpreted ``other business generated'' to 
make clear that it excludes personally performed services (but includes 
corresponding technical components).
    In short, we interpreted section 1877 of the Act to establish a 
straightforward test that compensation arrangements should be at fair 
market value for the work or service performed or the equipment or 
space leased. We indicated that we would apply our interpretation of 
the volume or value standard uniformly to all provisions under section 
1877 of the Act and part 411 where the language appears. The ``other 
business generated'' restriction applies only to those exceptions in 
which it expressly appears.
    In Phase I, we also concluded that, in certain situations, 
compensation arrangements that require physicians to refer to 
particular DHS entities would be permitted under section 1877 of the 
Act, if the compensation is set in advance, is consistent with fair 
market value (without regard to anticipated or required referrals), 
otherwise complies with an applicable exception, and complies with 
certain conditions ensuring patient choice, insurer choice, and a 
physician's independent medical judgement. In response to comments, we 
are clarifying that this provision, codified at Sec.  411.354(d)(4), 
applies only to employment, managed care, and

[[Page 16069]]

personal services arrangements and only if (i) the required referrals 
relate solely to the physician's services covered under the 
arrangement; and (ii) the referral requirement is reasonably necessary 
to effectuate the legitimate purposes of the compensation relationship.
    Comments to the Phase I rule on the ``volume or value'' standards 
and our responses follow.
    Comment: Two commenters requested that we clarify that per-use or 
per unit-of-service based payment methodologies do not vary with the 
volume or value of referrals or other business generated within the 
meaning of the regulations. One of the commenters asked that the 
regulatory text be modified to make this clear.
    Response: Section 411.354(d)(2) and Sec.  411.354(d)(3) clearly 
state that time-based and unit-of-service based compensation will be 
deemed not to take into account the volume or value of referrals or 
other business generated between the parties as long as the time-based 
or unit-of-service based compensation is fair market value for services 
or items actually provided and the compensation does not vary during 
the course of the compensation agreement in any manner that takes into 
account referrals of DHS (or, in the case of Sec.  411.354(d)(3), other 
business generated by the referring physician, including private pay 
health care business). We consider per-use payments (also known as 
``per click'') payments to be unit-of-service based compensation. When 
viewed in the aggregate (for example, for purposes of the indirect 
compensation arrangement definition at Sec.  411.354(c)(2)), unit-of-
service based compensation is likely to vary or otherwise reflect the 
volume or value of DHS referrals or other business generated, as 
applicable.
    In reviewing the regulatory text, we discovered that the language 
``for services or items actually provided'' appears in Sec.  
411.354(d)(2), but not correspondingly in Sec.  411.354(d)(3); this was 
a technical oversight and has been corrected. We are also clarifying 
Sec.  411.354(d)(3) by changing the phrase ``during the term of the 
agreement'' to ``during the course of the compensation agreement'' to 
conform to the language used in Sec.  411.354(d)(2). We intended these 
provisions to be comparable.
    Comment: A number of commenters questioned the discussion of the 
``volume or value'' standard as applied in the context of the indirect 
compensation arrangement definition at Sec.  411.354(c) and the 
indirect compensation arrangements exception at Sec.  411.357(p).
    Response: As discussed above at section II.B, the use of very 
similar language in the indirect compensation arrangement definition, 
indirect compensation arrangments exception, and the explanations of 
the ``volume or value'' and ``other business generated'' standards at 
Sec.  411.354(d)(2) and Sec.  411.354(d)(3) raised unnecessary 
questions, and we have revised the regulations. For purposes of 
determining whether an indirect compensation arrangement exists under 
the definition at Sec.  411.354(c), the inquiry is whether the 
aggregate compensation to the referring physician reflects the volume 
or value of DHS referrals or other business generated by the referring 
physician, even if individual time-based or unit-of-service based 
payments would otherwise be permissible (that is, the payments are fair 
market value at inception and do not vary over the term of the 
agreement). In short, many time-based or unit-of-service based fee 
arrangements will involve aggregate compensation that varies based on 
volume or value of services and thus will be ``indirect compensation 
arrangements'' under Sec.  411.354(c). However, in determining whether 
these arrangements fit into the indirect compensation arrangements 
exception at Sec.  411.357(p), which does not include an aggregate 
requirement, the relevant inquiry is whether the individual payments 
are fair market value not taking into account the volume or value of 
referrals or other business generated by the referring physician (and 
do not change after inception). In other words, the issue is whether 
the time-based or unit-of-service based fee is fair market value and 
not inflated to compensate for the generation of business. As noted 
above, we have revised Sec.  411.354(c)(2)(ii) to clarify the 
application of the ``volume or value'' standards in Sec.  411.354(d) to 
indirect compensation arrangements.
    Comment: A commenter asked whether a per-use or per unit-of-service 
based methodology that incorporated decreasing payments as volume 
increased would be permitted. According to the commenter, these payment 
methodologies often more accurately reflect fair market value for 
equipment leases because they spread fixed costs over the term of the 
lease.
    Response: Payments of the sort described by the commenter would be 
reviewed on a case-by-case basis. There may be circumstances, 
particularly in the context of equipment leases, in which payments that 
decrease as volume increases most accurately reflect fair market value 
and do not take into account the volume or value of referrals or other 
business generated for purposes of section 1877 of the Act. For 
example, to the extent the declining payments are fair market value and 
based on costs, rather than volume, they would be permitted. It is our 
understanding that these declining payment arrangements primarily occur 
in the context of equipment leases, where the costs allocable to the 
equipment decline over time.
    Comment: In Phase I, we determined that the volume or value 
standard would not be implicated by an otherwise acceptable 
compensation arrangement solely because the arrangement required the 
physician to refer to a particular provider as a condition of payment, 
as long as certain conditions were satisfied (66 FR 878). Several 
commenters objected to permitting employers to require employees to 
refer to specific DHS entities, notwithstanding the conditions imposed 
under Sec.  411.354(d)(4). Commenters representing competitor entities 
that are not part of integrated health systems objected to our position 
on required referrals, believing themselves to be competitively 
disadvantaged by our rule.
    Response: In limited circumstances, required referrals are a 
reasonable and appropriate aspect of certain health care business 
arrangements that should not, in and of themselves, implicate section 
1877 of the Act. Notwithstanding, we are persuaded by the commenters 
that Sec.  411.354(d)(4) is overly broad and could permit required 
referrals beyond those that are reasonable and appropriate. We are 
modifying Sec.  411.354(d)(4) to permit only those required referrals 
that are related to the services a physician performs while acting 
under his or her arrangement with an entity, such as when an employer 
requires its employees, when working in their capacity as employees, to 
refer to employer-affiliated entities or when a managed care 
organization requires its network providers, when treating enrollees, 
to refer to other network providers. Thus, Sec.  411.354(d)(4) will 
apply to employment, managed care, and other contractual arrangements 
that include required referrals only to the extent those referrals 
relate to the physician's services that are covered under the 
contractual arrangement and the referral requirement is reasonably 
necessary to effectuate the legitimate purposes of the compensation 
relationship. For example, an entity that employs or contracts with a 
physician on a part-time basis to provide services to the entity cannot 
condition the employment or contract--or any compensation under

[[Page 16070]]

the employment or contract-on referrals of the physician's private 
practice business (for example, patients seen by the physician when he 
or she is not working part-time for the entity). As we cautioned in 
Phase I, mandatory referral arrangements could still implicate the 
anti-kickback statute, depending on the facts and circumstances.
    Comment: Several commenters asked us to clarify whether the rules 
set out in Sec.  411.354(d) are requirements or simply ``safe 
harbors.'' One commenter sought confirmation of the following 
interpretation: a promotional item offered free of charge to referring 
and non-referring physicians alike would not violate the ``volume or 
value of referrals'' standard, even though it would not qualify under 
Sec.  411.354(d) because it was not sold at fair market value.
    Response: The provisions at Sec.  411.354(d) are intended to be 
``deeming'' or ``safe harbor'' provisions. In other words, there may be 
some situations not described in Sec.  411.354(d) where an arrangement 
does not take into account the volume or value of referrals. The 
promotional giveaway arrangement described by the commenter might not 
take the volume or value of referrals into account if the promotional 
item were offered to all physicians in a community (but not, for 
example, if the giveaway were limited to all members of a particular 
medical staff in the community). The arrangement still creates a 
financial relationship with the referring physicians that would need to 
comply with an exception. Apart from the non-monetary compensation up 
to $300 or hospital medical staff incidental benefits exceptions, other 
potentially applicable exceptions require that compensation be fair 
market value.

V. Exceptions Applicable to Ownership and Compensation Arrangements 
(Section 1877(b) of the Act; Phase I--66 FR 879; Sec.  411.355)

A. Physician Services Exception (Section 1877(b)(1) of the Act; Phase 
I--66 FR 879; Sec.  411.355(a))

    Section 1877(b)(1) of the Act specifies that the general 
prohibition 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. We are making no modifications to the Phase I 
rule for this exception.
    Comment: We received one comment on this provision. A group 
practice of allergists objected to the inclusion of antigens as an 
outpatient prescription drug in the final rule. According to the 
commenter, the provision of antigens is paid as a physician service and 
is defined as a physician service in the Act. The group asked that we 
clarify that the provision of antigens is a physician service covered 
by Sec.  411.355(a) or, in the alternative, that the furnishing of such 
antigens by a physician in his office is not a referral when he or she 
personally furnishes the antigens to the patient.
    Response: The commenter is correct that providing antigens is a 
physician service and that the provision of antigens may qualify under 
the physician services exception at Sec.  411.355(a). Moreover, under 
the final rule, personally performed services are not considered 
referrals to an entity. Finally, we note that the provision of antigens 
will frequently qualify under the in-office ancillary services 
exception, which also covers physician services that are DHS.

B. In-Office Ancillary Services Exception (Section 1877(b)(2) of the 
Act; Phase I--66 FR 880; Sec.  411.355(b))

[If you choose to comment on issues in this section, please include the 
caption ``In-Office Ancillary Services Exception'' at the beginning of 
your comments.]

    A detailed discussion of the in-office ancillary services exception 
appears in the Phase I preamble. In general, the exception regulates 
physicians' ordering of DHS in the context of their own practices. The 
exception is designed to protect the in-office provision of certain DHS 
that are truly ancillary to the medical services being provided by the 
physician practice.
    The Phase I rule made significant changes to the January 1998 
proposed rule, which was generally criticized as overly restrictive. In 
response to a large volume of comments to the January 1998 proposed 
rule, we modified the types of services that could qualify for 
protection under the exception, the level of physician supervision 
required to qualify, the kinds of physicians that could provide the 
requisite supervision, and the locations where the services could be 
provided. While the overwhelming majority of the comments to the Phase 
I rule strongly supported the changes, some commenters raised concerns 
about aspects of the Phase I rule, particularly the building 
requirements. We have simplified the building tests as described in 
section V.B.4 of this preamble. We have made a number of other minor 
changes.
    As in Phase I, comments and responses to the in-office ancillary 
services exception are divided into five sections: general comments, 
covered DHS, supervision requirements, building requirements, and 
billing requirements.
1. General Comments (Sec.  411.355(b))
    Several commenters objected to the easing of the requirements for 
meeting the in-office ancillary services exception. In particular, a 
number of physical and occupational therapy organizations complained 
that physicians would use the exception to expand the scope of the 
services they provide within their practices and thus capture 
additional revenues from their own referrals. These commenters 
suggested tightening various elements of Sec.  411.355(b).
    As we explained more fully in the Phase I preamble (66 FR 880), we 
believe the final rule reflects the balance that the Congress sought 
between regulating physician financial relationships and not unduly 
interfering with the practice of medicine.
2. Covered Designated Health Services (Phase I--66 FR 881; Sec.  
411.355(b))
    The in-office ancillary services exception in section 1877(b)(2) of 
the Act covers all DHS except durable medical equipment (DME) (other 
than infusion pumps) and parenteral and enteral nutrients, equipment, 
and supplies. In Phase I, we used the statutory authority at section 
1877(b)(4) of the Act to expand the scope of DHS potentially included 
in the in-office ancillary services exception by--
    (1) Clarifying that outpatient prescription drugs may be 
``furnished'' in the office, even if they are used by the patient at 
home;
    (2) Permitting external ambulatory infusion pumps that are DME to 
be provided under the in-office ancillary services exception;
    (3) Clarifying 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.
    We are making no further changes to the DHS covered by the in-
office ancillary services exception in Phase II.
    Comment: Many commenters approved of the modification made in Sec.  
411.355(b)(4) to permit physicians to

[[Page 16071]]

furnish crutches, canes, walkers, and manual folding wheelchairs to 
patients who need assistance in ambulating in order to depart from the 
physician's office. Several physician organizations commended the 
modifications, but suggested that the regulatory language should not be 
specific as to the items covered. An association for DME suppliers 
expressed concern that the provision of folding manual wheelchairs 
might discourage patients from receiving more appropriate chairs and 
suggested we only permit physicians to loan wheelchairs.
    Response: It is unlikely that the provision of a folding wheelchair 
will deter a patient from receiving a more appropriate wheelchair on a 
long-term basis. In general, with the exception of infusion pumps, the 
statute expressly excludes DME from the in-office ancillary services 
exception. Given this statutory directive, we think a specific and 
limited list of permitted items is appropriate. While we recognize that 
specificity limits future flexibility, we do not anticipate significant 
changes in the equipment that might be permitted in the future.
    Comment: A DME supplier association asked us to clarify the 
provision in Sec.  411.355(b)(4)(iv) that physicians or group practices 
that furnish DME under the in-office ancillary services exception must 
meet all DME supplier standards in Sec.  424.57(c). Specifically, the 
commenter asked whether physicians must apply for a supplier number 
from the National Supplier Clearinghouse. If not, the commenter asked 
how the DME will be billed to ensure that payment is made at the DME 
regional carrier (DMERC) rates.
    Response: Certification of a physician or physician group as a 
provider of Medicare services does not authorize that physician or 
group to bill Medicare for DME. Rather, the physician or physician 
group must obtain a Medicare certification as a DME Prosthethic, 
Orthotics and Supplies (DMEPOS) supplier under the DMEPOS fee schedule. 
Given this payment rule, if a physician or group intends to furnish and 
bill Medicare for DME under the in-office ancillary services exception, 
the physician or group would need to obtain a supplier number.
3. Direct Supervision (Section 1877(b)(2)(A)(i) of the Act; Phase I--66 
FR 885; Sec.  411.355(b)(1))
    The in-office ancillary services exception includes a requirement 
that the DHS be provided personally by: (i) The referring physician; 
(ii) a physician who is a member of the same group practice as the 
referring physician; or (iii) individuals ``directly supervised'' by 
the physician or another physician ``in the group practice'' (section 
1877(b)(2)(A)(i) of the Act). In the Phase I final rule, we interpreted 
``directly supervised'' to mean that the supervision meets the 
physician supervision requirements under applicable Medicare payment or 
coverage rules for the specific service at issue. We interpreted 
physicians ``in the group practice'' to include owners of the group 
practice, employees of the group practice, and independent contractors 
who, while not ``members of the group,'' contract to provide services 
to the group's patients in the group's facilities pursuant to an 
arrangement that 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 (CMS 
Pub. 14-3), Part 3--Claims Process.
    Commenters were generally pleased with the Phase I interpretation 
of the ``supervision'' requirement, and we are making no significant 
changes to the rule. Comments to the Phase I rule and our responses 
follow.
    Comment: In the Phase I final rule, we interpreted the ``direct 
supervision'' requirement in section 1877(b)(1) of the Act to mean that 
supervision must be provided at the level necessary to meet the 
Medicare program payment and coverage rules applicable to the 
particular designated health service being furnished. (See Sec.  
411.355(b)(1)(iii)). While several commenters approved of this general 
approach, they objected to various aspects of the current supervision 
standards in the payment and coverage rules. For example, several 
commenters objected to the fact that ``incident to'' services require a 
very high level of supervision.
    Response: This regulation is not the appropriate vehicle for 
addressing concerns with the supervision requirements in current 
coverage and payment rules and policies. This regulation addresses 
supervision of services only insofar as it is relevant to determining 
whether there is a prohibited financial relationship or a prohibited 
referral. In that regard, we have simply tied this regulatory scheme to 
the payment and coverage supervision standards. If those rules change 
in the future, those changes would similarly apply, prospectively, 
under these regulations.
    Comment: A physician organization asked that we modify the language 
of Sec.  411.355(b)(1)(iii) from ``another physician in the group 
practice'' (emphasis added) to ``a physician in the group practice.'' 
According to the commenter, the proposed change more clearly reflects 
that a solo practitioner can furnish DHS through a shared facility in 
the same building. In the commenter's view, the current language 
implies that the referring physician must be in a group practice.
    Response: The regulatory language cited by the commenter is 
identical to the statutory language. However, to forestall any 
confusion, we have clarified the regulatory text to make clear that the 
language ``another physician in the group practice'' is not intended to 
mean that the referring physician must be in a group practice. Under 
the regulations, a solo practitioner may provide DHS through a shared 
facility, as long as the supervision, location, and billing 
requirements of the in-office ancillary services exception are 
satisfied. The supervision requirement referenced by the commenter 
requires that the services be furnished personally by an individual 
supervised by:
    (1) The referring physician or, in the alternative if applicable; 
(2) another physician in the referring physician's group practice. 
(Under other sections of the regulation, in-office ancillary services 
may also be furnished personally by the referring physician or a member 
of his or her same group practice (Sec.  411.355(b)(1)(i) and Sec.  
411.355(b)(1)(ii))). Thus, a solo practitioner can satisfy the first 
alternative and provide the necessary supervision himself or herself. 
(The level of supervision that the practitioner must provide is 
dictated by the applicable Medicare coverage and payment rules for the 
service.)
    Comment: Several physical therapists and a professional association 
representing physical and occupational therapists urged us to require 
personal supervision under Sec.  411.355(b)(1). The professional 
association specifically requested clarification of the following 
issues:
     When physical therapists work in a physician 
office, is the physician required to bill ``incident to'' for those 
services? Would the standards of Medicare Carrier's Manual 2050 apply?
     Does the level of supervision required in the 
physician's office differ depending on whether a physical therapist has 
his or her own provider number?
     Can a group practice own a rehabilitation agency 
and bill through it? What is the supervision requirement?
     If a group practice owns a comprehensive 
outpatient rehabilitation facility (CORF), and the physicians who own 
the practice refer patients for

[[Page 16072]]

physical therapy, what are the supervision requirements?
    According to the commenter, if physicians can own these kinds of 
facilities without providing direct supervision, the intent of section 
1877 of the Act would be circumvented.
    Response: As explained in the Phase I preamble (66 FR 885-886), we 
have concluded that section 1877 of the Act should not subject 
physicians to supervision standards that differ from the standards for 
Medicare payment and coverage for the services provided. Thus, for 
example, services billed ``incident to'' will require the level of 
supervision applicable under the ``incident to'' rules. Services that 
require only low-level general supervision are subject to that lower 
level of supervision for purposes of section 1877 of the Act. As noted 
above, these regulations under section 1877 of the Act do not, in the 
first instance, establish the supervision requirements applicable to 
particular services, nor are they an appropriate vehicle for doing so.
    Similarly, group practices must comply with all existing billing 
and claims submission rules. These regulations do not change any of 
those existing rules, nor is this an appropriate place to address other 
rules. Strictly for purposes of meeting the in-office ancillary 
services exception, the referred DHS must be billed in a manner that 
satisfies Sec.  411.355(b)(3) (discussed below).
4. The Building Requirements (Section 1877(b)(2)(A)(ii) of the Act; 
Phase I--66 FR 887; Sec.  411.355(b)(2))
    Under the in-office ancillary services exception, DHS must be 
furnished to patients in the same building where the referring 
physicians provide their regular medical services, or, in the case of a 
group practice, in a central building, provided certain conditions are 
satisfied (section 1877(b)(2)(A)(ii) of the Act). As the Phase I 
preamble notes, the building requirements help ensure that the DHS 
qualifying for the exception are truly ancillary to the physician's 
core medical office practice and are not provided as part of a separate 
business enterprise.
    In the Phase I final rule, we adopted the suggestion of some 
commenters and defined a ``building'' as 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 and 
interior parking garages. Under this test, a building can include a 
skilled nursing or other facility or a patient's private home, provided 
all other conditions of the in-office ancillary services exception are 
satisfied. A mobile van or trailer is not considered a building or a 
part of a building for purposes of section 1877 of the Act (see Sec.  
411.351). We are retaining the Phase I definition.
    We are also retaining without substantive change the Phase I 
``centralized building'' test for group practices under the in-office 
ancillary services exception. To prevent abuse of off-site DHS 
arrangements, such as part-time MRI or CAT scan rentals, Phase I 
provided that the group practice must have full-time, exclusive 
ownership or occupancy of the centralized space. While many commenters 
objected to this requirement, we are not changing the rule.
    We are, however, substantially revising the ``same building'' test 
under the in-office ancillary services exception to provide greater 
flexibility and a clearer rule. The same building test in the statute 
requires that the building be one in which the referring physician (or 
a member of his or group practice) furnishes physician services 
unrelated to the furnishing of DHS. In the Phase I rule, we interpreted 
this standard as requiring the referring physician (or another 
physician who is a member of the same group practice) to furnish in the 
same building ``substantial'' physician services unrelated to the 
furnishing of DHS.
    We defined the phrase ``physician services unrelated to the 
furnishing of DHS'' using a three-part test (the ``Phase I three-part 
test''). First, ``physician services unrelated to the furnishing of 
DHS'' was defined to mean physician services that are neither Federal 
nor private pay DHS, even if the physician services lead to the 
ordering of a designated health service. Second, we required that the 
physician services unrelated to the furnishing of DHS that are 
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). Third, we added a 
requirement that the DHS furnished in the building must be furnished to 
patients whose primary reason for coming in contact with the referring 
physician (or his or her group practice) is the receipt of physician 
services unrelated to the furnishing of DHS. The Phase I three-part 
test was intended so that parties could not use the same building test 
to circumvent the intent of the statute that the in-office ancillary 
services exception be limited to services that are truly ``in-office'' 
and related to the physician's core medical services to his or her 
patients.
    A number of commenters raised concerns about the Phase I three-part 
test. Some found it unclear or insufficiently ``bright line''. For 
example, some commenters wanted further guidance on the meaning of the 
``substantial physician services'' and ``primary reason'' elements. 
Commenters representing practitioners in specialty groups that 
primarily provide DHS, such as radiology or oncology, suggested that 
the Phase I three-part test was unduly restrictive and precluded them 
from using the in-office ancillary services exception.
    In addition, since publication of the Phase I final rule, we have 
become concerned that the Phase I three-part test might be susceptible 
to abuse. In particular, we are concerned that the test would allow 
physicians to implement arrangements in which DHS are insufficiently 
tied to the referring physician's core medical practice and are, in 
essence, separate business enterprises. For example, under the Phase I 
three-part test, a group practice might lease space at an off-site 
imaging facility, provide physician services there one day a week, and 
then provide nothing but imaging services the remainder of the week 
without any involvement or presence of the group practice physicians at 
the site. These types of arrangements would not be consistent with the 
intent of the ``same building'' requirement in the statute, and we had 
not intended to permit them.
    For all of these reasons, we have developed three new, alternative 
tests that are more straightforward, afford physicians greater 
flexibility, and are less susceptible to abuse. Only one of the three 
tests needs to be satisfied to meet the ``same building'' requirement. 
All three tests are available to solo practitioners, as well as group 
practices. These new tests replace the Phase I three-part test in its 
entirety. We believe that virtually all legitimate arrangements that 
complied with the Phase I three-part test should qualify under one of 
the new tests, as will many arrangements that had difficulty meeting 
the Phase I three-part test. Arrangements that may have complied with 
the Phase I three-part test, but do not meet any of the new tests, 
should be restructured (or unwound) prior to the effective date of this 
regulation.
    Under the first new test, at Sec.  411.355(b)(2)(i)(A), a 
designated health service is furnished in the ``same building'' if the 
building is one in which the referring physician or his or her group 
practice (if applicable) has an

[[Page 16073]]

office that is normally open to their patients at least 35 hours per 
week, and the referring physician or one or more members of his or her 
group regularly practices medicine and furnishes physician services to 
patients in that office at least 30 hours per week. Some of the 
services must be physician services that are unrelated to the 
furnishing of DHS, whether Federal or private pay, although the 
unrelated physician services may lead to the ordering of DHS. This new 
test should address the concerns expressed by radiologists, 
oncologists, and others whose practices primarily consist of furnishing 
DHS. Conceptually, this test generally describes buildings that are the 
principal place of practice for physicians or their groups.
    Under the second new test, at Sec.  411.355(b)(2)(i)(B), a 
designated health service is furnished in the ``same building'' if the 
building is one in which the referring physician or his or her group 
practice has an office that is normally open to their patients at least 
8 hours per week, and the referring physician regularly practices 
medicine and furnishes physician services to his or her patients in 
that office at least 6 hours per week (including some physician 
services unrelated to the furnishing of DHS). In this test, services 
provided by members of the referring physician's group practice do not 
count toward the 6-hour threshold. In addition, the building must be 
one in which the patient receiving the designated health service 
usually sees the referring physician or other members of his or her 
group practice (if the physician practices in a group practice). 
Conceptually, this test generally describes a building where a 
referring physician practices medicine at least 1 day per week and that 
is the principal place in which the physician's patients receive 
physician services.
    Under the third new test, at Sec.  411.355(b)(2)(i)(C), a 
designated health service is furnished in the ``same building'' if the 
building is one in which the referring physician or his or her group 
practice has an office that is normally open to their patients at least 
8 hours per week, and the referring physician or a member of his or her 
group practice (if any) regularly practices medicine and furnishes 
physician services to patients at least 6 hours per week in that office 
(including some physician services unrelated to the furnishing of DHS). 
In addition, the referring physician must be present and order the 
designated health service in connection with a patient visit during the 
time the office is open in the building or the referring physician or a 
member of his or her group practice (if any) must be present while the 
designated health service is furnished during the time the office is 
open in the building. This test requires presence in the building, but 
not necessarily in the same space or part of the building. 
Conceptually, this test generally describes buildings in which 
referring physicians (or group practice members, if any) provide 
physician services to patients at least 1 day per week and the DHS are 
ordered during a patient visit or the physicians are present during the 
furnishing of the designated health service.
    Under all of these tests, referring physicians or group practices 
must have offices in the building that are normally open to their 
patients a requisite number of hours per week. This standard is not 
intended to preclude occasional weeks in which the office is open fewer 
hours (for example, during vacation periods). In addition, under all 
three tests, referring physicians (or for Sec.  411.355(b)(2)(i)(A) and 
Sec.  411.355(b)(2)(i)(C), their group practice members) must regularly 
practice medicine and furnish physician services for a minimum number 
of hours per week in that office. This standard is not intended to 
preclude use of the in-office ancillary services exception by 
physicians or group practices that have unfilled appointment slots, 
cancellations, or other occasional gaps in the furnishing of services 
such that they do not actually provide the requisite number of hours of 
physician services in particular weeks. Rather, they must regularly 
(that is, in the customary, usual, and normal course) practice medicine 
and furnish physician services in the building for the minimum number 
of hours. In addition, consistent with the statute, the tests require 
that ``some'' of the physician services be unrelated to the furnishing 
of DHS. We are not requiring any particular threshold amount of 
physician services unrelated to the furnishing of DHS--``some'' should 
be interpreted in its common sense meaning. For purposes of 
establishing compliance with the ``same building'' test, we do not 
interpret the statute to mean that the physician services must be 
entirely disconnected from subsequent furnishing of DHS. A stricter 
interpretation would be inconsistent with the Congress' intent to 
create an exception that allows physicians to conduct their medical 
practices in their own offices for their own patients. Moreover, in the 
context of this exception, we are concerned that a stricter 
interpretation could potentially adversely impact the delivery of 
patient care. Therefore, as in Phase I, we are defining ``physicians' 
services unrelated to the furnishing of DHS'' to mean physician 
services that are neither Federal nor private pay DHS, even if the 
physician services lead to the ordering of a designated health service 
(for example, a physical examination that leads to the ordering of a 
clinical laboratory test or an x-ray). The provision of interpretations 
and reads of diagnostic or other tests will not be considered 
physicians' services unrelated to the furnishing of DHS for purposes of 
this rule.
    Finally, we are making several minor modifications to the building 
requirements described in the responses to comments below. Moreover, we 
are revising the regulations to make clear that physicians and group 
practices may purchase the technical components of mobile services 
(which are not buildings for purposes of the in-office ancillary 
services exception) and bill for them pursuant to Sec.  414.50 and the 
purchased diagnostic testing rules at section 3060 of the Medicare 
Carriers Manual (as amended or replaced from time to time).
    Comments to the Phase I building requirements follow, along with 
our responses.
    Comment: A number of commenters objected to using the post office 
street address to determine whether DHS are being provided in the same 
building as the physician's practice. Some commenters suggested various 
alternative tests, including same ``strip mall'', same ``campus'', 
``adjacent buildings'', and several others. One commenter said that the 
decision as to location of the DHS was frequently controlled by the 
landlord, not the physician.
    Response: Any bright line test in this area will produce aberrant 
results in some circumstances. Nevertheless, a bright line test for 
``same building'' is essential given the significance of the in-office 
ancillary services exception and, in particular, the significance of 
the building tests. The post office address test was proposed by 
commenters to the January 1998 proposed rule (66 FR 888). None of the 
tests proffered by the Phase I commenters, nor any other test proposed 
in comments to the January 1998 proposed rule, is sufficiently definite 
to establish a ``bright line'' test. Any specific listing of types of 
building configurations would invariably cover some situations but omit 
others. The postal address test, while imperfect, provides a clear, 
fair, easily-applied standard. Moreover, as we explained in Phase I (66 
FR 889), the easing of the supervision standards under the

[[Page 16074]]

exception elevates the importance of meaningful building requirements 
in ensuring that the in-office ancillary services exception protects 
those DHS that are truly ancillary to the physician's office practice 
and not those that are essentially a separate business enterprise.
    Comment: A number of commenters objected to the exclusion of 
services furnished in mobile vans or other facilities not permanently 
affixed to the building. These commenters stated that mobile equipment 
was cost-efficient and offered convenience to patients, especially in 
rural areas. One commenter asked why we were prohibiting physicians 
from purchasing the technical component of these mobile services. 
Another commenter asked that we clarify that mobile equipment that can 
be moved into a building can qualify for the in-office ancillary 
exception.
    Response: As we stated in the Phase I preamble (66 FR 891), part-
time rentals of DHS equipment are precisely the arrangements that 
section 1877 of the Act was designed to restrict. Mobile equipment that 
is placed inside a building qualifies for the exception if it is 
located and used inside the ``same building'' (that is, not in the 
garage or an internal loading dock or parking garage). (In this regard, 
we have modified the rule consistent with our original intent in Phase 
I, to clarify that internal loading docks are not considered the ``same 
building''.) The special circumstances of rural area providers are 
addressed by the rural exception at section 1877(d)(2) of the Act 
(Sec.  411.356(c)(1)), discussed in more detail below at VII.B.
    It was not our intent to prohibit physicians and group practices 
from purchasing diagnostic tests under the purchased diagnostic testing 
rules Sec.  414.50 and in section 3060 of the Medicare Carriers Manual 
(Reassignment) (as amended or replaced from time to time). Upon further 
review, however, we have concluded that the Phase I rule did not 
adequately provide for the furnishing of those services. The purchased 
diagnostic tests rules permit physicians or groups to bill Medicare for 
purchased diagnostic tests, as long as they do not mark up the charge 
for the test, and they accept the lowest of the physician fee schedule, 
the physician's actual charge, or the supplier's net charge to the 
physician or group as payment in full for the test, even if assignment 
is not accepted. Having considered various options for addressing this 
issue in this interim final rule with comment period, we have 
determined that the best approach would be to exclude physicians (or 
group practices) who bill for purchased diagnostic tests in accordance 
with Medicare rules from the definition of ``entity'' under Sec.  
411.351, which otherwise defines an ``entity'' as the party that bills 
Medicare for the DHS. Conceptually, this approach reflects the 
substance of a purchased diagnostic test transaction, in which another 
entity actually furnishes the test, but passes the responsibility for 
billing Medicare on to the physician, who is precluded from profiting.
    Comment: In response to comments to the January 1998 proposed rule, 
the Phase I rule included a special provision under the in-office 
ancillary services exception for services provided by physicians 
(including services provided by qualified persons accompanying those 
physicians) whose principal medical practice involves treating patients 
in their private residences (Sec.  411.355(b)(6)). Under Sec.  
411.355(b)(6), the ``same building'' test is met if DHS are provided in 
a private home contemporaneously with a physician service that is not a 
designated health service. A private home does not include a nursing, 
long-term care, or other facility or institution. We solicited comments 
as to whether additional special rules might be appropriate. Two 
commenters urged us to expand the exception to cover more locations and 
to ease the other restrictions so that more physicians could qualify. 
One commenter objected to the requirement that the physician's 
principal medical practice consist of home care; the commenter stated 
that the requirement was unnecessary and limited the applicability of 
the exception. The commenter suggested that a physician should qualify 
if his or her medical group spent more than 50 percent of the group's 
practice time outside of the office setting, including travel time, 
preparation, and follow up. The same commenter asked us to clarify that 
the requirement that the services be contemporaneous does not require 
the physician's presence during the furnishing of the designated health 
service.
    Response: While we understand that relaxing the standards would 
result in more physicians qualifying under the special rule for home 
care physicians, the commenters apparently misunderstood our intent. 
Simply put, we intended to create a narrow rule for a particular group 
of specialty physicians who otherwise would generally be precluded from 
using the in-office ancillary services exception because they would 
have no ``building'' that could qualify as the place in which they 
furnish DHS under the exception. Restricting the special rule to 
physicians who principally practice in the home care field is designed 
to insure that the patient's home is, in fact, the physician's real 
locus of practice. The special rule is specifically limited to private 
residences, not nursing or other facilities.
    The commenter is correct that the contemporaneous requirement does 
not require the physician to be present throughout the furnishing of 
the designated health service. However, the physician must be present 
in the patient's private residence at the inception of the designated 
health service. This presence requirement is necessary to limit the 
exception to services truly furnished as part of the referring 
physician's ``office'' medical practice.
    Comment: One commenter asked us to clarify that residences in 
independent living facilities and assisted living facilities qualify as 
private homes. The commenter observed that some assisted living 
facilities have examination rooms that physicians use to treat 
residents. The commenter asked whether DHS furnished in such rooms 
would qualify as services furnished in the patient's residence.
    Response: We agree that private residences in independent living 
facilities and assisted living facilities should qualify as private 
homes for purposes of the special rule. We will consider a residence in 
an independent living facility or assisted living facility to be 
``private'' if the patient occupies the premises as his or her 
residence, through ownership or lease (by the patient or a relative or 
friend on the patient's behalf), and has the right to exclude others 
from the premises. The use of common examination rooms in those 
facilities is more problematic. For example, in some cases, assisted 
living facilities are conjoined with nursing facilities, and a case-by-
case evaluation would be required to determine whether a shared 
examination room is part of the nursing facility or the assisted living 
facility. On balance, we prefer a clear rule in this area, and thus 
would not consider a common examination room to be a private residence.
    Comment: Many commenters objected to the requirements in the ``same 
building'' test that (i) the referring physician (or another physician 
in his or her group practice) furnish substantial physician services 
unrelated to the furnishing of DHS in the same building (Sec.  
411.355(b)(2)(i)(A)); and (ii) those unrelated services represent the 
full range of services that the referring physician routinely provides 
(or, for a

[[Page 16075]]

referring physician in a group practice, the full range of services 
that the physician routinely provides for the group practice) (Sec.  
411.355(b)(2)(i)(B)).
    These commenters described these requirements as vague, both with 
respect to the quantity of services that are not DHS that must be 
performed in the building and the kinds of services that are not DHS 
that qualify. Moreover, the commenters objected to the requirement in 
Sec.  411.355(b)(2)(i)(C) that the receipt of DHS not be the primary 
reason the patient comes into contact with the referring physician or 
the group practice. Commenters pointed out that the latter requirement 
was particularly problematic for physicians in certain specialties, 
such as radiology and oncology, where much of their practice consists 
of furnishing DHS. Commenters suggested a number of replacements for 
the term ``substantial,'' including ``any,'' ``more than incidental,'' 
``10 percent,'' and ``significant,'' and requested clarification as to 
the application of the ``primary reason'' test to oncology and 
radiology practices.
    Response: The statute requires that the DHS be furnished in the 
``same building'' where the referring physician (or a member of his or 
her group practice) furnishes ``physicians'' services unrelated to the 
furnishing of DHS.'' The requirements referenced by the commenters were 
intended to ensure that DHS furnished under the in-office ancillary 
services exception are truly ancillary to the delivery of physician 
services and that the exception is sufficiently circumscribed to 
prevent abuse, particularly since the exception, as revised in the 
Phase I rule, permits certain shared facilities.
    As explained in detail above, we agree that the Phase I three-part 
test did not adequately take into account the nature of certain 
speciality practices, such as oncology and radiology, that inherently 
involve the furnishing of substantial DHS and relatively limited 
physician services unrelated to the furnishing of DHS. We have 
addressed those concerns, among others, by replacing the Phase I three 
part test with three new tests, one of which applies to any building in 
which a physician's practice (whether solo or group) is normally open 
for business 35 hours per week and in which the physician (or, if 
applicable, members of his or her group) regularly practices medicine 
and furnishes physician services to patients at least 30 hours per 
week. Some part of the physician services must be physician services 
unrelated to the furnishing of DHS, even if the physician services lead 
to the ordering or furnishing of DHS. We are no longer requiring that 
the physician services unrelated to the furnishing of DHS be 
``substantial.'' We believe that radiology, oncology, and other 
specialty practices that primarily provide DHS to their patients will 
be able to meet the lower threshold of providing ``some'' unrelated 
services in the revised regulations.
    We note that interpretations or reads of tests are generally DHS 
and will not count as physician services unrelated to the furnishing of 
DHS.
    Comment: One commenter asked us to clarify that, in Sec.  
411.355(b)(2)(i)(B) of Phase I, the physician services unrelated to the 
furnishing of DHS can be provided by the referring physician or by 
another physician who is a member of the same group practice.
    Response: The commenter is correct, although the test will be 
superseded as of the effective date of these regulations by the new 
building tests described above. However, for referrals and claims filed 
during the period between the effective date of Phase I (January 4, 
2002) and the effective date of Phase II, the Phase I building test 
would apply.
    Comment: Several commenters suggested that the Phase I three part 
test in Sec.  411.355(b)(2) should count only DHS payable by Medicare 
or Medicaid.
    Response: We disagree. The purpose of the same building test is to 
determine the location where the physician or group practice is 
practicing medicine so as to ascertain whether the DHS are truly 
ancillary to the referring physician's core medical practice and 
furnished in the same building as the referring physician's (or his or 
her group's) core medical practice. Consistent with this purpose, 
physicians should be providing in the building that is the subject of 
the inquiry at least some physician services that are unrelated to the 
furnishing of any DHS, whether Federal or private pay. In other words, 
the fact that a physician or group provides private pay x-rays in a 
building is insufficient to establish that the provision of DHS is 
ancillary to the physician's or group's core office medical practice. 
We have incorporated this concept in the three new same building tests 
described above.
    Comment: Several commenters asked us to clarify that the primary 
purpose element of the Phase I three-part test does not preclude a 
referral of a patient to a group practice or to a physician for DHS 
from a physician who is not in the group.
    Response: Unless the outside physician has a financial relationship 
with the group or physician to whom the patient is referred, a referral 
for a designated health service to a physician or group practice by an 
outside physician would not implicate section 1877 of the Act. As noted 
previously, we are eliminating the primary purpose element in the new 
Phase II regulations.
    Comment: Many commenters commended our decision to permit shared 
facilities in the same building provided the parties comply with the 
supervision, location, and billing requirements of the in-office 
ancillary services exception. Several commenters urged us to permit 
shared facilities that are not located in the same building. Many 
commenters objected to the requirement in the centralized building test 
(66 FR 889) that the building be owned or leased by the group practice 
on a full-time basis and used exclusively by the group practice, thus 
excluding shared off-site facilities under the centralized building 
test. Some commenters observed that the full-time, exclusive use 
requirement unduly favored large group practices over small ones.
    Response: We are not persuaded to change the regulations regarding 
shared off-site facilities. As discussed in greater detail in the Phase 
I preamble (66 FR 888), we believe that section 1877 of the Act is 
directed at arrangements that enable physicians to profit from 
referrals to free-standing DHS that are not ancillary to their medical 
practices. For the reasons given in the Phase I preamble (66 FR 888-
893), we believe the final Phase I regulation strikes the proper 
balance with respect to shared facilities.
    Comment: Several commenters objected to our decision to permit 
group practices to have more than one centralized facility.
    Response: We discern no reason to restrict group practices to a 
single centralized building, nor does the statutory language compel 
that result. We believe the requirement that any centralized building 
must be owned or leased 24 hours per day, 7 days per week, for at least 
six months, and used exclusively by the group practice should 
adequately protect against abuse.
5. The Billing Requirement (Section 1877(b)(2)(B) of the Act; Phase I--
66 FR 893; Sec.  411.355(b)(3))
    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 that 
physician is a member under that group practice's billing number; or an 
entity that is wholly owned by the referring or

[[Page 16076]]

supervising physician or the referring or supervising physician's group 
practice. In addition, under the Phase I rule, the group practice may 
bill if the physician is a ``physician in the group practice'' under 
the group practice's billing number. (This interpretation corrected a 
statutory anomaly and conformed the billing requirement to the 
corresponding statutory supervision requirements.) As with the other 
requirements in the in-office ancillary services exception, the billing 
requirements serve to directly associate the ancillary services for 
which self-referrals will be permitted with the physician's core 
medical practice. The billing requirement is a threshold rule for 
determining whether a designated health service furnished by a 
physician practice may be billed or claimed. The bill or claim itself 
must still comply with all other applicable billing and claims 
submission laws, regulations, and policies.
    Comment: One commenter asked that we interpret the billing 
requirement to permit a shared facility to bill under its own billing 
number.
    Response: We decline to adopt the commenter's suggestion. The 
billing arrangement proposed by the commenter clearly falls outside of 
the statutory requirement. Moreover, the proposal would undermine the 
role of the billing requirement in ensuring that the excepted 
furnishing of DHS closely relates to a physician's core medical 
practice.
    Comment: The same commenter interpreted the final regulations as 
permitting physicians to bill ``incident to'' for DHS that only require 
general supervision, even though the ``incident to'' billing rules 
require ``direct supervision''. Another commenter asked whether 
physical therapy services had to be directly supervised by a physician 
if the services are billed by a physician or a group practice.
    Response: The commenter misapprehends the scope of these 
regulations. The regulations under section 1877 of the Act do not 
establish or authorize any billing practice that is not in full 
compliance with other applicable Medicare coverage and payment rules. 
The billing requirement set forth in these regulations is for the 
purpose of determining whether a designated health service fits within 
the in-office ancillary services exception such that, as a threshold 
matter, a claim or bill for the service may be submitted at all by a 
physician or group practice. If a claim or bill may be submitted, it 
must still comply with all applicable Medicare payment and coverage 
rules (including, for example, the ``incident to'' rules).
    Comment: A professional association for physical therapists asked 
the following questions:
     If a physical therapist employed by a physician 
practice furnishes services, bills using the physical therapy provider 
number, and then reassigns payment to the group practice, are the 
billing requirements met?
     Would a rehabilitation agency, which is owned by 
physicians, and has its own billing number, be considered a wholly 
owned entity for billing purposes?
     Can physicians own a physical therapy private 
practice office and bill through the provider number of that office?
     When a designated health service is billed by an 
entity wholly owned by a group practice, do the Medicare conditions of 
participation applicable to the wholly owned entity determine the 
applicable level of supervision or do the supervision requirements 
related to group practice billing apply?
    Response: With respect to the first question, we assume it is 
directed at services provided after March 1, 2003, as prior to that 
date, services by an employed physical therapist had to be billed as 
``incident to'' services. Billing by a physical therapist under his or 
her own billing number does not satisfy the billing requirement of 
section 1877(b)(2)(B) of the Act, which requires that the service be 
billed by the performing physician, the supervising physician, the 
group practice using a number assigned to the group, or an entity 
wholly owned by the performing or supervising physician or the group 
practice. However, if the physical therapist reassigns his or her right 
to payment to the group, and the group bills using its own billing 
number (with the physical therapist's number indicated on the bill), 
then the billing requirement would be met. As to the second and third 
questions, the rehabilitation facility or physical therapy practice 
would be considered wholly owned if it is owned 100 percent by the 
physician group practice; 100 percent by the performing physician; or 
100 percent by the supervising physician. A wholly owned entity can 
bill using its own billing number (See Sec.  411.355(b)(3)(iv)). With 
respect to the last question, the supervision must meet the 
requirements applicable to the billing submitted to the Medicare 
program.

C. Group Practice Definition (Section 1877(h)(4)) of the Act; Phase I--
66 FR 894; Sec.  411.352)

[If you choose to comment on issues in this section, please include the 
caption ``Group Practice Definition'' at the beginning of your 
comments.]

    The Phase I rulemaking addressed the definition of a ``group 
practice'' under section 1877(h)(4) of the Act (the regulatory 
definition appears at Sec.  411.352). Most commenters commended the 
changes made in Phase I. In particular, the final rule incorporated 
significant additional flexibility for group practices. We are making 
no major changes to that definition in Phase II. We have modified the 
``primary purpose'' test to make clear that the relevant inquiry is the 
current operation of the group practice and have eliminated the 
requirement for centralized utilization review under the ``unified 
business'' test. We have revised the special rules on profit shares and 
productivity bonuses to make clear that the ``safe harbors'' are 
deeming provisions. We have also made certain modifications to address 
particular concerns raised by group practices operating across State 
lines, group practices employing part-time physicians, and existing 
group practices adding new members.
    Comments on the Phase I group practice definition and our responses 
follow.
    Comment: Two commenters asked us to clarify the application of the 
single legal entity rule in Sec.  411.352(a) to a group practice that 
has offices in more than one contiguous State and thus operates through 
``mirror'' entities with identical ownership and governance.
    Response: As long as both entities are absolutely identical as to 
ownership, governance, and operation, the States in which the group is 
operating are contiguous, and the group uses multiple legal entities 
solely to comply with jurisdictional licensing laws, we will consider 
the two entities to be a single legal entity. We have modified the 
regulation accordingly. We note that, as a whole, the States in which 
the group operates need to be contiguous, but each State need not be 
contiguous with every other State.
    Comment: A number of commenters objected to the requirement in 
Sec.  411.352(a) that the single legal entity must be formed primarily 
for the purpose of being a physician group practice. According to the 
commenters, the purpose at the time of formation is irrelevant, as long 
as the entity is currently operated primarily as a physician group 
practice.
    Response: We agree with the commenters that the relevant inquiry 
should be whether the group currently is operating primarily for the 
purpose of being a physician practice. We have

[[Page 16077]]

revised the rule accordingly. We want to iterate, however, that an 
entity that has a substantial purpose other than operating a physician 
group practice, such as operating a hospital, will not qualify. Thus, 
hospitals that employ two or more physicians are not physician ``group 
practices'' for purposes of section 1877(h)(4) of the Act and are not 
eligible under the in-office ancillary services exception. A hospital 
may own or acquire a separate physician group practice that qualifies 
under section 1877(h)(4) of the Act and would be eligible under the in-
office ancillary services exception.
    Comment: One commenter asked us to clarify that a group practice 
can meet the definition at Sec.  411.352 if it is owned by a medical 
group, as long as the medical group that owns it no longer provides 
medical services. Some commenters asked us to reconsider our position 
that the single legal entity requirement is not met if a group practice 
is owned by another functioning medical group.
    Response: Under Sec.  411.352(a), defunct medical groups no longer 
providing medical services can own or operate a medical practice that 
qualifies as a ``group practice'' for purposes of section 1877(h)(4) of 
the Act. In this regard, we have clarified the third sentence in Sec.  
411.352(a) to read: ``The single legal entity may be organized or owned 
(in whole or in part) by another medical practice, provided that the 
other medical practice is not an operating physician practice (and 
regardless of whether the medical practice meets the conditions for a 
group practice under this section).'' We stand by our determination 
that a group practice owned by other functioning medical groups cannot 
meet the single legal entity requirement; to conclude otherwise would 
insufficiently protect against sham group practice arrangements or 
physicians forming groups substantially for the purpose of profiting 
from DHS referrals.
    Comment: Several commenters objected to our determination that, for 
purposes of section 1877(h)(4) of the Act, a hospital cannot form a 
group practice of its employed physicians without organizing them into 
a separate entity.
    Response: As we explained in the Phase I preamble (66 FR 898-899), 
treating a ``group'' of hospital-employed physicians as a ``group 
practice'' for purposes of section 1877(h)(4) of the Act would stretch 
the meaning of a ``group practice'' too far. It would enable hospitals 
that employ two or more physicians to use the in-office ancillary 
services exception inappropriately to protect virtually all inpatient 
and outpatient hospital services. We do not believe that the Congress 
intended the in-office ancillary services exception, which focuses on 
services provided by physician practices, to be used to exempt hospital 
services from the scope of section 1877 of the Act. Under the ``group 
practice'' definition, a hospital may legally organize, own, or operate 
a group practice that is a separate legal entity; however, the hospital 
itself (or other facility or entity the primary purpose of which is 
something other than the operation of a physician group practice) 
cannot be a group practice for purposes of section 1877(h)(4) of the 
Act. Hospitals that employ physicians can appropriately structure their 
arrangements with physicians to fit in the employment exception.
    Comment: Some commenters urged that a foundation-model physician 
practice should be allowed to qualify as a ``group practice'' under 
section 1877(h)(4) of the Act.
    Response: It is our understanding that ``foundation-model'' 
physician practices exist in a variety of forms, depending on 
jurisdiction and other factors (including, for example, whether a 
particular State bars the corporate practice of medicine). Given the 
variety of foundation-model arrangements, it would be difficult to 
craft a uniform definition of a foundation-model group. Moreover, the 
personal services arrangements exception corresponds more closely to 
the contractual arrangements that typically establish foundation-model 
physician practices. Indeed, the legislative history reflects 
congressional intent to apply the personal services exception to 
foundations. (H.R. Conf. Report No. 103-213 at 814 (1993) (``The 
conferees intend that this exception would apply to payments made by a 
non-profit Medical Foundation under a contract with physicians to 
provide health care services and which conducts medical research 
[sic].'')) Thus, as explained in Phase I (66 FR 897), foundation-model 
practices should use the personal service arrangements exception. We 
believe the modifications we are making to that exception in this Phase 
II will address the commenters' concerns and offer adequate protection 
for DHS referrals within most foundation-model group structures. This 
determination does not preclude particular foundations or foundation-
model practices that, in fact, meet the single legal entity test from 
qualifying as a group practice and using the in-office ancillary 
services exception.
    Comment: Section 1877(h)(4) of the Act requires that a ``group 
practice'' consist of ``2 or more physicians.'' Several commenters 
asked that we clarify whether the ``2 or more physicians'' test is met 
if a group consists of one full-time physician and one part-time 
employed physician or independent contractor physician. The commenters 
interpreted the Phase I preamble as requiring that the second physician 
be a full-time, rather than part-time, employee. The commenters viewed 
this requirement as conflicting with Sec.  411.352(b), which requires 
that the group have two physicians who are ``members of the group'' (as 
defined in Sec.  411.351), whether as employees or direct or indirect 
owners. The commenters pointed out that, under the ``members of the 
group'' test, a physician with only token ownership in the group could 
qualify as a member of the group. Given this relatively expansive test 
for ``members of the group,'' the commenters discerned no reason for 
the ``2 or more physicians'' test to require that the second physician 
be a full-time employee.
    Response: The list of examples of acceptable group practice 
structures in the Phase I preamble (66 FR 897) is illustrative, not 
exhaustive, of the kinds of arrangements that could qualify under the 
group practice definition. We agree with the commenters' interpretation 
that the physicians counted for the ``2 or more physicians'' test can 
be part-time employed physicians. The group practice would still need 
to satisfy the remaining conditions of Sec.  411.352. This 
interpretation is consistent with the language of Sec.  411.352(b), and 
we are therefore making no textual change.
    However, with respect to independent contractor physicians, we are 
not expanding Sec.  411.352(b) to permit them to fulfill the ``2 or 
more physicians'' test. Independent contractors are not group practice 
``members'' under Sec.  411.351. A large number of commenters to the 
January 1998 proposed rule, as well as commenters to the Phase I rule, 
opposed including independent contractors in the definition of ``member 
of the group'' because of concerns about meeting certain of the 
statutory group practice tests (66 FR 900). Accordingly, we excluded 
those physicians from being group practice members, but included them 
in the definition of ``physicians in the group practice,'' a resolution 
consistent with the comment letters and the statutory language. To 
count non-member physicians in the ``2 or more physicians'' test would 
effectively expand the group practice definition to groups with no 
physician members (that is, groups with 2 or more independent 
contractors), a result inconsistent with the statute. That expansion 
would

[[Page 16078]]

enable physicians to nullify the various tests in section 1877(h)(4) of 
the Act related specifically to group practice members. For example, 
the ``75 percent physician-patient encounters'' test in section 
1877(h)(4)(A)(v) of the Act, which requires that members of the group 
conduct at least 75 percent of the group practice's physician-patient 
encounters, would be meaningless.
    Comment: One commenter asked that we reconsider permitting group 
practices to elect to treat independent contractors as members for 
purposes of determining compliance with Sec. Sec.  411.352(d) and (h) 
(the 75 percent ``substantially all'' and ``75 percent physician-
patient encounters'' tests, respectively).
    Response: We are not persuaded that a change is warranted or 
feasible. As we indicated in the Phase I preamble (66 FR 900), an 
election process would impose an administrative burden on groups 
without significant corresponding benefit, given the overall design of 
the final ``group practice'' definition and in-office ancillary 
services exception. Moreover, no mechanism currently exists to 
administer or monitor that election, and we do not believe most 
physician groups would favor creation of an election reporting 
requirement. Given the lack of an election reporting mechanism, any 
election provision would have to be an alternative to the existing 
test, making enforcement difficult. In short, an election procedure is 
impracticable. A single ``bright line'' test is preferable.
    The ``substantially all'' and ``75 percent physician-patient 
encounters'' tests are intended to measure whether a group practice 
functions as an integrated whole. If a group is unable to take 
advantage of the benefits afforded group practices under the statute 
because of the use of independent contractor physicians, it can 
integrate the physicians into the group as employees or owners or 
restructure to comply with another exception. As noted above, a 
substantial number of commenters to the January 1998 proposed rule (as 
well as commenters to the Phase I rule) asked that independent 
contractors not be considered members of the group to ease compliance 
with the group practice definition. In response to those original 
comments, we excluded independent contractors as members of the group, 
while including them as ``physicians in the group practice'' where that 
term is relevant.
    Comment: Section 411.352(d)(5) establishes a 12-month ``grace 
period'' for start-up groups to come into compliance with the group 
practice definition. The grace period does not apply when an existing 
group adds a new member (for example, a new employed physician) or 
reorganizes. Several physician professional associations commented that 
application of this rule could cause group practices that add new 
physician members to lose their group practice designations for a 
period of time after the new physician joins, because the new physician 
could skew the ``substantially all'' test (which requires that at least 
75 percent of patient care services provided by group members be 
provided through the group and billed under a number assigned to the 
group, with the amounts received treated as revenues of the group). 
According to the associations, there are frequently delays in obtaining 
Medicare billing numbers for newly employed physicians. Moreover, the 
associations believe that the current rule discourages bringing younger 
physicians into existing practices.
    Response: Our intent in excluding existing group practices that add 
new members from the broad grace period under Sec.  411.352(d)(5) was 
to ensure that groups would not, in essence, secure perpetual grace 
periods through the continuing addition of new physicians. In many 
cases, the addition of new physicians, such as physicians with 
established medical practices, to an existing group practice will not 
impair the group's ability to meet the group practice definition. We 
concur with the commenters, however, that some accommodation should be 
made for group practices that add new members, as long as the group 
practice otherwise continues to fit squarely in the definition. We are 
therefore creating Sec.  411.352(d)(6) to provide that, if the addition 
of a new member who has relocated his or her practice to an existing 
group practice would cause the group practice to fall out of compliance 
with the requirements of the ``substantially all'' test at Sec.  
411.352(d)(1), the group practice will have 12 months to come back into 
full compliance, provided that--
    (i) For the 12-month period, the group practice is fully compliant 
with the ``substantially all'' test if the new member is not counted as 
a member of the group for purposes of Sec.  411.352; and
    (ii) The new physician's employment with, or ownership or 
investment interest in, the group practice is documented in writing 
before commencement of the new employment or ownership.
    We have limited this rule to new members who have relocated their 
medical practices (as defined in the revised physician recruitment 
exception) to prevent abuse by groups that add new members through 
mergers with other groups. We are retaining the portion of the current 
rule that precludes group practices that reorganize from taking 
advantage of the startup or new member grace periods; if a group 
practice wants to use the exceptions available to group practices, the 
group should reorganize in accordance with the group practice 
definition.
    Comment: One commenter asked that we clarify whether leased 
physician employees can be considered employees (that is, members) of a 
group practice. A commenter noted that the new rules for coverage of 
``incident to'' services treat leased employees as employees and 
suggested that the same treatment should extend to determining whether 
a leased physician employee is a member of a group practice.
    Response: To the extent that a leased employee is a bona fide 
employee of the group under IRS rules, that leased employee physician 
would be considered an employee of the group practice, and therefore a 
member of the group. Group practices bear the burden of establishing 
the necessary criteria for employment. We have clarified the definition 
of ``member of the group'' accordingly.
    Comment: The definition of ``physician in the group practice'' in 
Sec.  411.351 provides that referrals from an independent contractor 
who is a physician in the group practice are subject to the prohibition 
on referrals under section 1877 of the Act and that the group practice 
is subject to the limitation on billing for referred services. A 
commenter asked us to clarify that this provision means that 
independent contractor referrals for DHS within the group implicate 
section 1877 of the Act to the same extent that the group member's 
referrals are implicated and not that DHS referrals cannot be made.
    Response: The commenter is generally correct. Like group practice 
members, an independent contractor who is a physician in the group 
practice can make referrals of DHS to the group practice, as long as an 
exception applies to those referrals. There is no group practice 
exception as such. In general, group practices rely on the in-office 
ancillary services exception for referrals within a group. Referrals 
from a ``physician in the group practice'' can be covered by this 
exception if all of the conditions in the exception are met. 
Alternatively, referrals from an independent contractor to a group 
practice for DHS could be excepted

[[Page 16079]]

under the personal service arrangements or fair market value 
exceptions.
    Comment: A commenter representing free clinics requested 
modifications to the ``substantially all'' and ``full range of 
services'' tests to accommodate the special circumstances of volunteer 
physicians providing free patient care services at free clinics. The 
commenter suggested that these services be treated comparably to 
services provided in Health Professional Shortage Areas (HPSAs) under 
Sec.  411.352(d)(4). The commenter explained that the modifications are 
necessary to prevent section 1877 of the Act from acting as a 
disincentive to providing free clinic services. Specifically, the 
commenter recommended that Sec.  411.352(c) be amended to exclude 
volunteer patient services provided by physicians in HPSAs from the 
``full range of services'' test and that a new subparagraph be added to 
Sec.  411.352 to create a special rule for volunteer patient services 
provided at a clinic operated by a governmental entity or agency or by 
a tax-exempt entity.
    Response: We do not believe, nor was it our intent, that donating 
volunteer services to patients at free clinics or similar facilities 
should adversely impact a group practice's ability to qualify as a 
``group practice'' within the meaning of Sec.  411.352. The ``full 
range of services'' test at Sec.  411.352(c) measures whether a member 
of a group practice provides substantially the same scope of patient 
care services within the group context as he or she provides outside 
the group context. The test does not require absolute identity of 
services. To the extent a physician donates the same scope of patient 
care services at a free clinic (that is, outside the group) as he or 
she provides as part of the group practice (that is, inside the group), 
there should be no problem meeting the ``full range of services'' test. 
To the extent the physician donates patient care services in a free 
clinic that are different from those he or she provides for the group, 
we would not expect that the donated patient care services would 
prevent the group from meeting the ``substantially all'' requirement. 
To the extent our reference in the Phase I preamble (66 FR 903) to 
volunteer activities involving treating indigent patients suggested 
otherwise, we withdraw the reference.
    With respect to the ``substantially all'' test at Sec.  411.352(d), 
a group practice member's donation of volunteer services to a free 
clinic generally should not impair the group's ability to meet the 75 
percent threshold. In those situations where it may, we see no reason 
that arrangements for the donated services could not be structured such 
that the services are donated to the free clinic through the group. So 
structured, we would consider donated patient care services to a free 
clinic (or comparable charitable enterprise) to be ``billed'' through 
the group, notwithstanding that no actual bills are sent or collected.
    Comment: A commenter representing physicians in group practices 
with members who provide substantial academic medical services sought 
relief similar to the preceding comment for time spent by physicians 
providing academic patient care services. The commenter explained that 
a medical school physician group would have difficulty meeting the 
``substantially all'' test because its members provide substantial 
academic medical services to clinics and foundations at the medical 
school. One commenter gave an example of a medical school group in 
which physicians spend over 25 percent of their time supervising 
residents and providing care at a university-affiliated clinic, 
hospital, and foundation, primarily for Medicaid patients. Since these 
services count as ``patient care'' services under the definition of 
that term in Sec.  411.351, and the physicians do not bill for these 
services under their arrangement with the academic medical center, the 
physician group cannot meet the ``substantially all'' test. The 
commenter urged that academic patient care services provided by 
academic physicians to university hospitals, clinics, and foundations 
as part of the university's faculty practice plan be excluded from the 
``substantially all'' test.
    Response: As with the donated volunteer services described above, 
we see no reason that, in situations in which the 75 percent threshold 
will not otherwise be met, arrangements for the provision of academic 
patient care services could not be structured such that the services 
are billed through the group and treated as receipts of the group (66 
FR 905).
    Comment: A commenter sought clarification that a medical school 
group practice can use the in-office ancillary services exception, even 
though it and its physicians are part of a faculty practice plan of an 
academic medical center.
    Response: If the medical school group practice meets the definition 
of a ``group practice'' in Sec.  411.352, and all of the criteria of 
the exception are satisfied, it can use the in-office ancillary 
services exception to protect referrals within the group practice (but 
not referrals to other components of the academic medical center, such 
as the teaching hospital).
    Comment: A commenter representing several entities described as 
``independent practice associations'' (IPAs) expressed concern that 
physicians in group practices who participate in an IPA representing a 
significant revenue source for the group practice may forfeit their 
group practice eligibility because they will not meet the 
``substantially all'' test. That test requires that 75 percent of the 
total patient care services of the group practice members be furnished 
through the group practice and billed under a billing number assigned 
to the group practice, and that the amounts received be treated as 
receipts of the group practice. According to the commenter, IPAs often 
employ or contract with group practice physicians directly and bill for 
the provision of their services under managed care contracts. According 
to the commenter, if a large portion of group members' patient care 
services are provided and billed under these contracts, they will not 
meet the 75 percent ``substantially all'' test. The commenter proposed 
two solutions. First, we could count as ``patient care services'' only 
``fee for service'' services, excluding managed care services. 
Alternatively, we could count only Medicare and Medicaid services.
    Response: We are somewhat unclear as to the nature of the 
particular entities represented by the commenter. They do not appear to 
be typical IPAs, which generally do not employ physicians. 
Nevertheless, we understand the commenter to be asking about the 
treatment of managed care contract services under the ``substantially 
all'' test. In Phase I, a commenter posed a similar situation: a group 
member physician contracts with a hospital to provide professional 
services and reassigns his or her payments for those services to the 
hospital. Thus, the hospital, not the group, bills Medicare for the 
services. In response, we affirmed that a group should be able to count 
professional services provided by the group member under a global 
payment when calculating the ``75 percent of patient care services'' 
requirement for purposes of the ``substantially all'' test. As we 
explained, the ``substantially all'' test is intended to guarantee that 
group practice members are providing a substantial amount of their 
services through the group practice (66 FR 905). Thus, ``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'' (66 FR 905). We indicated our intent to interpret 
the requirement

[[Page 16080]]

that ``substantially all'' of a physician's patient care services be 
provided through the group and billed ``under a billing number assigned 
to 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.
    Applied to the commenter's managed care contracts example, this 
interpretation means that the group practice could count patient care 
services provided under managed care contracts that are part of the 
group practice's business (for example, where the group practice 
contracts with the IPA to provide the services or where an individual 
physician member contracts to provide the services, but assigns his or 
her right to payment to the group). However, services provided by 
physicians pursuant to outside employment or contractual arrangements 
that are not tied to the group cannot meaningfully be said to be 
provided ``through the group practice.'' Accordingly, such services 
would not be counted as patient care services provided through the 
group practice. Thus, services provided by physicians during the course 
of employment with an IPA would count against a group practice under 
the ``substantially all'' test.
    We are not adopting either of the two alternative tests suggested 
by the commenter. We believe they are too narrow to achieve the purpose 
of the ``substantially all'' test in measuring the bona fides of a 
group practice.
    Comment: Section 411.352(d)(2) requires that data used to calculate 
compliance with the ``substantially all'' test in Sec.  411.352(d)(1) 
and supportive documentation must be made available to the Secretary 
upon request. One commenter asked that we delete this requirement, 
calling it simply a back-door attestation requirement.
    Response: The commenter misapprehends the legal distinction between 
an attestation, a document created to make mandatory representations, 
and a documentation requirement, which merely requires that a group 
retain records of its own activities. The documentation provision, 
which mandates production of documentation only upon the Secretary's 
request, enables the government to ascertain whether the 
``substantially all'' test has been satisfied. Group practices that 
choose to take advantage of the special treatment afforded groups under 
the statute should be prepared to demonstrate compliance with relevant 
statutory and regulatory standards.
    Comment: Section 411.352(f) sets forth a three-part test for 
determining whether a group practice is a ``unified business.'' Section 
411.352(f)(1)(i) requires 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. Section 411.352(f)(1)(ii) requires 
consolidated billing, accounting, and financial reporting. One 
commenter asked us to clarify the meaning of these provisions. 
Specifically, the commenter asked whether the test is met if individual 
group practice locations devise their own budgets, including salary and 
compensation, and submit them for approval by the group's governing 
board.
    Response: The ``unified business'' test is intended to be flexible 
and to accommodate a wide variety of group practice arrangements, while 
ensuring that a group practice for purposes of section 1877 of the Act 
is organized and operated on a bona fide basis as a single integrated 
business enterprise with legal and organizational integration. The 
``unified business'' test sets general parameters indicative of 
integration, but does not dictate specific practices. (For further 
discussion of the ``unified business'' test, see the Phase I preamble 
(66 FR 905).) With respect to the centralized decision-making aspect, 
we believe there must be substantial ``group level'' management and 
operation. While, in the interest of flexibility, we are not 
prescribing any particular process for managing budgets or determining 
compensation and salaries, the centralized management of the group 
practice must exercise substantial control over the process and output 
of these activities and not simply rubber stamp decisions by the 
various cost centers or locations.
    Comment: The third part of the ``unified business'' test, Sec.  
411.352(f)(1)(iii), provides that the group must have ``centralized 
utilization review.'' Several commenters asked that we delete or modify 
this requirement because many group practices do not perform 
utilization review.
    Response: We agree and are deleting Sec.  411.352(f)(1)(iii).
    Comment: A number of commenters asked that we clarify that 
physicians in the group practice can be paid a productivity bonus or 
profit share based directly on services that are ``incident to'' 
services personally performed by the physician. The commenters stated 
that while the Phase I preamble plainly contemplated that such bonuses 
were permitted (66 FR 909), they found the language of the regulatory 
text in Sec.  411.352(i) to be ambiguous.
    Response: The commenters are correct with respect to our intent in 
Phase I, and we are amending the regulatory text in Sec.  411.352(i)(3) 
to make our original intent clear. Section 1877(h)(4)(B)(i) of the Act 
expressly permits a physician in the group practice to receive a profit 
share or productivity bonus based directly on services that he or she 
personally performs and services that are ``incident to'' his or her 
personally performed services. We have revised the regulations to make 
clear that profit shares or productivity bonuses can be based directly 
on services that are ``incident to'' the physician's personally 
performed services.
    Comment: Two commenters asked that we apply the group practice 
bonus and profit sharing rules to employees and independent 
contractors.
    Response: For purposes of section 1877 of the Act, a group practice 
may pay any employee or independent contractor of the group practice 
who qualifies as a ``physician in the group practice'' profit shares 
and productivity bonuses under Sec.  411.352(i). Referrals from a 
physician in the group practice to the group practice may be protected 
under the in-office ancillary services exception (provided the 
conditions of the exception are met). However, if a group practice 
instead uses the bona fide employment, personal service arrangements, 
or fair market value exceptions to protect referrals from an 
independent contractor to the group practice, the compensation rules 
applicable under those exceptions must be satisfied. These rules are 
discussed in section VIII below.
    Comment: Section 411.352(i)(2) provides that ``overall profits'' of 
the group must be based on any component of the group consisting of at 
least five physicians. Several commenters asked that we permit groups 
to distribute profits based on pools of fewer than five physicians. 
Another commenter asked that we clarify that any grouping of five 
physicians in the group constitutes an acceptable pool.
    Response: As we explained in the Phase I preamble (66 FR 908), we 
believe a threshold of at least five physicians is broad enough to 
attenuate the ties between an individual physician's compensation and 
his or her referrals. We rejected a previous suggestion from a 
commenter to the January 1998 proposed rule that we use a threshold of 
three physicians, because we believed that the lesser threshold would 
result in pooling that would be

[[Page 16081]]

too narrow and, therefore, potentially too closely related to DHS 
referrals. The commenter is correct that any grouping of five 
physicians is permissible.
    Comment: Two commenters asked that we clarify that bonuses based on 
factors other than the volume or value of referrals of DHS are 
permitted. Another commenter asked that we clarify that group practices 
may distribute all their revenue using the approved allocation 
methodologies in Sec.  411.352(i)(2) and Sec.  411.352(i)(3).
    Response: Nothing in the statute or regulations prohibits or 
restricts group practice bonuses or incentives based on criteria that 
do not take into account the volume or value of DHS referrals. There is 
nothing to prevent a group practice from allocating all of its revenue 
using the ``safe harbored'' allocation methodologies.
    Comment: One commenter asked that we clarify that, for purposes of 
the ``safe harbors'' at Sec.  411.352(i)(2)(iii) and Sec.  
411.352(i)(3)(iii), less than five percent of the group practice's 
revenues and less than five percent of each physician's revenues must 
be attributable to DHS reimbursable by Medicare or Medicaid.
    Response: The commenter is generally correct. The regulations 
provide that revenues derived from DHS must be less than 5 percent of 
the group practice's total revenues, and that the amount of those 
revenues allocated to any individual physician must constitute 5 
percent or less of his or her total compensation from the group 
practice. The regulations define ``DHS'' as Medicare or Medicaid DHS. 
Thus, an allocation method is acceptable if less than 5 percent of the 
group practice's and less than 5 percent of each physician's total 
revenues come from Medicare or Medicaid DHS.

D. Prepaid Plans (Section 1877(b)(3) of the Act; Phase I--66 FR 911; 
Sec.  411.355(c))

[If you choose to comment on issues in this section, please include the 
caption ``Prepaid Plans Exception'' at the beginning of your comments.]

    Comments related to the prepaid plan exception are discussed in 
connection with comments to the risk-sharing arrangements exception at 
section XII.F below.
    In addition, in the January 1998 proposed rule, we proposed a 
prepaid plans exception for certain Medicaid prepaid plans. As 
explained in Phase I (66 FR 911), a number of commenters urged us to 
expand the exception to include other Medicaid organizations analogous 
to the Medicare prepaid plans covered by section 1877(b)(3) of the Act, 
and we agree with these commenters. While we are deferring final 
regulations for section 1903(s) of the Act, given the prevalence of 
managed care in the Medicaid program, we believe it would be useful and 
appropriate to expand the prepaid plans exception at Sec.  411.355(c) 
to include referrals of enrollees in Medicaid managed care plans 
analogous to the Medicare plans previously included in the exception. 
The modification effectively addresses the application of section 
1903(s) of the Act to referrals of items or services provided to 
Medicaid managed care patients by making clear that such referrals 
would not result in the denial of payment under section 1877 of the Act 
and thus would not result in denial of Federal financial participation 
under section 1903(s) of the Act. In short, instead of creating a 
separate exception for Medicaid prepaid plans as proposed in 1998, we 
are achieving the proposed regulatory result through modification of 
Sec.  411.355(c).

VI. General Exception Related Only to Ownership or Investment in 
Publicly-Traded Securities and Mutual Funds (Section 1877(c) of the 
Act; Phase II; Sec.  411.356(a) and Sec.  411.356(b))

[If you choose to comment on issues in this section, please include the 
caption ``Publicly-Traded Securities Exception'' at the beginning of 
your comments.]

    Existing Law: Section 1877(c) of the Act creates an exception for 
ownership in certain publicly-traded securities and mutual funds. To 
qualify for the exception in section 1877(c)(1) of the Act:
    (1) The securities must be securities that may be purchased on 
terms generally available to the public;
    (2) The securities must be listed on the New York Stock Exchange, 
the American Stock Exchange, or any regional exchange in which 
quotations are published on a daily basis, or be foreign securities 
listed on comparable exchanges or traded under the National Association 
of Securities Dealers automated quotation system; and
    (3) The ownership must be in a corporation that had shareholder 
equity exceeding $75 million at the end of the corporation's most 
recent fiscal year or on average during the previous three fiscal 
years.
    In addition, section 1877(c)(2) of the Act permits ownership of 
investments in mutual funds with total assets exceeding $75 million at 
the end of the most recent fiscal year or the average of the last three 
fiscal years. Investment securities include shares or bonds, 
debentures, notes, or other debt instruments.
    Proposed Rule: The January 1998 proposed rule interpreted the 
requirement that the investment securities be those that ``may be 
purchased on terms generally available to the public'' to mean that, at 
the time the physician (or his or her immediate family member) obtained 
the ownership interest, the interest could have been purchased on the 
open market, even if the physician or family member acquired the 
interest in another manner. For purposes of the $75 million test, the 
proposed regulation defined stockholder equity as the difference in the 
value between a corporation's total assets and total liabilities.
    Final Rule: For reasons set out in more detail in the responses to 
comments that follow, we have reconsidered the interpretation of the 
``may be purchased on terms generally available to the public'' 
provision in the January 1998 proposed rule. In this Phase II interim 
final rule, we are interpreting the provision to mean that the 
ownership interest must be in securities that are generally available 
to the public at the time of the DHS referral. In other words, 
securities acquired by a referring physician or his or her family 
member prior to a public offering will fit in the exception if they are 
available to the public at the time of any designated health service 
referral (and the other conditions in the exception are satisfied). In 
addition, as explained in this preamble in section II.B, we will not 
consider stock options received as compensation to be ownership or 
investment interests until the time that they are exercised. Having 
received no comments on the definition of stockholder equity, we are 
adopting the January 1998 proposal.
    Comment: Several commenters objected to our interpretation in the 
January 1998 proposed rule that, in order to qualify for the public 
securities exception, the securities owned by the referring physician 
(or his or her immediate family member) must have been generally 
available to the public at the time the physician or family member 
acquired their ownership interest. According to the commenters, this 
interpretation conflicted with the language and history of the statute 
and the overall statutory scheme, which focuses on DHS referrals. The 
commenters suggested that the proper interpretation should be that the 
securities are generally available to the public at the time any DHS 
referrals are made.
    Response: After careful consideration of the proposed rule, the 
statutory scheme, and the comment letters, we have reconsidered our 
position and

[[Page 16082]]

concur with the commenters. The interim final rule adopts the 
interpretation proffered by the commenters. We believe this rule 
strikes an appropriate balance between excepting legitimate investments 
and precluding abusive ``sweetheart'' deals predicated on referrals.
    Comment: Several commenters asserted that the statutory exception's 
$75 million benchmark is too restrictive and that investments in 
smaller public companies should be permitted. Two commenters proposed 
that we except any investment in a publicly-traded company as long as 
the referring physician's (or immediate family member's) ownership 
constitutes less than five percent of the total ownership of the 
company. Another commenter suggested that we except any investment in 
any publicly-traded corporation or mutual fund. However, one commenter 
urged us not to expand the publicly-traded securities exception beyond 
the strict statutory standards.
    Response: We find no support in the statutory language for either 
of the suggested expansions of the exception, nor are we persuaded that 
either expansion would be without risk of abuse, the standard for 
promulgating new regulatory exceptions under section 1877(b)(4) of the 
Act. The commenters urging the five percent ownership test 
misunderstand the purpose of the statute. The statute is targeted at 
financial relationships that create financial incentives for physicians 
to refer to DHS entities. While a five percent test may be probative on 
the issue of control of an entity, that test would be largely 
irrelevant to the existence of an incentive to refer. On the other 
hand, the limitation in the statutory exception to companies with 
stockholder equity in excess of $75 million is relevant, because it 
effectively severs any tie between referrals and returns on the 
investment. In short, the relationship between returns and referrals is 
sufficiently diffuse. An exception for investments in all publicly-
traded companies, including smaller companies, would not preclude 
abuse.
    Comment: One commenter requested that we create a new exception to 
permit publicly-traded companies that do not meet the statutory 
thresholds to bill for a de minimis amount of Medicare and Medicaid DHS 
referred by physicians (or immediate family members) if the company 
does not know that the physicians (or immediate family members) are 
stockholders of the company.
    Response: In Phase I, we added Sec.  411.353(e), which creates an 
exception for entities that submit claims for DHS if the entity does 
not have actual knowledge of, and does not act in reckless disregard or 
deliberate ignorance of, the identity of the referring physician, and 
the claim otherwise complies with all applicable laws, rules, and 
regulations. We believe Sec.  411.353(e) adequately addresses the 
commenter's concerns, and no further exception is needed.
    Comment: One commenter requested that we create a new exception to 
protect investments in privately held companies. According to the 
commenter, physicians are investing in a variety of risk-bearing, 
integrated practice structures, such as physician-sponsored 
organizations (PSOs) and physician practice management companies 
(PPMCs). The commenter believed that investments in these companies 
should be protected.
    Response: Nothing in the statute or regulations prohibits 
investments in entities that do not furnish DHS. In Phase I of this 
rulemaking, we clarified and significantly narrowed the situations in 
which a managed care entity will be considered an entity providing DHS. 
(See Sec.  411.351 (definition of ``entity''); see also 66 FR 943.) We 
also significantly expanded the statutory exception for referrals to 
prepaid plans at Sec.  411.355(c) and created a new regulatory 
exception for risk-sharing arrangements at Sec.  411.357(n). These 
aspects of the interim final rule largely address the situations raised 
by the commenter. Of course, if the PSO, PPMC, or other investment 
entity directly (or indirectly through a subsidiary) furnishes DHS 
(that is, is an ``entity'' under the definition at Sec.  411.351), 
there is no reason to treat it differently from any other DHS entity.
    Comment: One commenter was concerned that the January 1998 proposed 
rule imposed an impossible administrative reporting requirement on 
publicly-traded companies. Under the August 1995 final rule, DHS 
entities were required to report to the Secretary any ownership, 
investment, or compensation arrangements, including the names and 
unique physician identification number (UPIN) of all physicians holding 
an ownership or investment interest. However, the regulations released 
entities from reporting any arrangements that qualified for certain 
exceptions under the Act, including the publicly-traded securities 
exception. By contrast, the January 1998 proposed rule proposed 
requiring entities to report all arrangements with physicians, 
including those that qualify for an exception. According to the 
commenter, while the proposal makes some effort to accommodate the 
burden placed on publicly-traded companies, the reporting requirements 
are unduly burdensome.
    Response: As explained in the section on reporting requirements at 
section IX below, this Phase II interim final rule eliminates the 
reporting requirement for shareholder information regarding financial 
relationships that satisfy the exceptions in Sec.  411.356(a) and (b) 
for ownership and investment interests in publicly-traded securities 
and mutual funds.

VII. Additional Exceptions Related Only to Ownership or Investment 
Prohibition (Section 1877(d) of the Act; Phase II; Sec.  411.356)

A. Hospitals in Puerto Rico (Section 1877(d)(1) of the Act; Phase II; 
Sec.  411.356(c)(2))

    Section 1877(d)(1) of the Act provides that an ownership or 
investment interest in a hospital located in Puerto Rico is not a 
financial relationship within the meaning of section 1877 of the Act. 
We received no comments on the January 1998 proposed rule for this 
exception. The interim final rule adopts the proposed rule without 
change.

B. Rural Providers (Section 1877(d)(2) of the Act; Phase II; Sec.  
411.356(c)(1))

[If you choose to comment on issues in this section, please include the 
caption ``Rural Providers Exception'' at the beginning of your 
comments.]

    Existing Law: With respect to DHS furnished in a rural area (as 
defined in section 1886(d)(2)(D) of the Act), section 1877(d)(2) of the 
Act provides an exception for ownership or investment interests in 
rural providers that furnish DHS in a rural area, if substantially all 
of the DHS are furnished to individuals residing in a rural area. 
Section 507 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), (Pub. L. 108-173), amended section 
1877(d)(2) of the Act to specify that, for the 18-month period 
beginning on December 8, 2003, the rural provider may not be a 
specialty hospital. Section 507 defined the term ``specialty hospital'' 
in a new subsection 1877(h)(7).
    Proposed Rule: In the January 1998 proposed rule, we defined a 
``rural provider'' as an entity that furnishes at least 75 percent of 
its total DHS to residents of a rural area. Consistent with the 
statute, we provided that the DHS must be furnished in a rural area, 
and we defined a ``rural area'' as an area that is not an urban area 
pursuant to

[[Page 16083]]

Sec.  412.62(f)(1)(ii) of this chapter (that is, an area outside a 
Metropolitan Statistical Area (MSA)). We proposed eliminating the 
requirement from the August 1995 final rule that the rural provider be 
located in a rural area.
    Final Rule: Except for codifying the changes made by section 507 of 
MMA, this interim final rule adopts the January 1998 proposed rule 
without change. In addition, the Phase II interim final rule creates a 
limited new exception, Sec.  411.355(j), for certain referrals from a 
referring physician to a DHS entity with which his or her immediate 
family member has a financial relationship, if the patient being 
referred resides in a rural area and there is no DHS entity available 
in a timely manner in light of the patient's condition to furnish the 
DHS to the patient in his or her home (for DHS furnished to patients in 
their homes) or within 25 miles of the patient's home (for DHS 
furnished outside the patient's home).
    We have been asked to ``grandfather'' investments in DHS entities 
furnishing services in rural areas that are subsequently reclassified 
as non-rural areas. As we explained in the August 1995 preamble (60 FR 
41954), section 1877 of the Act specifically requires that a rural 
provider provide DHS in a rural area and provide ``substantially all'' 
of its DHS to residents of a rural area. Accordingly, if an area is 
reclassified and these requirements cannot be met, a physician investor 
in a rural provider cannot refer Medicare patients for DHS to that 
rural provider. As noted in section II.A above, we have established a 
regulatory exception at Sec.  411.353(f) for certain arrangements that 
inadvertently and temporarily fall out of compliance with certain 
exceptions. This new exception would apply to rural providers.
    Comment: Two commenters stated that the proposed exception was too 
broad and would unfairly benefit physician-owned DHS entities in rural 
areas, especially home health agencies. One commenter suggested that 
the exception be limited to areas where there is no other provider of 
the designated health care services.
    Response: The statutory exception clearly applies to rural 
providers of DHS regardless of whether other DHS entities already 
operate in a particular rural area or serve a particular rural patient 
population. In this regard, the statute may benefit physician-owned 
entities to the detriment of competing DHS entities that are not owned 
by physicians. However, the statutory directive is clear.
    Comment: A commenter objected to our proposed interpretation of the 
term ``substantially all'' in section 1877 of the Act as requiring the 
DHS entity to furnish at least 75 percent of its DHS to residents of a 
rural area. The commenter stated that many providers in rural areas are 
part of larger State-wide or regional health care systems that provide 
services outside the rural area. The commenter suggested that the 
``substantially all'' requirement should be met if the entity provides 
rural area residents with one or more DHS on a 24-hour basis.
    Response: We disagree that a ``24-hour basis'' rule would 
appropriately or adequately implement the ``substantially all'' 
requirement. Indeed, the suggested test would create a loophole into 
which virtually any provider could fit, thereby evading the statutory 
prohibition. While we understand that many services in rural areas may 
be provided by entities that are part of larger systems, we are not 
convinced that fact should permit them to have physician ownership 
simply because they operate minimally in a rural area. We believe the 
Congress enacted the rural provider exception to ensure adequate access 
to DHS for residents in rural areas that might otherwise have 
difficulty attracting a sufficient number of providers and suppliers. 
The 75 percent test we are adopting fully implements the statutory 
requirement that ``substantially all'' of the DHS of an excepted rural 
provider be furnished to residents of a rural area.
    Comment: One commenter urged that physicians be permitted to own 
DHS entities in ``rural'' areas located inside an urban area (that is, 
inside a MSA). The commenter gave an example of a radiologist married 
to a primary care physician, where the nearest alternate radiologist is 
15 miles away. In the commenter's view, it would be a hardship for 
patients if the primary care physician were to send them to the remote 
radiology facility.
    Response: The fundamental premise of section 1877 of the Act is 
that physicians should not own DHS entities to which they refer. We see 
no reason to expand the scope of the rural provider exception beyond 
the bright line rural area definition provided in the statute. 
Moreover, commenters to the various rulemakings in section 1877 of the 
Act have consistently urged us to adopt ``bright line'' regulations. 
The commenter's suggested test would blur an existing clear line and 
would present a substantial risk of program and patient fraud and 
abuse.
    With respect to the commenter's example of the primary care 
physician (that is, the referring physician) married to the local 
radiologist (that is, the DHS entity for purposes of the example), the 
problem is less with the rural provider exception than with the 
financial relationship resulting from the family relationship (that is, 
the radiologist's ownership of the DHS entity is imputed to the 
referring spouse because of the ``immediate family'' rule). We 
discussed this problem in some detail in the Phase I preamble at 66 FR 
885. There, we responded to a comment asking 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. We responded that the 
referral should be allowed as long as DHS were not the reason for the 
original referral and any subsequent referrals by the physician spouse 
fit within the in-office ancillary services exception. We further 
recognized that there could be some circumstances, particularly in 
underserved areas, where a spouse may be the only qualified provider of 
a particular designated health service. We indicated that we were 
considering a limited additional exception and invited comments.
    Having considered the issue further, and in the interest of 
ensuring access for patients in remote or sparsely-served areas, we 
have concluded that a limited exception is warranted for intra-family 
rural referrals where there are no other available providers or 
suppliers of the DHS in the area to furnish the designated health 
service in a timely manner in light of the patient's condition. So as 
to prevent program abuse and to minimize any unfair competitive effect 
on non-physician owned DHS entities that may seek to provide services 
in rural areas, we have crafted a narrow exception under our authority 
at section 1877(b)(4) of the Act. The new exception, at Sec.  
411.355(j), excepts intra-family rural referrals if the patient resides 
in a rural area and there is no DHS entity available to furnish the 
referred DHS to the patient in a timely manner in light of the 
patient's condition (i) at the patient's residence in the case of home 
health services or other services required to be furnished in the 
patient's home (for example, certain DME, such as hospital beds), or 
(ii) within 25 miles of the patient's residence in the case of services 
furnished outside the patient's home. Although we have considered the 
15-mile radius suggested by the commenter, we believe a 25-mile radius 
will best serve our need to ensure access to care, preclude any 
potential for program abuse, and minimize the potential for any unfair 
competitive

[[Page 16084]]

effects on non-physician owned entities in rural areas. We note that 
this standard is consistent with that used elsewhere in this 
regulation.
    This new exception focuses on the location where the services are 
furnished, not where the DHS entity is located. In other words, if a 
physician knows that a home health agency located 50 miles away is 
willing to provide home health services to a patient, the patient may 
not be referred to a family-owned home health agency under this 
exception. The referring physician or the immediate family member must 
make reasonable inquiries as to the availability of other persons or 
entities to furnish DHS.
    However, neither the referring physician nor the immediate family 
member has any obligation to inquire as to the availability of persons 
or entities located farther than 25 miles from the patient's residence. 
Depending on the circumstances, reasonable inquiry might include, for 
example, consulting telephone directories, professional associations, 
other providers, or Internet resources. As with all exceptions in 
section 1877(b)(4) of the Act, the financial arrangement between the 
immediate family member and the DHS entity must not violate the anti-
kickback statute.
    We note that while this new exception looks to timely availability 
of DHS, it does not take into account the quality of other available 
DHS entities. In other words, the exception is not available if a 
physician makes an intra-family referral because he or she is 
dissatisfied with the quality of care provided by an otherwise 
available DHS entity. While quality services for Medicare beneficiaries 
and others is of the highest priority, it is not feasible to craft an 
objective, qualitative measure in the new exception. Other Federal, 
State, and local laws and regulations exist to address quality issues.

C. Hospital Ownership (Section 1877(d)(3) of the Act; Phase II; Sec.  
411.356(c)(3))

    Existing Law: Section 1877(d)(3) of the Act provides that, with 
respect to DHS provided by a hospital, an ownership or investment 
interest in a hospital (and not merely a subdivision of the hospital) 
is not a financial relationship within the meaning of section 1877 of 
the Act if the referring physician is authorized to perform services at 
the hospital. Section 507 of MMA amended section 1877(d)(3) to provide 
that, effective for the 18-month period beginning on December 8, 2003, 
the ownership or investment interest must not be a specialty hospital. 
Section 507 defined the term ``specialty hospital'' in a new subsection 
1877(h)(7) of the Act.
    Proposed Rule: In the preamble to the January 1998 proposed rule 
(63 FR 1698), we interpreted the requirement that the DHS be ``provided 
by the hospital'' to mean that the services had to be furnished by the 
hospital and not by another hospital-owned entity, such as a skilled 
nursing facility or a home health agency. We further stated that the 
exception only protects referred services provided by an entity that is 
a ``hospital'' under the Medicare conditions of participation and that 
the referring physician must be authorized to perform services at the 
hospital to which he or she wishes to refer. We further explained that 
a physician can have an ownership or investment interest in a hospital 
by virtue of holding an interest in an organization (such as a health 
system) that owns a chain of hospitals, because the statute does not 
require the physician to have a direct interest in the hospital (63 FR 
1713). The interest must be in the whole hospital, not in a part or 
department of the hospital.
    Final Rule: The Phase I final rule reincorporated the definition of 
``hospital'' that was originally established in the August 1995 final 
regulations and that was followed by the January 1998 proposed rule 
(with incidental conforming changes). In this Phase II rulemaking, we 
are adopting the January 1998 proposed rule for the hospital ownership 
exception without change, except for conforming amendments to 
incorporate the provisions of section 507 of MMA.
    Comments and responses follow.
    Comment: A commenter objected generally to the exception as giving 
physician-owned hospitals an unfair competitive advantage over not-for-
profit community hospitals. The commenter recommended that we limit the 
exception to situations in which the physician-owned hospital was a 
sole community provider.
    Response: While we recognize that physician-owned hospitals may 
have a competitive advantage under section 1877 of the Act, the 
statutory language is clear and applies to physician ownership in any 
hospital (but not a subdivision, part, or department of a hospital), if 
the DHS are provided by the hospital and the referring physician is 
authorized to perform services at the hospital. We believe that the 
statute requires a bona fide authorization to perform services at the 
hospital (for example, granting privileges to a physician who is not 
expected to perform services at the hospital is not a bona fide 
authorization to perform services). Notwithstanding, physician 
ownership of hospitals may implicate the anti-kickback statute, section 
1128B(b) of the Act, depending on the circumstances. For example, 
specialty hospital ventures in which investment opportunities are 
substantially limited to physicians in a position to refer to the 
specialty hospital may implicate the anti-kickback statute. Physician 
ownership interest in specialty hospitals may also implicate section 
1877 of the Act, as revised by section 507 of the MMA.
    Comment: Several commenters, including several hospital trade 
associations, objected to our interpretation that the exception only 
applies to services furnished by the hospital and not to services 
furnished by other providers owned by the hospital. The commenters 
believe that the interpretation substantially limits the usefulness of 
the exception, since many hospitals provide DHS through entities that 
have separate accreditation or licensure. According to the commenters, 
the larger the consolidated entity (that is, hospital plus 
subsidiaries), the greater the attenuation of the financial incentive. 
A hospital trade association asserted that the proposed interpretation 
was inconsistent with the statutory language ``in the case of DHS 
provided by a hospital.'' According to the association, if the statute 
only protected inpatient and outpatient hospital services provided by 
the hospital, rather than subsidiaries or affiliates, the use of the 
broader term ``DHS'' was unnecessary. Another commenter thought the 
proposed interpretation was inconsistent with the discussion in the 
January 1998 proposed rule (63 FR 1713) relating to indirect ownership 
of a hospital through ownership of stock in a hospital chain.
    Response: We believe our interpretation is correct and consistent 
with the statutory language. The commenter's focus on the use of the 
term ``DHS'' ignores the modifying language ``provided by a hospital'' 
that immediately follows. The interpretation we are adopting gives 
meaning to every word in the statutory provision. The interpretation 
proffered by the commenters would effectively create a blanket 
exemption for for-profit hospital conglomerates and would create 
incentives for physicians to refer their patients to such conglomerates 
for all health services. Instead of attenuating the financial incentive 
to refer, ownership in a large hospital conglomerate is equally likely 
to intensify the incentive by increasing the

[[Page 16085]]

profit opportunities for the physician. Finally, the commenter's 
suggested interpretation would give for-profit, hospital-owned DHS 
entities, including DME suppliers and home health agencies, a 
significant and unwarranted commercial advantage over their free-
standing competitors.
    With respect to the comment that our interpretation is inconsistent 
with the discussion in the preamble to the January 1998 proposed rule 
addressing ownership interests in hospital chains (63 FR 1713), we 
disagree. In that discussion, we explained that we would except an 
indirect ownership interest in a hospital if a direct ownership in the 
hospital would have been excepted. We explained that the statutory 
language of the exception was not limited to direct ownership interests 
and that the exception had to be read in conjunction with section 
1877(a)(2) of the Act, which establishes the principle that an 
ownership interest includes an indirect ownership interest for purposes 
of section 1877 of the Act. In the case of hospital-owned DHS entities, 
such as home health agencies, however, direct ownership by physicians 
would be prohibited (absent some other applicable exception). We see no 
reason to protect indirect ownership of such entities under the 
hospital ownership exception, nor do we believe that the Congress 
intended the exception to be used to circumvent the general prohibition 
on physician ownership of DHS entities. (We note that, in some cases, 
another exception-such as the rural provider or in-office ancillary 
services exception--may apply to referrals from a physician-owner of a 
hospital to a hospital-owned DHS entity.) Our interpretation conforms 
conceptually with the language in the exception precluding ownership of 
a part or subdivision of a hospital.

VIII. Exceptions Relating to Other Compensation Arrangements (Section 
1877(e) of the Act; Phase II; Sec.  411.357)

A. Rental of Office Space and Equipment (Sections 1877(e)(1)(A) and 
(e)(1)(B) of the Act; Phase II; Sec.  411.357(a) and Sec.  411.357(b))

[If you choose to comment on issues in this section, please include the 
caption ``Space and Equipment Rental Exception'' at the beginning of 
your comments.]

    The Existing Law: Section 1877(e)(1)(A) and section 1877(e)(1)(B) 
of the Act set forth exceptions for certain lease arrangements for 
space and equipment that meet six specific criteria: (i) The lease is 
in writing, signed by the parties, and specifies the space or equipment 
covered by the lease; (ii) the space or equipment rented or leased does 
not exceed what is reasonable and necessary for the legitimate business 
purposes of the lease or rental and is used exclusively by the lessee 
when being used by the lessee (except that space leases can include 
appropriately prorated payments for common areas); (iii) the lease or 
rental term is at least one year; (iv) the rental charges over the term 
of the lease are set in advance, consistent with fair market value, and 
not determined in a manner that takes into account the volume or value 
of any referrals or other business generated between the parties; (v) 
the lease would be commercially reasonable even if there were no 
referrals between the parties; and (vi) the lease meets other 
requirements set by the Secretary to protect against program or patient 
abuse. ``Fair market value'' is defined in section 1877(h)(3) of the 
Act as the value of rental property for general commercial purposes 
(not taking into account the property's intended use). For rentals or 
leases where the lessor is a potential source of patient referrals to 
the lessee, fair market value means general commercial value not taking 
into account intended use or the additional value the prospective 
lessee or lessor would attribute to the proximity or convenience to the 
lessor. The August 1995 final rule enacted Sec.  411.357(a) and Sec.  
411.357(b) (space and equipment rentals, respectively), which tracked 
the statutory language, including the definition of ``fair market 
value.''
    The Proposed Rule: The preamble to the January 1998 proposed rule 
set forth several interpretive changes to the lease exceptions. First, 
we proposed interpreting the requirement that the lease term be for one 
year as permitting leases to be terminated for cause within the one-
year period, provided the parties did not enter into another lease 
until after the expiration of the original term (63 FR 1713). We also 
proposed interpreting the one-year term requirement as requiring that 
any renewal of a lease be for at least one year, thereby precluding 
holdover month-to-month leases (63 FR 1713). Second, we proposed 
interpreting the exclusive use provisions to prohibit subleases, unless 
the sublease itself satisfied the conditions of the exception (63 FR 
1714). Third, we proposed interpreting the exceptions as applying to 
operating leases, but not capital leases (63 FR 1714). Finally, we 
proposed that ``per click'' (for example, per use or per service) 
equipment rental payments would qualify for the equipment rental 
exception, unless the payments were for the use of the equipment on 
patients referred by the lessor-physician (63 FR 1714).
    The Final Rule: The Phase I final rule addressed the definitions of 
several terms used in the lease exceptions, including: ``fair market 
value'', ``set in advance,'' ``volume or value of referrals,'' and 
``other business generated between the parties.'' Under the final rule, 
these terms have uniform meanings wherever they appear in the 
regulations, including the lease exceptions. Additional discussion of 
the ``volume or value of referrals,'' ``other business generated,'' and 
``set in advance'' definitions appear elsewhere in this Phase II 
preamble in section IV. The final regulations for the lease exceptions 
at Sec.  411.357(a) and Sec.  411.357(b) adopt the regulatory language 
of the January 1998 proposed rule, with minor changes noted in the 
responses to comments below. Specifically:
     Leases or rental agreements may be terminated 
with or without cause as long as no further agreement is entered into 
within the first year of the original lease term and any new lease fits 
on its own terms in an exception.
     Month-to-month holdover leases are allowed for 
up to six months if they continue on the same terms and conditions as 
the original lease.
     All leases or rental agreements, whether 
operating or capital, are eligible for the lease exceptions if they 
meet the applicable criteria.
     We have revised the ``exclusive use'' provision 
to allow subleases in many cases. The exclusive use test will be 
considered met as long as the lessee (or sublessee) does not share the 
rented space or equipment with the lessor during the time it is rented 
or used by the lessee (or sublessee). A subleasing arrangement may 
create a separate indirect compensation arrangement between the lessor 
and the sublessee that would need to be evaluated under the indirect 
compensation rules.
     ``Per click'' rental payments are permitted for 
DHS referred by the referring physician as long as the payments are 
fair market value and do not take into account the volume or value of 
referrals or other business generated by the referring physician, as 
those concepts are defined in Sec.  411.351 and Sec.  411.354.
    Our responses to comments on the lease exceptions follow.
    Comment: Several commenters requested that we interpret the one-
year term rule to include leases or rental agreements that provide for 
termination without cause, as long as the parties do

[[Page 16086]]

not enter into a new agreement during the original term. According to 
the commenters, parties frequently prefer to use a ``without cause'' 
provision even if they have sufficient grounds to justify a ``for 
cause'' termination to avoid the costs of litigation. Several 
commenters disagreed with our position that upon expiration of a 
contract's term, holdover month-to-month tenancies would trigger the 
statutory prohibition. A commenter suggested that as long as the 
holdover was on the same terms and conditions as the original lease, 
there was little additional risk of abuse.
    Response: We agree that there is little risk from ``without cause'' 
terminations as long as the parties do not enter into a new lease or 
rental agreement during the first year of the original term and any new 
agreement fits on its own terms in an exception. We have modified Sec.  
411.357(a)(2) and Sec.  411.357(b)(3) accordingly. We also agree that 
there is little risk if a holdover month-to-month tenancy or possession 
proceeds on the same terms and conditions as the original lease or 
rental agreement for a limited time (that is, no more than six months). 
We have added Sec.  411.357(a)(7) and Sec.  411.357(b)(6) to reflect 
these interpretations.
    Comment: One commenter sought clarification regarding whether the 
requirement that an arrangement be commercially reasonable in the 
absence of referrals only applies to referrals of Medicare DHS. The 
commenter said that a broader interpretation would prohibit the payment 
of any amounts for referrals of private pay DHS as part of the 
acquisition of the practice of a non-retiring physician.
    Response: In Phase I, we defined a referral for purposes of section 
1877 of the Act to mean a request for, or plan of care that includes, a 
``designated health service'' and ``designated health service'' to 
include only Medicare-covered services. We intend to use uniform 
definitions in these regulations whenever possible. For purposes of 
Sec.  411.357(a)(6) and Sec.  411.357(b)(5), we interpret the 
restriction to mean that the lease or rental agreement must be 
commercially reasonable even if no referrals of Medicare DHS are made 
to the DHS entity. We note, however, that, in addition to the 
commercial reasonableness condition, sections 1877(e)(1)(A)(iv) and 
(e)(1)(B)(iv) of the Act provide that rental charges may not be 
determined in a manner that takes into account ``other business 
generated between the parties.'' As discussed in this preamble in 
section IV, Sec.  411.354(d)(3) provides that ``other business 
generated between the parties'' includes private pay health care 
business (but not personally performed services). Of course, as with 
all exceptions and consistent with the statutory scheme and purpose, 
the conduct of the actual financial relationship between the parties 
must comport with the terms of the written agreement. The written 
agreement is the documentary evidence of the underlying financial 
relationship.
    Comment: A number of commenters objected to the interpretation in 
the January 1998 proposed rule that the exclusive use requirement in 
the lease exceptions prohibits subleases. These commenters recommended 
that we permit subleases if they meet the other requirements of the 
exception.
    Response: We concur with the commenters that the Congress did not 
intend for the lease exceptions to preclude lessees from subletting 
leased space or equipment. The statutory lease exceptions provide that 
the lessee must use the leased space or equipment ``exclusively'' when 
the lessee is using the space or equipment. Upon further consideration 
of the statutory scheme and purpose, we believe a fair reading of the 
exclusive use provision in the context of the lease exceptions is that 
the rented space or equipment cannot be shared with the lessor when it 
is being used or rented by the lessee (or any subsequent sublessee). In 
other words, a lessee (or sublessee) cannot ``rent'' space or equipment 
that the lessor will be using concurrently with, or in lieu of, the 
lessee (or sublessee). (The statute and these regulations do allow 
shared common space when the rent is appropriately prorated.) Thus, for 
example, if a DHS entity rents examination rooms from a physician 
practice, the physician practice may not use those same examination 
rooms while the lessee (or a sublessee) is using or renting them.
    To preclude referring physicians or group practices from 
circumventing this rule by setting up separate real estate holding 
companies or subsidiaries to act as the ``lessor'', we are modifying 
the regulations to preclude sharing of rented space with the lessor or 
any person or entity related to the lessor, including, but not limited 
to, group practices, group practice physicians, or other providers 
owned or operated by the lessor. We believe our interpretation 
effectuates congressional intent to curb abusive rental arrangements, 
gives meaning to the exclusive use requirement in the statutory 
exceptions, and, in conjunction with other conditions in the exceptions 
(such as the fair market value and ``reasonable and necessary for 
legitimate business purposes'' requirements) adequately protects 
against abuses, while allowing legitimate subletting arrangements.
    Persons or entities should be aware that, depending on the 
circumstances, a sublease may create an indirect compensation 
arrangement between the original lessor and the sublessee through a 
chain of leases (that is, compensation arrangements). The indirect 
compensation arrangement thus created would have to fit in the indirect 
compensation arrangements exception in Sec.  411.357(p).
    Finally, we note that, depending on the circumstances, equipment 
leases may be eligible alternatively under the new fair market value 
exception in Sec.  411.357(l) (66 FR 917). However, that exception, 
which is limited to items and services provided by physicians, does not 
apply to space leases.
    Comment: Several commenters disagreed with our interpretation that 
the lease exceptions apply only to operating leases and not capital 
leases.
    Response: We agree with the commenters. Any kind of bona fide lease 
arrangement that in form and substance satisfies the regulatory 
conditions can fit in the exceptions.

B. Bona Fide Employment Relationships (Section 1877(e)(2) of the Act; 
Phase II; Sec.  411.357(c))

[If you choose to comment on issues in this section, please include the 
caption ``Employment Relationships Exception'' at the beginning of your 
comments.]

    Existing Law: Section 1877(e)(2) of the Act establishes an 
exception for payments made by an employer to a physician (or immediate 
family member) with whom the employer has a bona fide employment 
relationship for the provision of services, if certain conditions are 
met. These conditions require that--
    (1) The employment is for identifiable services;
    (2) The amount of the payment is fair market value for the services 
and is not determined in a manner that takes into account (directly or 
indirectly) the volume or value of referrals by the referring 
physician;
    (3) The employment agreement would be commercially reasonable even 
if no referrals were made to the employer; and
    (4) The employment meets such other requirements as the Secretary 
may impose to protect against program or patient abuse.
    The statute expressly provides that employers may pay employees 
productivity bonuses based on services the employee personally 
performs. The statute defines an ``employee'' as an individual who 
would be considered an

[[Page 16087]]

employee under the usual common law rules applicable in determining the 
employer-employee relationship, as applied for purposes of section 
3121(d)(2) of the Internal Revenue Code of 1986. (See section 
1877(h)(2) of the Act.) We note that there is no presumption of 
employment under section 1877 of the Act.
    The August 1995 final rule incorporated the provisions of sections 
1877(e)(2) and 1877(h)(2) of the Act into the regulations in Sec.  
411.357(c) and Sec.  411.351, respectively, without imposing any 
additional requirements.
    Proposed Rule: The January 1998 proposed rule retained the employee 
exception in Sec.  411.357(c), with certain additional requirements. 
The preamble to the January 1998 proposed rule took the position that 
the productivity bonus provision created an improper financial 
incentive for physicians to generate referrals of DHS that the 
physician would personally perform. Thus, under the authority in 
section 1877(e)(2)(C) of the Act to add additional requirements in the 
interest of protecting against abuse, we proposed excluding any 
productivity bonus based on a physician's own referrals of DHS, even 
where personally performed. We pointed out that this restriction would 
not limit a physician's ability to receive productivity bonuses for 
generating referrals of non-DHS or non-covered services. The proposed 
rule also added a restriction on compensation related to other business 
generated between the parties that is not present in the statute. The 
proposed rule made no changes to the August 1995 final rule definition 
of ``employee.''
    Final Rule: We are adopting the January 1998 proposed rule without 
the proposed limitation on productivity bonuses or the addition of the 
``other business generated'' language. The limitation is no longer 
relevant given our determination in the Phase I rulemaking that 
personally performed DHS are not referrals for purposes of section 1877 
of the Act. Moreover, as we explained in the Phase I preamble, the 
statute contemplates that employed physicians can be paid in a manner 
that directly correlates to their own personal labor, including labor 
in the provision of DHS. What the statute does not permit are payments 
for an employee's productivity in generating referrals of DHS performed 
by others (66 FR 876). Except as permitted under the group practice 
definition for employees of group practices, ``incident to'' DHS may 
not be the basis for productivity bonuses paid to employed physicians. 
We are adopting without change the January 1998 proposed rule 
definition of ``employee'', which follows the statutory language.
    Comments to the ``employee'' exception and our responses follow.
    Comment: Several commenters asked us to expand the statutory 
definition of ``employee'' in Sec.  411.351 beyond the common law 
definition established in the statute to include leased employees as 
defined by State law.
    Response: We believe that the statutory definition is clear and 
that incorporation of State law definitions of employment would be 
inconsistent with the statute. As noted above in the discussion of 
group practices, to the extent that a leased employee is a bona fide 
employee of the DHS entity under IRS rules, remuneration paid to that 
employee would be eligible under the exception. As with all exceptions, 
the DHS entity would bear the burden of establishing the necessary 
indicia of employment. There is no presumption of employment.
    Comment: A commenter expressed concern that physicians employed by 
health care systems are pressured into referring to DHS entities within 
the same health system, sometimes without regard to a patient's best 
interests. Other commenters, however, urged that employers should be 
allowed to control their employees and should be able to require 
referrals to the employer or an entity affiliated with the employer. 
These commenters believed that the proper focus is on whether the 
referral requirement interferes with a physician's medical judgement. A 
commenter representing emergency room physicians explained that 
emergency room physicians are often constrained when making referrals 
because of hospital policies and rules, on-call policies, contractual 
arrangements, patient's prior contact with primary care doctors or 
specialists, common practice, or professional courtesy.
    Response: We agree that health care referrals should always take a 
patient's best interests into account and that referral requirements 
should not interfere with a physician's medical judgement. However, we 
believe that section 1877 of the Act was not intended to interfere 
unduly with legitimate employment and health system structures. As 
discussed above, we have narrowed the rule for directed referrals in 
Sec.  411.354(d)(4) to employers, managed care organizations, and 
certain contractual arrangements (including many emergency room 
physician contracts). We have concluded that a referral restriction 
will not violate the volume and value of referrals standard in section 
1877 of the Act if--
     The referring physician is compensated at fair 
market value for services performed in an arrangement that otherwise 
fits within the employment (or another) exception;
     The referral restriction relates solely to the 
physician's services covered by the scope of the employment or contract 
and is reasonably necessary to effectuate the legitimate purposes of 
the compensation relationship; and
     Referrals are not required (directly or 
indirectly)--
    A. When the patient expresses a different choice,
    I. When the patient's insurer determines the provider, or when the 
referral is not in the best medical interest of the patient in the 
physician's judgment.

We believe this narrower rule strikes a reasonable balance between the 
legitimate business needs of employers and health systems, and 
protection of patient choice and physician judgment.
    Our determination here is limited to the effect of directed 
referrals under section 1877 of the Act. Other laws and regulations 
exist to address medically inappropriate referrals.
    Comment: A number of commenters objected to the January 1998 
proposal to prohibit productivity bonuses based on personally performed 
DHS. Some commenters suggested that the limitation should apply only to 
referrals of DHS performed by others. Some commenters urged, however, 
that employers be permitted to base productivity bonuses on DHS 
rendered under the supervision of an employee or, in the case of 
physicians employed by a group practice, under the supervision of 
another member of the group practice. A commenter urged that 
productivity bonuses be permitted for supervision of ``incident to'' 
services that are not DHS.
    Response: We are not adopting the 1998 proposed prohibition. In 
Phase I, we concluded that personally performed DHS are not referrals 
within the meaning of section 1877 of the Act. Accordingly, physicians 
may be paid productivity bonuses based on personally performed 
services, including personally performed DHS. In addition, nothing in 
the exception precludes a productivity bonus based solely on personally 
performed supervision of services that are not DHS, since that bonus 
would not take into account the volume or value of DHS referrals.
    Productivity bonuses based on supervising DHS raise a different 
issue. We are concerned that, in some cases, a payment for supervision 
services may

[[Page 16088]]

merely be a proxy payment for having generated the DHS being 
supervised. In many cases, especially in hospitals, the supervision 
required under Medicare rules is minimal, and the supervisor need do 
nothing more than be present in the facility while conducting other 
work. Accordingly, we are concerned that such payments could mask 
improper cross-referral or circumvention schemes. We note that any 
payment for supervision services must meet the fair market value 
standard in the exception.
    As for productivity bonuses for employees of group practices, we 
expect that most group practices will rely on the in-office ancillary 
services exception, rather than the employment exception, to protect 
referrals by employed physicians. In that case, the group practice may 
compensate the employed physicians under the productivity bonus 
provisions of the ``group practice'' definition in Sec.  411.352 
(discussed above at section V.C). If a group practice chooses to rely 
on the employment exception, it must restrict productivity bonuses to 
personally performed services and comply with the overall fair market 
value requirement.
    Comment: Two commenters asked whether the employment exception 
would be satisfied if an employer paid an employed physician a flat fee 
for each mid-level provider he or she supervises in order to compensate 
the physician for the time spent on supervision.
    Response: We see nothing in the exception that would bar flat fee 
compensation based on the number of mid-level providers under the 
physician's supervision, as long as the compensation is fair market 
value for actual time dedicated to supervision services and is not 
determined in any manner that takes into account, directly or 
indirectly, the volume or value of DHS referrals generated by the 
physician. The burden of proving the time will be on the DHS entity.
    Comment: A number of commenters raised questions regarding 
physician compensation that is stable and unvarying, but could still be 
viewed as predicated on the volume or value of referrals. For example, 
some commenters inquired regarding exclusivity provisions in employment 
contracts (for example, contracts for hospital-based physicians). The 
commenters noted that the exclusivity provision could be viewed as 
taking into account the volume or value of referrals, even if the 
dollar compensation paid to the exclusively employed physician is 
unvarying. One commenter observed that exclusivity in a hospital-based 
physician contract may be important for liability and insurance 
purposes. Similarly, some commenters asked for clarification regarding 
inclusion of covenants not to compete in employment contracts.
    Response: We agree that exclusive contracting arrangements between 
hospitals and traditional hospital-based physicians (radiologists, 
pathologists, anesthesiologists, and emergency room physicians) can, in 
certain circumstances, serve legitimate business purposes. To the 
extent that these payments are for personally performed services, we do 
not believe they raise any substantial concerns under the statute or 
regulations. If the payments reflect or take into account non-
personally performed services, they may raise concerns under the 
statute and would merit case-by-case determination, regardless of the 
apparent fixed payment. In the circumstances described by the 
commenters, non-compete covenants in employment contracts generally do 
not take into account the volume or value of referrals. However, the 
payment for the non-compete covenant must be at fair market value. (We 
note that, in some contexts, these covenants in conjunction with a 
lease arrangement may not be able to satisfy the special fair market 
value rules for leases of space and equipment.)
    Comment: Several commenters urged that the exception permit 
hospitals to pay incentives to employed physicians based on meeting 
hospital or drug utilization targets. The commenters believe that these 
payments should not be construed as based on the volume or value of 
referrals for purposes of section 1877 of the Act.
    Response: There is no exception in the statute or in these 
regulations that would permit payments to physicians based on their 
utilization of DHS, except as specifically permitted by the risk-
sharing arrangements, prepaid plans, and personal service arrangements 
exceptions. None of those exceptions permit those payments other than 
in the context of services provided to enrollees of certain health 
plans. We believe that the Congress intended to limit these kinds of 
incentives consistent with the civil monetary penalty provision at 
section 1128A(b)(1) of the Act that prohibits a hospital from paying 
physicians to reduce or limit care to hospital patients. Given that 
prohibition, we cannot say that payments based on lowering utilization 
present no risk of fraud or abuse. Our specific authority in section 
1877(e)(2)(D) of the Act to add additional requirements to the 
employment exception is limited to requirements needed to protect 
against program or patient abuse. Since section 1128A(b)(1) of the Act 
represents a legislative determination of potential abuse, we cannot 
create an exception for those activities.
    Comment: According to a commenter representing an integrated 
delivery system, employers should be able to reward employees based on 
appropriateness of referrals as measured by quality-oriented medical 
records review and compliance with clinical protocols and guidelines. 
In addition, the commenter supported allowing employers to pay employed 
physicians in part based on volume data in relationship to industry 
norms. The commenter believed that the statutory language, unencumbered 
by the 1998 proposed addition, would achieve this result.
    Response: We agree that nothing in the statutory exception bars 
payments based on quality measures, as long as the overall compensation 
is fair market value and not based directly or indirectly on the volume 
or value of DHS referrals, and the other conditions of the exception 
are satisfied. For example, nothing in the statute or regulations would 
prohibit payments based on achieving certain benchmarks related to the 
provision of appropriate preventive health care services or patient 
satisfaction. To the extent that a payment gives a physician an 
incentive to reduce the volume or value of DHS, it must be a qualified 
physician incentive plan payment under the personal service 
arrangements exception or fit in the prepaid plans or risk-sharing 
arrangements exceptions. Moreover, hospitals should be aware that 
payments to reduce or limit services--which could include certain 
payments based on ``appropriateness'' of referrals--may violate the 
civil money penalty provision at section 1128A(b)(1) of the Act.
    Comment: A commenter presented the following scenario. A hospital 
employs a physician at an outpatient clinic and pays the physician for 
each patient seen at the clinic. The physician reassigns his or her 
right to payment to the hospital, and the hospital bills for the Part B 
physician service (with a site of service reduction). The hospital also 
bills for the hospital outpatient services, which may include some 
procedures furnished as ``incident to'' services in a hospital setting. 
The commenter's concern is that the payment to the physician is 
inevitably linked to a facility fee, which is a designated health 
service (that is, a hospital service). Accordingly, the commenter 
wondered whether the payment to the physician

[[Page 16089]]

would be considered an improper productivity bonus based on a DHS 
referral (that is, the facility fee).
    Response: The fact that corresponding hospital services are billed 
would not invalidate an employed physician's personally performed work, 
for which the physician may be paid a productivity bonus (subject to 
the fair market value requirement).
    Comment: A commenter described the following scenario. A DME 
supplier leases a supply closet in a physician's office. The DME 
supplier and the physician share a non-physician employee who measures 
braces and fits other supplies. If the physician does not see the 
patient, the DME supplier bills Medicare. If the physician does see the 
patient, the physician bills Medicare for a level 1 service. The DME 
supplier and the physician each pay for the employee's services for 
which each bills. The commenter inquired whether the shared employee 
creates a financial relationship.
    Response: The scenario presented by the commenter suggests several 
possible financial relationships. First, the ``shared'' employee raises 
significant issues. If the salary paid by the DME supplier covers any 
portion of the employee's work that benefits the physician (for 
example, work for which the physician would otherwise have incurred 
costs), that portion of the employee's salary could be remunerated to 
the physician that would create a financial relationship between the 
physician and the DME company. Second, if the shared employee is a 
family member of a referring physician, the employee's salary payments 
from the DME supplier would also create a compensation arrangement with 
the referring physician. Third, the rental of the supply closet creates 
a direct financial relationship between the physician and the DME 
supplier.
    Comment: A commenter inquired whether a physician employed by a 
hospital-owned management services organization (``MSO'') could refer 
to the hospital if his or her compensation from the management services 
company fits in the employment exception.
    Response: The arrangement described by the commenter is a potential 
indirect compensation arrangement (hospital--MSO--physician) that would 
need to be analyzed under the indirect compensation rules (discussed 
above in section II.B). Under the indirect compensation analysis, the 
physician's compensation would be excepted if it is fair market value 
for services and does not reflect the volume or value of referrals to 
the hospital (that is, the DHS entity). The employment exception is not 
applicable in the commenter's example, because the exception applies to 
direct employment arrangements between a referring physician and an 
employer that is an entity furnishing DHS (for example, section 
1877(e)(2)(C) of the Act: ``even if no referrals were made to the 
employer'') (emphasis added). In the example, the hospital--not the 
employer MSO--is the entity furnishing DHS. Thus, the referring 
physician's financial relationship with the hospital is indirect.
    Comment: A commenter urged that a physician employed by a hospital 
should be allowed to refer to a home health agency owned by the 
hospital.
    Response: As in the preceding comment, the commenter's scenario 
potentially involves an indirect compensation arrangement between the 
employed physician and the home health agency (the DHS entity) that 
would have to fit in the indirect compensation arrangements exception. 
Under that exception, the compensation paid by the hospital to the 
physician could not vary or otherwise take into account referrals to 
the home health agency. However, the hospital can require its employees 
to refer to its home health agency without running afoul of the 
restriction on compensation that reflects referrals if the requirements 
of Sec.  411.354(d)(4) are satisfied.

C. Personal Service Arrangements (Section 1877(e)(3) of the Act; Phase 
II; Sec.  411.357(d))

[If you choose to comment on issues in this section, please include the 
caption ``Personal Services Exception'' at the beginning of your 
comments.]

    Existing Law: Section 1877(e)(3) of the Act establishes an 
exception for personal service arrangements if--
    (1) The arrangement is set out in writing, signed by the parties, 
and specifies the services covered by the arrangement;
    (2) The arrangement covers all of the services to be provided by 
the physician (or immediate family member) to the entity;
    (3) The aggregate services contracted for do not exceed those that 
are reasonable and necessary for the legitimate business purposes of 
the arrangement;
    (4) The term of the arrangement is for at least one year;
    (5) The compensation paid over the term is set in advance, does not 
exceed fair market value, and, except for certain physician incentive 
plans, is not determined in a manner that takes into account the volume 
or value of referrals or other business generated between the parties;
    (6) The services do not involve the counseling or promotion of an 
unlawful business arrangement or other activity; and
    (7) The arrangement meets the other requirements that the Secretary 
may impose by regulation to protect against program or patient abuse.
    For purposes of the exception, a physician incentive plan (PIP) is 
defined in section 1877(e)(3)(B)(ii) of the Act as ``any compensation 
arrangement between an entity and a physician or physician group that 
may directly or indirectly have the effect of reducing or limiting 
services provided with respect to individuals enrolled with the 
entity.'' Under a PIP, compensation may be determined in a manner that 
takes into account (through a withhold, capitation, bonus or otherwise) 
directly or indirectly the volume or value of referrals or other 
business generated between the parties, provided that the PIP meets the 
following requirements--
    (1) No specific payment is made as an inducement to reduce or limit 
medically necessary services provided with respect to a specific 
enrolled individual;
    (2) If the PIP places the physician at substantial financial risk, 
the PIP complies with the requirements in section 1876(i)(8)(A)(ii) of 
the Act; and
    (3) Upon the Secretary's request, the entity provides the Secretary 
with access to descriptive information regarding the PIP to enable the 
Secretary to determine whether the PIP is in compliance with applicable 
requirements under the personal services exception.
    The August 1995 final rule incorporated section 1877(e)(3) of the 
Act into regulations in Sec.  411.357(d) and the definition of 
``physician incentive plan'' in Sec.  411.351, without imposing any 
additional requirements.
    Proposed Rule: The January 1998 proposed rule contained several 
technical changes and some additional proposed interpretations. The 
technical changes would conform the PIP requirements to the regulations 
governing PIPs issued on March 27, 1996 (61 FR 13430) established in 
Sec.  417.479; delete Sec.  411.357(d)(3), a time-sensitive provision 
that is now obsolete; and reorder certain paragraphs for clarity.
    We proposed interpreting the exception as covering services 
furnished by a physician or his or her immediate family member (63 FR 
1701). We proposed interpreting the requirement that the proposed 
arrangement cover all services to be provided by the physician (or 
immediate family member) to permit multiple agreements between the

[[Page 16090]]

physician and the entity if each individual agreement fits in an 
exception and all of the agreements incorporate one another by 
reference (63 FR 1701). With respect to covered ``services'' under the 
exception, we concluded that the exception is limited to ``personal 
services'', that is, services of any kind performed personally by an 
individual for an entity, but not including any items or equipment. 
Thus, ``personal services'' would not be limited to generic Medicare 
services (defined in Sec.  400.202). We further interpreted the 
exception to permit the contracting physician (or immediate family 
member) to perform the services personally or to provide the services 
through technicians or others whom they employ (63 FR 1701). We 
interpreted the exception to apply to situations in which an entity has 
an arrangement with either an individual physician (or immediate family 
member) or a group practice to provide personal services. Thus, a 
hospital could use the exception if it contracted with a group practice 
for purposes of having group members serve as the hospital's staff (63 
FR 1702).
    With respect to PIPs, we concluded that the exception applies only 
when the entity paying the physician or physician group is the kind of 
entity that enrolls its patients, such as a health maintenance 
organization (63 FR 1701).
    Final Rule: As described in more detail in the responses to 
comments, we are adopting the January 1998 proposed rule, with some 
modifications. These modifications include clarifying the treatment of 
the termination provisions, clarifying that payments from downstream 
subcontractors are included in the physician incentive plan exception, 
and easing the incorporation by reference rule. These changes are 
discussed in greater detail in the following comments and responses. In 
addition, we are making a technical change to Sec.  411.357(d)(2)(iii) 
(the physician incentive plan (PIP) exception) by updating the 
citations to reflect that, since January 1, 1999, the PIP requirements 
that apply to Medicare risk contracts have been set forth at Sec.  
422.208 and Sec.  422.210.
    As indicated in the Phase I preamble (66 FR 897) and above in this 
preamble, we believe that the personal service arrangements exception 
is the applicable exception for most foundation-model physician 
practices. The fair market value exception may also be available, 
depending on the circumstances. Changes we have made to the 
regulations, particularly in the definitions of ``referral'' and ``set 
in advance,'' should enable foundation-model practices to use the 
personal service arrangements exception to engage freely in common 
foundation-model structures and compensation arrangements. In 
particular, the regulations make clear that independent contractor 
physicians--including most, if not all, foundation-model physicians--
can receive compensation that takes into account the volume or value of 
personally performed services (that is, services that are not referrals 
for purposes of section 1877 of the Act) and can be compensated using a 
percentage-based compensation methodology as long as the methodology is 
set in advance. We also discuss, in the following responses to 
comments, new ``safe harbors'' for determining fair market value for 
physician services.
    Comment: Several commenters suggested that the exception not be 
limited to contracts between entities and physicians or group 
practices. For example, the commenters suggested that contracts with 
hospitals, universities, or corporations for the services of employed 
physicians should be included.
    Response: In light of the new exceptions for fair market value 
compensation arrangements in Sec.  411.357(l), indirect compensation 
arrangements in Sec.  411.357(p), and risk-sharing arrangements in 
Sec.  411.357(n), we do not believe any further change is necessary to 
accommodate the types of arrangements described by the commenter under 
section 1877 of the Act.
    Comment: Several commenters sought clarification concerning whether 
the aggregate compensation paid under a personal services arrangement 
needed to be set in advance.
    Response: The aggregate compensation need not be set in advance 
under the personal service arrangements exception. The requirements 
under the ``set in advance'' standard are set forth in Sec.  
411.354(d)(1) and discussed in this Phase II preamble at section IV 
above.
    Comment: Many commenters stated that the proposed regulations would 
not permit any termination of a personal service arrangement without 
cause before the end of the one-year term. These commenters believed 
that termination should be permitted for any reason as long as the 
parties do not enter into the same or substantially the same 
arrangement within the original term.
    Response: As with leases, we agree that there is little risk as 
long as the parties do not enter into the same or substantially the 
same arrangement during the first year of the original term and any 
subsequent agreement fits on its own terms in an exception. This 
provision includes, but is not limited to, arrangements for the same or 
substantially same services to the same or substantially same patients 
or entities. We have modified Sec.  411.357(d)(1)(iv) to reflect this 
interpretation.
    Comment: A number of commenters urged that we expand the PIP 
exception to include incentive plans with entities other than HMOs. 
Commenters also advocated for expansion of the PIP exception to include 
arrangements involving subcontractors of the HMO.
    Response: The PIP exception in the final rule has been modified to 
clarify that it applies to downstream subcontractor arrangements 
related to health plan enrollees. We addressed the issue of incentive 
plans with other entities in Phase I in connection with the new risk-
sharing arrangements exception, discussed in the Phase I preamble (66 
FR 912-914).
    Comment: Several commenters recommended that the exception be 
modified to allow physicians to hire independent contractors or use 
wholly owned companies to perform services they have contracted to 
provide.
    Response: The commenter's proposal would present a potential for 
abuse. The personal service arrangements exception is not limited to 
professional services, and physicians may be hired to provide non-
physician services as well. Allowing physicians to use independent 
contractors to provide services would allow a physician to enter into 
brokering arrangements for virtually any kind of service and take a fee 
as a middle person, without actually performing any services. This is 
contrary to the intent and purpose of the statute. Using bona fide 
employees to provide contract services is different. The employment 
relationship ties the employee to the physician in a manner evidencing 
a bona fide business operated by the physician to provide the services. 
Along these same lines, we agree that a physician should be able to use 
a wholly owned company to provide contracted services under the 
exception.
    Comment: One commenter inquired about the relationship between 
supervision requirements and services provided by a physician's 
employees.
    Response: Nothing in these regulations affects the supervision 
necessary for Medicare payment and coverage purposes. A physician may 
only provide services through his or her employees if he or she 
provides the requisite level of supervision under the applicable 
payment and coverage rules.
    Comment: Several commenters objected to our proposed interpretation

[[Page 16091]]

that items and equipment cannot be included in an arrangement under the 
personal service arrangements exception (63 FR 1701). These commenters 
urged that equipment or items incidental or peripheral to the provision 
of personal services should be covered by the exception, if the 
equipment or items comprise only a minor component of the overall 
arrangement. These commenters urged that providers not be required to 
parse an arrangement through several exceptions. One commenter noted 
that there is a difference between a lease, in which exclusive 
possession of the leased equipment is transferred, and a services 
contract in which the services provider uses his or her own equipment 
to provide a service. One commenter inquired, for example, whether 
parties contracting for personal services and an equipment lease would 
have to have two separate contracts.
    Response: We have reconsidered our position on items or equipment 
under the personal service arrangements exception. It is a common 
practice for many independent contractors to provide the tools of their 
trade in connection with their services contracts. As a practical 
matter, given the similarities between the personal service 
arrangements and equipment rental exceptions, the proposed exclusivity 
rule would be unnecessarily formalistic. Both exceptions require fair 
market value compensation that does not take into account the volume or 
value of DHS referrals or other business generated by the referring 
physician. For purposes of determining fair market value, however, we 
will separate services and equipment contained in a single arrangement. 
As previously noted, in all cases the conduct of the actual financial 
relationship between the parties must comport with the terms of the 
written agreement.
    Comment: Several commenters inquired about various forms of 
remuneration to ``voluntary'' or ``affiliated'' physicians. For 
example, one commenter wanted the exception to cover ``voluntary 
leadership'' arrangements in which physicians volunteer several hours 
per week to enhance patient care or further an organization's health 
care mission, receiving only incidental out-of-pocket expenses or 
training. According to the commenter, the time volunteered by the 
physician almost always exceeds the value of the training and costs 
incurred.
    Response: Nothing in the statute precludes a physician from 
``donating'' time spent in excess of the fair market value of the 
compensation received in the circumstances described by the commenter.
    Comment: A commenter explained that many integrated delivery 
systems rely on affiliation agreements to encourage integration in 
managed care endeavors. The commenter believed that integrated delivery 
systems should be able to structure compensation under affiliation 
agreements that reflects the volume or value of appropriate referrals. 
The commenter suggested that the PIP exception in Sec.  411.355(d)(2) 
be expanded to apply equally to compensation ``intended to improve the 
quality of patient care.''
    Response: As discussed earlier in the context of employment 
arrangements, we do not believe an expansion of the physician incentive 
plans exception is appropriate. Compensation arrangements that reward 
physicians for reducing or limiting care to patients under their 
clinical care are subject to abuse. (See, for example, section 
1128A(b)(1) of the Act.) The only permitted arrangements are those that 
will fit in an existing exception. We note that physician incentive 
payments under existing exceptions are limited to enrollees of a health 
plan. Section 1877 of the Act is not a per se prohibition on other 
forms of incentive payments that are not based on the volume or value 
of referrals or other business generated between the parties and that 
do not directly or indirectly reduce or limit medically necessary 
patient care. For example, a bonus paid to a physician for ensuring 
that his or her patients received preventive care services would not be 
considered to be a payment to reduce or limit medically necessary 
services.
    Comment: Several commenters stated that requiring multiple 
agreements to incorporate one another by reference imposes an undue 
administrative burden on providers, particularly large providers with 
high volumes of physician contracts, all subject to various 
commencement and termination dates. In addition, one commenter was 
concerned that the incorporation requirement potentially created a 
situation in which an agreement could be technically breached due to a 
default under a marginally related contract. The commenter offered the 
following example: if the wife of a physician were to breach her 
contract as a fitness instructor at a hospital, that breach could taint 
the hospital's contract with her spouse's group practice for the 
provision of medical services to hospital patients. Some commenters 
recommended that the incorporation requirement be deleted or that it be 
changed to require a cross-reference to a master list of contracts that 
would be maintained and updated centrally.
    Response: We agree that the incorporation requirement may impose a 
significant burden on entities. We included the incorporation 
requirement to fulfill the statutory directive in section 
1877(e)(3)(A)(ii) of the Act that arrangements cover all of the 
services to be provided. To alleviate the burden on entities, we are 
adopting the commenters' suggestion and changing the regulations to 
require either incorporation of other agreements or cross-referencing 
to a master list of contracts that is maintained and updated centrally. 
We understand that some providers may organize their contracting 
functions by department or otherwise have more than one central 
repository for contracting data. The master list alternative will be 
satisfied if more than one master list is maintained and cross-
referenced, so long as the several master lists, taken together, cover 
all of the contracts with the referring physician or immediate family 
member. Moreover, annual or other regular financial statements (such as 
quarterly statements) that clearly show parties, dates, payments, and 
purposes of payments separately for each personal service contract can 
qualify as a master list if the statements are appropriately cross-
referenced in the agreement. We are adding a requirement that the 
master list or lists be made available for inspection by the Secretary 
upon request and that the list or lists be maintained in a manner that 
preserves the historical record (that is, updating should not be done 
in a manner that erases records of past contracts). We believe this 
solution adequately fulfills the statutory ``covers all'' requirement 
while minimizing the burden on entities.
    Comment: A commenter expressed concern that the personal service 
arrangements exception does not contain an exception for productivity 
bonuses, noting that this is a particular issue for contractors of 
group practices, who under the January 1998 proposed rule were not 
considered members of the group. The commenter asked whether 
independent contractors can be paid a percentage of collections related 
to work personally performed by the contractor if the percentage is 
fair market value and not based on DHS referred to the group by the 
independent contractor.
    Response: Changes made in the Phase I rulemaking largely address 
the commenter's concern. First, under Phase I, independent contractors 
are considered ``physicians in the group'' and may be paid productivity 
bonuses

[[Page 16092]]

in accordance with the group practice rules set forth in Sec.  411.352. 
However, if the independent contractor generates DHS referrals for the 
group practice, and the group practice relies on the personal service 
arrangements exception rather than the in-office ancillary services 
exception to protect those referrals, then the compensation rules of 
the personal service arrangements exception would apply. Second, under 
the Phase I rules, the definition of ``referral'' no longer includes 
personally performed DHS, so compensation paid for personally performed 
services does not vary based on the volume or value of referrals. Thus, 
all physicians, whether group practice physicians, employed physicians, 
or independent contractor physicians, can be compensated for personally 
performed DHS, whether self-referred or referred by someone else. (We 
note that, under the statute, productivity bonuses for services 
``incident to'' personally performed services are only permitted for 
physicians in group practices.) The personal service arrangements 
exception requires that a physician's compensation be ``set in 
advance.'' Under changes we are making in this Phase II rule to the 
``set in advance'' requirement in Sec.  411.354(d)(1), certain 
percentage compensation arrangements will be considered ``set in 
advance.'' Assuming that the new ``set in advance'' requirements are 
met, the scenario described by the commenter would be permitted, since 
the compensation is fair market value and none of the compensation 
relates to referrals of DHS.
    Comment: Two commenters representing independent dialysis 
laboratories urged us to issue additional regulations prohibiting 
referrals between dialysis centers and laboratories owned by a common 
parent company. These commenters believed that the two major 
corporations that own dialysis facilities should be subject to the same 
referral prohibition as physicians. In addition, these commenters 
raised concerns about medical director contracts or other employment or 
services contracts entered into in connection with a physician's sale 
of his or her dialysis facility to a corporate owner. The commenters 
believe that these contracts--which often are long-term and include 
non-compete clauses--are part of the overall purchase price of the 
facility and should be considered when determining whether the sale is 
at fair market value. They also believe that these contracts serve to 
lock the physician into referring to the corporation's laboratories, 
thus competitively disadvantaging independent laboratories.
    Response: Section 1877 of the Act is limited to referrals by 
physicians and does not cover referrals among commonly held entities, 
absent involvement of a referring physician. With respect to medical 
director contracts or other contracts between corporate dialysis 
facilities and physicians, these arrangements may create indirect 
compensation arrangements between the medical director and the 
corporate laboratory that would need to fit in the indirect 
compensation exception. In other words, the medical director contract 
creates a link between the physician and the dialysis facility, which 
is linked through ownership to the parent corporation, which is linked 
by ownership to the corporation's laboratory (the DHS entity). If the 
physician's compensation takes laboratory referrals into account, the 
arrangement would not fit in the exception. (See discussion of indirect 
arrangements in section II.B)
    Comment: One commenter recommended that we establish a benchmark 
for evaluating whether end-stage renal disease (ESRD) facility medical 
director compensation is fair market value by establishing a presumed 
appropriate fair market value hourly rate.
    Response: With respect to the commenters' suggestion that we fix a 
fair market value benchmark for medical directors, we are not in a 
position--nor would it be appropriate--to set a fixed, industry-wide 
fair market value rate for ESRD medical directors. However, we are 
creating a ``safe harbor'' provision under the definition of ``fair 
market value'' in Sec.  411.351 for hourly payments to physicians for 
their personal services. The ``safe harbor'' provision applies to 
payments for services provided personally by the physician, but not to 
services provided by the physician's employees or other persons or 
entities. The safe harbor is not limited to medical director services 
for ESRD facilities, but may be used for other hourly physician 
compensation paid by any DHS entity.
    The safe harbor consists of two methodologies for calculating 
hourly rates that will be deemed to be ``fair market value'' for 
purposes of section 1877 of the Act. The first methodology requires 
that the hourly payment be less than or equal to the average hourly 
rate for emergency room physician services in the relevant physician 
market, provided there are at least three hospitals providing emergency 
room services in the market. The second methodology requires averaging 
the fiftieth percentile salary for the physician's specialty of four 
national salary surveys and dividing the resulting figure by 2000 hours 
to establish an hourly rate. The ``safe harbor'' provides a choice of 
six recognized, readily-available surveys. If the relevant specialty 
does not appear on the survey, the safe harbor looks to the salary for 
general practice.
    Compliance with these safe harbor methodologies is entirely 
voluntary; DHS entities may continue to establish fair market value 
through other methods. DHS entities that choose to use either of the 
two ``safe harbor'' methodologies will be assured that their 
compensation rates will be deemed fair market value for purposes of 
section 1877 of the Act. (Their arrangements will still need to meet 
all other conditions of an applicable exception.) For example, we 
believe that nephrology salary data from four surveys could be used to 
calculate an hourly payment for medical directors of ESRD facilities 
(that is, the average fiftieth percentile nephrologist salary from four 
surveys divided by 2000 hours). DHS entities using other methodologies 
to determine fair market value will continue to bear the risk that 
their rates may not be considered fair market value.
    For purposes of section 1877 of the Act, we would treat a sale of a 
dialysis facility and an accompanying employment contract as separate 
arrangements to be evaluated under the isolated transactions exception 
and the employment exception, respectively. Both exceptions require 
fair market value compensation.
    Finally, we note that the arrangements described by the commenters 
may be problematic under the anti-kickback statute.
    Comment: Commenters representing independent dialysis laboratories 
stated that dialysis corporations sell dialysis supplies at a discount 
to physicians who agree to refer to the corporation laboratories and 
enter into management contracts with independent dialysis facilities 
that steer the facility business to the corporation laboratories.
    Response: If the dialysis corporations sell items or services to 
physicians at a price below fair market value (including any discount), 
the arrangement will not fit in the exception for payments by a 
physician for items or services at Sec.  411.357(i). Similarly, cut-
rate management contracts in exchange for the ability to steer business 
will not fit in an exception. Again, these arrangement may raise 
concerns under the anti-kickback statute.

[[Page 16093]]

    Comment: Two commenters recommended that the personal service 
arrangements exception allow the substitution of bona fide locum tenens 
physicians, consistent with the Medicare reassignment rules.
    Response: A physician may use a locum tenens physician to provide 
contracted services under this exception. To determine whether a 
physician is a bona fide locum tenens physician for purposes of this 
rule, we will look to the definition of ``locum tenens'' in Sec.  
411.351, except that the requirement in the definition that the regular 
physician must be a member of a group practice will not apply (for 
example, the regular physician could be a sole practitioner). We will 
apply this standard, even if the contracted services are not 
reimbursable by Medicare. Also in this regard, in Phase I we expanded 
the group practice definition to include independent contractors and 
locum tenens physicians.
    Comment: In the preamble of the January 1998 proposed rule (63 FR 
1700), we indicated our intent to interpret the ``commercially 
reasonable'' requirement for purposes of all exceptions that require 
commercial reasonableness to mean that an arrangement was a sensible, 
prudent business arrangement from the perspective of the particular 
parties involved, even in the absence of potential referrals. In the 
commenter's view, this interpretation injected an unwarranted 
subjective element into the test.
    Response: An arrangement will be considered ``commercially 
reasonable'' in the absence of referrals if the arrangement would make 
commercial sense if entered into by a reasonable entity of similar type 
and size and a reasonable physician (or family member or group 
practice) of similar scope and specialty, even if there were no 
potential DHS referrals.

D. Remuneration Unrelated to the Provision of Designated Health 
Services (DHS) (Section 1877(e)(4) of the Act; Phase II; Sec.  
411.357(g))

    [If you choose to comment on issues in this section, please include 
the caption ``Remuneration Unrelated to DHS Exception'' at the 
beginning of your comments.]
    Existing Law: Under section 1877(e)(4) of the Act, remuneration 
provided by a hospital to a physician that does not relate to the 
furnishing of DHS does not constitute a prohibited compensation 
arrangement. The exception does not apply to remuneration from a 
hospital to a member of a physician's immediate family. (Until January 
1, 1995, the payments to immediate family members were included.) Nor 
does it apply to remuneration from entities other than hospitals.
    Proposed Rule: To conform to various statutory changes, the January 
1998 proposed rule proposed to revise Sec.  411.357(g) by removing that 
portion that was based on the predecessor provision of section 
1877(b)(4) of the Act, since that provision had expired, and by 
changing the reference to remuneration not related to the furnishing of 
clinical laboratory services to remuneration not related to the 
furnishing of DHS.
    In addition, the January 1998 proposed rule discussed proposed 
interpretations of the exception. First, in order to come within the 
exception, the remuneration would have to be completely unrelated to 
the provision of DHS. Where a hospital made payments that were 
inordinately high for apparently unrelated services to a physician who 
referred DHS to the hospital, we would presume the excess payment was, 
in fact, related to the DHS. Second, we gave several examples to 
illustrate potentially ``unrelated'' services. These examples included 
fair market value payments by a teaching hospital to a physician to 
rent a house for use by visiting fellows, as well as payments for 
teaching, general administrative services, or utilization review. By 
contrast, payments to a physician for a medical device used in the 
provision of DHS (for example, inpatient procedures) or for malpractice 
insurance would be considered related to the provision of DHS. We 
stated that the test would be whether there was any link between the 
remuneration and the referral or provision of DHS. We noted that some 
of these arrangements might fit in another statutory or regulatory 
exception.
    Final Rule: We have incorporated the technical changes described in 
the January 1998 proposed rule. In light of the statutory history, we 
are interpreting the exception to be narrow and available only if 
remuneration is wholly unrelated to the provision of DHS. In general, 
for purposes of the exception, we will treat any item, service, or cost 
that could be allocated in whole or in part to Medicare or Medicaid 
under applicable cost reporting principles to be related directly or 
indirectly to the provision of DHS. In addition, other remuneration 
will be considered related to DHS for purposes of this exception if it 
is furnished, directly or indirectly, explicitly or implicitly, in a 
selective, targeted, preferential, or conditional manner to medical 
staff or other physicians in a position to make or influence referrals. 
The exception will not apply to any other remuneration that is related 
in any manner to the provision of DHS. Given the other exceptions, 
especially the personal services arrangements and fair market value 
exceptions, any bona fide compensation relationships related in any way 
to DHS could be structured to satisfy another exception.
    Section 411.357(g) has been modified to reflect these 
interpretations, which are explained further in the responses to 
comments.
    Comment: Several commenters objected to our statement that any link 
to the provision of DHS would make the exception unavailable. One 
commenter stated that our position appeared to mean that if either 
party would use the items or services provided under the arrangement to 
furnish DHS, the exception would not apply. Another commenter stated 
that the broad statements in the preamble to the January 1998 proposed 
rule were not consistent with the statutory language. Another commenter 
objected to the example in the preamble suggesting that payments to a 
physician for a medical device used for an inpatient procedure would be 
considered related to the provision of a designated health service. The 
same commenter stated that payment for malpractice insurance should not 
be considered related to the provision of DHS and that under the 
proposed interpretation, even granting staff privileges would trigger 
the prohibition.
    Response: We believe that the exception for services unrelated to 
DHS in section 1877(e)(4) of the Act is intended to be very limited and 
available only if the remuneration is wholly unrelated to the provision 
of DHS, such as the rental of residential property. We believe this 
narrow reading is consistent with the statutory history. Initially, 
under the original statute, the exception was necessary to insulate a 
hospital's relationships with physicians that were unrelated to the 
provision of clinical laboratory services, a very small element of a 
hospital's practice. Since 1995, however, all hospital services are DHS 
and a narrower interpretation of the exception is required to prevent 
abuse. Given this breadth of DHS, the statute's purpose, and the 
industry's desire for bright line rules in connection with section 1877 
of the Act, we will treat any item, service, or cost that could be 
allocated in whole or in part to Medicare or Medicaid under applicable 
cost reporting principles as related to the provision of DHS. To the 
extent that the preamble to

[[Page 16094]]

the January 1998 proposed rule suggested that general administrative or 
utilization review services were not related to DHS, we are withdrawing 
that interpretation. Even if not covered by cost reporting principles, 
remuneration that is otherwise related to the provision of DHS will not 
come within the protection of the exception. We will consider 
remuneration to relate to DHS if it is furnished, directly or 
indirectly, explicitly or implicitly, to medical staff or other 
physicians in a position to make or influence referrals in any manner 
that is selective, targeted, preferential, or conditional. For example, 
a loan from a hospital to a physician to finance the physician's 
purchase of an interest in a limited partnership that owns the hospital 
would be related to the provision of DHS. Likewise, for example, a 
hospital's lease of office space in a nearby medical building to 
physicians in a position to refer to the hospital would be related to 
the provision of DHS. Any such arrangements must comply with another 
exception. Elsewhere in this rulemaking, we have promulgated sufficient 
exceptions that any legitimate arrangement between a hospital and a 
referring physician should be able to qualify for protection under 
another exception. Finally, the provision of malpractice insurance or 
other support services to physicians who would otherwise have to pay 
for them clearly creates a compensation arrangement within the language 
and intent of the statute.
    Comment: One commenter objected that the exception is limited to 
remuneration paid to physicians and does not extend to payments to 
immediate family members.
    Response: When the Congress amended the exception in 1993, it 
limited the provision solely to remuneration paid by a hospital to a 
physician. Accordingly, the regulation tracks the current statute. 
Legitimate arrangements with immediate family members should be able to 
qualify for one of the other available exceptions, such as the personal 
service arrangements or fair market value exceptions.
    Comment: A commenter objected to the statement in the preamble that 
we would presume that an above fair market value payment for services 
unrelated to the provision of DHS was actually related to those 
services. The commenter stated that we had no authority to add an 
additional requirement (that is, that payments for unrelated services 
be fair market value) to the statutory exception.
    Response: The commenter misunderstood our position. We agree that a 
payment that is wholly unrelated to the provision of DHS does not have 
to be fair market value for the exception to apply. However, as an 
enforcement matter, we will carefully scrutinize any payments that are 
above fair market value to ensure that they are not disguised payments 
related to DHS.
    Comment: One commenter concluded that our broad reading of 
``related'' meant that payments to physicians for covenants not to 
compete could not fit in the exception, since those covenants were 
related to the furnishing of DHS. The commenter observed that there is 
a distinction between a reasonable geographic restriction on providing 
medical services and an affirmative obligation to make referrals.
    Response: We agree with the commenter that a covenant not to 
compete is not necessarily equivalent to an obligation to make 
referrals. The statutory exception in section 1877(e)(4) of the Act, 
however, only protects payments unrelated to the provision of DHS, and 
a payment by a hospital to a physician for a covenant not to compete is 
plainly related to the provision of DHS. Nevertheless, transactions 
involving non-compete covenants can be structured to fit within other 
exceptions.
    Comment: One commenter asked whether the unrelated services 
exception would be available if the payment were from an entity related 
to a hospital, but not the hospital itself.
    Response: The exception is only available for payments from the 
hospital itself. Depending on the circumstances, payments from a legal 
entity related to the hospital would be analyzed as a direct 
compensation arrangement subject to the direct compensation exceptions 
or as an indirect compensation arrangement to which the indirect 
compensation exception may apply.

E. Physician Recruitment (Section 1877(e)(5) of the Act; Phase II; 
Sec.  411.357(e))

    [If you choose to comment on issues in this section, please include 
the caption ``Physician Recruitment Exception'' at the beginning of 
your comments.]
    Existing Law: Section 1877(e)(5) of the Act excepts remuneration 
provided by a hospital to a physician to induce the physician to 
relocate to the geographic area served by the hospital in order to be a 
member of the hospital's medical staff. To qualify, the following 
conditions must be met--
    (i) The physician is not required to refer patients to the 
hospital;
    (ii) The amount of remuneration under the arrangement is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any referrals by the referring physician;
    (iii) The arrangement meets any other requirements imposed by the 
Secretary to protect against program or patient abuse.
    The August 1995 final rule incorporated the provisions of section 
1877(e)(5) of the Act into our regulations at Sec.  411.357(e), with 
the additional requirements that the arrangement and its terms be in 
writing and signed by both parties and that the physician not be 
precluded from establishing staff privileges at another hospital or 
referring to another entity.
    Proposed Rule: The January 1998 proposed rule retained Sec.  
411.357(e), with minor editorial changes. In the preamble, we 
interpreted the rule to require that the recruited physician reside 
outside the hospital's geographic area and actually relocate into the 
area. We specifically solicited comments on how to define a hospital's 
``geographic area.'' We suggested that recruitment payments to 
physicians already residing in the hospital's geographic area, for 
example, community physicians or hospital residents, might be excepted 
under the proposed new ``fair market value'' compensation exception 
(Sec.  411.537(l)).
    Final Rule: The final rule substantially modifies the January 1998 
proposed rule in the following respects:
     The final rule looks to the relocation of the 
recruited physician's medical practice, rather than the physician's 
residence. A physician will be deemed to have relocated to the 
hospital's geographic area (defined as the lowest number of contiguous 
postal zip codes from which the hospital draws at least 75 percent of 
its inpatients) if: (i) The physician has relocated the site of his or 
her practice a minimum of 25 miles; or (ii) at least 75 percent of the 
physician's revenues from services provided by the physician to 
patients (including services to hospital inpatients) are derived from 
services provided to new patients.
     Residents and physicians who have been in 
medical practice less than one year will not be considered to have an 
established practice and will therefore be eligible under the physician 
recruitment exception regardless of whether or not the physician 
actually moves his or her practice location.
     We have created a regulatory exception for 
federally qualified health

[[Page 16095]]

centers (FQHCs) that make recruitment payments to physicians on the 
same basis as hospitals.
     Recruitment payments made through existing 
medical groups (rather than directly to the recruited physician) in 
connection with the recruitment of a new physician are covered under 
certain conditions elaborated below.
     We have added a limited new exception at Sec.  
411.357(t) for some retention payments made to physicians with 
practices in HPSAs.
     We have modified the proposed language requiring 
recruited physicians to establish staff privileges at other hospitals 
and to refer to other entities to make clear our original intent that 
recruitment payments not be used to lock physicians into using the 
recruiting hospital, except insofar as there may be a separate, 
excepted employment or contractual arrangement under which required 
referrals may be permitted in accordance with Sec.  411.354(d)(4). The 
revised language makes clear that recruited physicians must be allowed 
to establish staff privileges at other hospitals and, except as noted 
in the preceding sentence, to refer to other entities (even if the 
other hospital or entity is a competitor). For purposes of section 1877 
of the Act, reasonable credentialing restrictions on physicians 
becoming competitors of a hospital would not violate this condition.
    The reasons for these changes are discussed in the responses to 
comments that follow.
    Comment: A number of commenters objected to the proposed 
requirement that the recruited physician had to relocate his or her 
residence to qualify for the exception. The commenters suggested that 
the relevant inquiry should be where the physician practices medicine, 
not where the physician lives. One commenter urged abandonment of the 
relocation requirement entirely on the grounds that other conditions in 
the proposed regulation were sufficient to prevent abuse. Another 
commenter proposed that the exception apply as long as the recruited 
physician is new to the hospital's medical staff and either relocates 
his or her practice at least ten miles or derives 75 percent of his or 
her patient revenue from patients new to the physician. A hospital 
trade association proposed that the test be that the recruited 
physician either relocates to the hospital's service area (to be 
defined as the lowest number of contiguous zip codes of 51 percent of 
its inpatients) or relocates 15 miles.
    Response: In general, we agree with the commenters that our 
proposed regulation was unnecessarily restrictive. The relocation 
requirement is statutory, and even if it were not, we believe a 
relocation requirement is an important safeguard against abusive 
financial incentives disguised as ``recruitment'' payments. We are 
persuaded, however, that the recruited physician's practice location, 
not his or her residence, should be the relevant consideration. As to 
the test for ``relocation to the geographic area served by the 
hospital,'' we believe the regulations should set bright line rules, 
but also incorporate some flexibility to accommodate variations in 
legitimate recruitment arrangements. We have revised Sec.  411.357(e) 
by combining and modifying several of the commenters' suggestions. 
Specifically, the hospital's geographic service area is defined for 
purposes of the exception as the area composed of the lowest number of 
contiguous zip codes from which the recruiting hospital draws 75 
percent of its inpatients. Given the significant easing of the 
``relocation'' test described below, we believe using a 75 percent 
criteria is more appropriate than the 51 percent suggested by the 
commenter. In particular, it is less likely to lead to abusive 
recruiting payments to established physicians from nearby hospitals.
    The relocation test may be met by moving one's medical practice a 
minimum distance of 25 miles or by establishing a practice with a 
substantial base of new patients (75 percent of the physician's 
revenues from professional services provided to patients in the 
relocated practice (including services provided to hospital 
inpatients)). For the 75 percent revenues test, the regulations measure 
practice revenue annually on a fiscal or calendar year basis (at the 
physician's option). For the initial ``start up'' year of the recruited 
physician's relocated practice, the test is whether it is reasonable to 
expect that the recruited physician will meet the 75 percent test. New 
patients are those patients who have not been seen by the physician in 
his or her previous practice for at least three years. We believe these 
tests provide clear rules with sufficient flexibility to permit 
legitimate recruitment arrangements, while protecting against 
potentially abusive arrangements (for example, cross-town recruitment 
of an established physician's practice from a competitor hospital). 
Recruitment payments to community or other local physicians who do not 
meet the relocation requirement will not fit in the fair market value 
exception in Sec.  411.357(1), which requires fair market value 
payments for services rendered.
    Comment: Many commenters objected to treating residents and new 
physicians as residing in the hospital's service area. These commenters 
argued that these physicians have not yet established a medical 
practice, so hospitals should be permitted to recruit them. Other 
commenters pointed out that for many hospitals with residency programs, 
the residents were the most likely physicians to stay in the community.
    Response: We agree and have modified the regulation to provide that 
hospital residents, as well as physicians who have been in practice one 
year or less, will not be subject to the relocation requirement. In our 
view, these physicians do not have an established practice to relocate. 
However, the recruited physician must establish his or her medical 
practice in the geographic area served by the hospital to be eligible 
for recruitment payments under the exception.
    Comment: Two commenters wanted the exception to protect recruitment 
payments from DHS entities other than hospitals.
    Response: The statutory exception is expressly limited to 
recruitment payments made by hospitals, and we are not persuaded that a 
wholesale extension to other DHS entities is warranted. Under our 
authority in section 1877(b)(4) of the Act to create additional 
exceptions, we are extending the exception to cover federally qualified 
health centers (FQHCs) that recruit physicians to join their medical 
staffs. We believe that FQHCs should be able to recruit physicians to 
join their medical staffs under the same terms and conditions 
applicable to hospitals. This extension is consistent with the 
statutory intent and scheme and will help ensure that the statute does 
not impede efforts by FQHCs, which provide substantial services to 
underserved populations, to recruit adequate staffs. We are not 
persuaded that the exception should similarly be extended to other DHS 
entities, such as nursing homes or home health agencies, that may want 
to recruit physicians into their service areas. These kinds of 
recruitment arrangements could pose a risk of abuse. We are not 
extending the recruitment exception to cover recruitment payments made 
by physician practices. In the first place, physician practices do not 
have medical staffs comparable to hospitals under the terms of the 
exception. Moreover, the in-office ancillary services exception is 
available to cover referrals from recruited physicians. Because the 
FQHC expansion falls under our authority in section 1877(b)(4) of the 
Act, FQHCs will be subject to the additional general conditions that 
their arrangements not violate the anti-kickback statute and that

[[Page 16096]]

claims submissions comply with all program rules. Since these are pre-
existing obligations, they are not unduly burdensome.
    Comment: Several commenters observed that, contrary to statements 
in the January 1998 proposed rule (63 FR 1702), payments to recruit 
residents and payments to existing group practices to recruit 
physicians would not fit in the new fair market value exception. Two 
commenters noted that the proposed fair market value exception required 
compliance with the anti-kickback statute or an anti-kickback safe 
harbor and that the only available safe harbor was limited to physician 
recruitment in rural areas. Another commenter questioned whether 
recruitment would be an ``item or service'' for purposes of the fair 
market value exception. The commenter considered that a physician's 
relocation to a community benefits the community, not the recruiting 
hospital. Another commenter claimed that the commercial reasonableness 
and fair market value criteria in the fair market value exception would 
require hospitals to incur costs for expensive valuations and stated 
that comparative data was kept confidential and difficult to obtain. 
Finally, a commenter pointed out that the proposed fair market value 
exception included none of the additional safeguards contained in the 
physician recruitment exception.
    Response: In the preamble to the Phase I rule, we stated that 
physician recruitment arrangements might fit in the new fair market 
value exception, depending on the specific facts. Nevertheless, we 
recognized that many recruitment arrangements that offer ``extra'' 
payments to induce physicians to relocate would not be covered because 
the compensation would exceed the fair market value of the physician's 
services (66 FR 919). We concluded that we would consider the issue 
further in Phase II of the rulemaking.
    Upon further consideration, we do not believe that recruitment 
incentives can fit in the fair market value exception in Sec.  
411.357(l). We agree that the physician's relocation is not properly 
viewed as a benefit to the hospital, except as a potential source of 
DHS referrals--a consideration that is antithetical to the premise of 
the statute. As discussed above, we have modified the recruitment 
exception to make clear that payments to hospital residents can be 
covered. Payments by a hospital to a physician practice to assist the 
physician practice in recruiting physicians to the community who will 
join the existing practice are discussed in the following comment and 
response. On the issue of anti-kickback compliance, we refer to the 
discussion in the Phase I rulemaking (66 FR 918).
    Comment: Many commenters believed the exception should be expanded 
to include hospital payments to medical groups in connection with the 
recruitment of a new physician to join the group. One commenter pointed 
out that the proposed rule protected any ``remuneration provided by a 
hospital to recruit a physician,'' but did not specify to whom the 
payment had to be made (63 FR 1725). The commenters stated that many 
new physicians prefer to join existing groups and that such 
arrangements save the costs and labor of setting up a new practice and 
provide cross-coverage and peer review. Another commenter stated that 
under the existing Internal Revenue Service (IRS) rules, recruited 
physicians must report forgivable recruitment loan amounts in the years 
the debt is forgiven. According to the commenter, this rule discourages 
recruited physicians from staying in a community; allowing the payments 
to be made to a group practice might ease the tax burden. One commenter 
suggested that payments to a medical group be permitted if the group--
     Agrees to participate in Medicare and Medicaid;
     Agrees to participate in the hospital's on-call 
program;
     Provides professional services to all hospital 
patients; and
     Enters into an agreement with the recruited 
physician that does not contain a covenant not to compete or a 
liquidated damages provision if the physician leaves the group. 
According to the commenter, these conditions are consistent with IRS 
Revenue Ruling 97-21. Another commenter thought that payments could be 
made to groups to recruit physicians as long as the terms of the 
arrangement are set out in writing and signed by all the parties, and 
the group agrees to pass substantially all of the remuneration to the 
recruited physician.
    Response: Section 1877(e)(5) of the Act expressly excepts payments 
made by a hospital ``to a physician.'' We recognize that many new or 
relocating physicians prefer to join existing practices rather than set 
up a new practice for legitimate reasons, such as cost, cross-coverage, 
and professional expertise. We also recognize that hospitals may want 
to provide financial support through existing medical groups to aid in 
recruiting new physicians to the community. We are concerned that a 
recruitment arrangement involving direct or indirect payments to an 
existing physician practice might be used improperly to pay for 
referrals from the existing physician practice, in essence creating an 
improper financial relationship between the hospital and the existing 
physician practice. However, we have concluded that some narrowly 
tailored accommodation for recruitment into existing groups would be 
appropriate under the recruitment exception and have sought to create 
criteria that would preclude abuse of the exception. Accordingly, the 
regulations provide that the exception will apply to remuneration 
provided by a hospital (or FQHC) to a physician indirectly through 
payments to another physician or physician practice, as long as the 
following conditions are met:
     The arrangement between the hospital and the 
physician practice is set out in writing and signed by the parties.
     Except for actual costs incurred by the 
physician or physician practice in recruiting the new physician, the 
remuneration is passed directly through to or remains with the 
recruited physician. Records of the actual costs and the passed-through 
amounts must be maintained for a period of at least 5 years and made 
available to the Secretary upon request.
     In the case of an income guarantee made by the 
hospital to a physician who joins a local physician practice, costs 
allocated by the physician practice to the recruited physician may not 
exceed the actual additional incremental costs to the practice 
attributable to the recruited physician.
     The new physician must establish a medical 
practice in the hospital's geographic service area and join the 
hospital's medical staff.
     The physician practice's arrangement with the 
recruited physician is set out in writing and signed by the parties.
     The new physician is not required to refer 
patients to the hospital and is allowed to establish staff privileges 
at any other hospital(s) and to refer business to other entities 
(except insofar as required referrals are permitted under Sec.  
411.354(d)(4)).
     The remuneration from the hospital under the 
arrangement is not determined in any manner that takes into account 
(directly or indirectly) the volume or value of any referrals (actual 
or anticipated) by the recruited physician or by the physician practice 
receiving the direct payments from the hospital (or any physician 
affiliated with that physician practice).
     The physician practice receiving the hospital 
payments may not impose additional practice restrictions on the 
recruited physician (for example, a non-

[[Page 16097]]

compete agreement), but may impose conditions related solely to quality 
considerations.
    The regulations similarly apply to payments made directly to a 
physician who joins a physician practice.
    Because we are expanding this exception under our authority in 
section 1877(b)(4) of the Act, which authorizes the creation of new 
exceptions only if the excepted arrangement presents no risk of program 
or patient abuse, the arrangement must not violate the anti-kickback 
statute and must comply with all relevant claims submission and billing 
laws and regulations. In this context, if there is any intent 
unlawfully to reward or induce referrals from the physician practice 
whose recruitment the hospital chose to underwrite, the anti-kickback 
statute would be violated and the exception would not apply.
    This rule for pass-through hospital recruitment payments 
establishes an exception applicable to the compensation arrangement 
created between the hospital and the recruited physician (and between 
the hospital and the existing physician practice). We note that if the 
physician practice receiving the payments from the hospital is a DHS 
entity to which the recruited physician will refer (that is, the 
practice submits claims to Medicare for DHS), any separate or 
additional financial relationship it has with the recruited physician 
will have to fit in an exception (for example, the in-office ancillary 
services exception).
    Comment: Several commenters suggested that the regulatory exception 
should be expanded to permit hospitals to provide incentives to retain 
physicians already on the medical staff. Several commenters pointed out 
that these incentives are particularly useful for hospitals in rural or 
inner city areas where there is a shortage of health professionals and 
constant turnover is a significant problem and expense. One commenter 
suggested that retention payments could be limited to situations where 
the hospital had a bona fide, reasonable, and documented belief that a 
physician may terminate his or her staff privileges and join another 
hospital staff.
    Response: We are sympathetic to the problems faced by hospitals and 
other entities in certain rural and inner city areas in retaining 
sufficient numbers of qualified physicians in the community. On the 
other hand, we are concerned about, among other things, protecting 
payments to physicians in bidding wars between hospitals. The 
commenter's suggested standard of a reasonable and documented belief 
that a physician may terminate his staff privileges would not 
adequately address this potential abuse. We are persuaded that a narrow 
retention exception for some remuneration paid to physicians with 
practices in HPSAs to retain them in the community is appropriate and 
consistent with the statutory scheme. Therefore, in accordance with our 
authority under section 1877(b)(4) of the Act, we have added a new 
exception for retention payments made to a physician with a practice 
located in a HPSA (regardless of whether the HPSA is specifically 
designated for the physician's particular specialty) who has a firm 
written recruitment offer from an unrelated hospital or FQHC that 
specifies the remuneration being offered and that would require the 
physician to move the location of his or her practice at least 25 miles 
and outside of the geographic area served by the hospital or FQHC 
making the retention payment. The retention payment must be limited to 
the lower of (i) the difference between the physician's current income 
from physician and related services and the income the physician would 
receive from physician and related services in the recruitment offer 
(over no more than a 24-month period) or (ii) the reasonable costs the 
hospital or FQHC would otherwise have to expend to recruit a new 
physician to the geographic area served by the hospital or federally 
qualified health center in order to join the medical staff of the 
hospital or federally qualified health center to replace the retained 
physician. Parties must use a reasonable methodology to calculate the 
physician's current and anticipated incomes for purposes of this test. 
Moreover, parties must use the same methodology when calculating the 
physician's income from his or her current job and the anticipated 
income from the recruitment offer. Any retention payment must be 
subject to the same restrictions, if any, on repayment or forgiveness 
of indebtedness as the recruitment offer. A hospital may enter into a 
retention arrangement with a physician no more frequently than once 
every five years and the amount and terms of the retention payment may 
not be altered during the term of the arrangement in any manner that 
takes into account the volume or value of referrals or other business 
generated by the physician. Except in these limited circumstances, we 
are unable to devise a sufficiently clear and flexible exception for 
retention payments that would be without risk of program or patient 
abuse. If a hospital or federally qualified health center wishes to 
retain an employed physician by matching a salary offer from another 
facility, the hospital or federally qualified health center may 
structure an arrangement to fit in this exception. Alternatively, the 
arrangement may be structured to fit in the employee exception at Sec.  
411.357(c) (as discussed in this preamble at section VIII.B), provided 
the compensation to be paid to the employed physician will be fair 
market value and the other conditions of the exception are satisfied. 
The new exception for retention payments in underserved areas does not 
protect payments made indirectly to a retained physician via another 
person or entity, including a physician practice.
    Apart from physicians practicing in HPSAs or employed physicians, 
we think the best approach is to make decisions on retention 
arrangements on a case-by-case basis through advisory opinions. Thus, 
the final rule provides for approval of retention payments to 
physicians in other underserved areas (or serving underserved patient 
populations) on a case-by-case basis through an advisory opinion. We 
are not further defining underserved areas or underserved patient 
populations for purposes of this regulation in order to give the 
Secretary maximum flexibility in evaluating the special circumstances 
attendant on retention payments. We expect to approve retention 
payments in advisory opinions only in unusual and compelling 
circumstances. We caution that retention arrangements can implicate the 
anti-kickback statute, and parties should take care to scrutinize their 
arrangements for compliance with that statute.
    Comment: A trade association representing academic medical centers 
requested a special exception for teaching hospitals.
    According to the commenter, teaching hospitals often need to 
recruit local community physicians to teach. The commenter noted that 
many academic medical centers have closed medical staffs and would not 
be able to satisfy the condition that the recruited physician not be 
required to refer to the hospital.
    Response: We are not persuaded that a special exception is needed 
in light of the academic medical center exception created in the Phase 
I rulemaking and codified in Sec.  411.355(e) (see discussion in 
section XII.A below). In addition, arrangements with local faculty may 
fit in the personal service arrangements exception in Sec.  
411.357(e)(3) or the employment exception in Sec.  411.357(e)(2).

[[Page 16098]]

F. Isolated Transactions (Section 1877(e)(6) of the Act; Phase II; 
Sec.  411.357(f))

    [If you choose to comment on issues in this section, please include 
the caption ``Isolated Transactions Exception'' at the beginning of 
your comments.]
    Existing Law: Section 1877(e)(6) of the Act provides that an 
isolated transaction, such as a one-time sale of property or a 
practice, is not considered to be a compensation arrangement for 
purposes of the prohibition on physician referrals if the following 
conditions are met:
     The amount of remuneration for the transaction 
is consistent with fair market value and is not determined, directly or 
indirectly, in a manner that takes into account the volume or value of 
referrals.
     The remuneration is provided in accordance with 
an agreement that would be commercially reasonable even if no referrals 
were made to the entity.
     The transaction meets any other requirements 
that the Secretary may impose by regulation as needed to protect 
against program or patient abuse.
    The August 1995 final rule incorporated the provisions of section 
1877(e)(6) of the Act into our regulations in Sec.  411.357(f), with an 
additional requirement that there be no additional transactions between 
the parties for 6 months after the isolated transaction, except for 
transactions that are specifically excepted under another exception. 
The August 1995 final rule also established definitions of 
``transaction'' and ``isolated transaction'' in Sec.  411.351. The rule 
defined a ``transaction'' as an instance or process of two or more 
persons doing business and an ``isolated transaction'' as a transaction 
involving a single payment between two or more persons. The definition 
specifies that a transaction involving long-term or installment 
payments is not considered an isolated transaction.
    Proposed Rule: The January 1998 proposed rule proposed retaining 
Sec.  411.357(f) and the definitions in Sec.  411.351, with a 
clarification that ``transactions'' can involve persons or entities.
    Final Rule: The final rule retains the existing exception and 
definitions with the following modifications (as well as the 
clarification that transactions can involve persons or entities).
    First, we are modifying the definition of ``isolated transaction'' 
to permit installment payments, provided the total aggregate payment 
is: (i) Set before the first payment is made; and (ii) does not take 
into account, directly or indirectly, referrals or other business 
generated by the referring physician. Additionally, the outstanding 
balance must be guaranteed by a third party, secured by a negotiable 
promissory note, or subject to a similar mechanism to assure payment 
even in the event of default by the purchaser or obligated party. 
Second, post-closing adjustments that are commercially reasonable and 
not dependent on referrals or other business generated by the referring 
physician will be permitted if made within 6 months of the date of a 
purchase or sale transaction.
    Comments and our responses follow.
    Comment: Two commenters found the single payment requirement--in 
conjunction with the six-month prohibition on other transactions--
impractical since it precluded common post-closing adjustments in 
connection with sales of practices and other transactions. According to 
the commenters, escrows or post-closing adjustments occur shortly after 
the initial closing and are designed to remedy unknown conditions, 
shortfalls in accounts receivable, or similar contingencies. One 
commenter suggested that commercially reasonable post-closing 
adjustments be permitted within six months, while another commenter 
requested a one-year grace period.
    Response: We have adopted the commenters' suggestion to modify the 
rule to permit post-closing adjustments within six months of the date 
of sale if they are commercially reasonable, even if there are no 
referrals or other business generated by the referring physician.
    Comment: Several commenters questioned the necessity for the single 
payment rule. Several pointed out that the safe harbor under the anti-
kickback statute for the sale of a physician's practice (Sec.  
1001.952(e)) does not contain a similar requirement. According to these 
commenters, as long as the purchase price is set at the time of 
closing, consistent with fair market value, and not dependent on 
referrals, it should not matter if the funds are paid out over time. 
Two commenters observed that a seller would have a breach of contract 
claim for any unpaid amounts. One commenter pointed out that any risk 
that a selling physician would have an ongoing incentive to refer to a 
sold entity to assure payment by the purchaser could be addressed by 
requiring the purchase obligation to be secured in the event of the 
purchaser's default or bankruptcy.
    Response: The Congress clearly intended that an isolated 
transaction, whether through a single payment or installment payments, 
creates a financial relationship between the parties on a prospective 
basis. We have reconsidered the single payment requirement in light of 
the comments and have modified the final rule to also permit 
installment sales under certain conditions. We are concerned, however, 
that many installment transactions provide continuing incentives to 
refer. Resort to costly and uncertain litigation to enforce a 
contractual right is insufficient protection against the pressure to 
continue referrals. To address that concern, the installment payments 
rule requires that payments must be either immediately negotiable or 
otherwise secured so that the seller is guaranteed payment in the event 
of the purchaser's default or bankruptcy.
    Comment: A publicly-held company suggested that we create a special 
exception for installment payments by companies that are eligible for 
the publicly-held entity exception in Sec.  411.356(a).
    Response: As discussed above, the final rule permits installment 
sales that meet certain conditions. There is no reason to distinguish 
between large publicly-held companies and other purchasers.
    Comment: A physician association objected to the prohibition on 
other unexcepted transactions within six months of the transaction 
qualifying under the isolated transaction exception. According to the 
association, a better rule would be a maximum number of transactions 
within a calendar year.
    Response: We decline to adopt the suggestion. We think that the 
concept of an isolated transaction is incompatible with the suggestion 
that parties can routinely engage in multiple transactions each year or 
more than one transaction during a short period of time.
    Comment: One commenter asked us to clarify that only transactions 
related to DHS are subject to the prohibition on other transactions 
within six months of an isolated transaction.
    Response: The prohibition applies to all transactions. A financial 
relationship between a DHS entity and a referring physician can be 
created by any financial relationship, whether or not the financial 
relationship involves DHS and whether or not the financial relationship 
involves Medicare or private pay business. Unless the financial 
relationship--whatever it may be--can fit in one of the statutory or 
regulatory exceptions, the physician may not refer any Medicare DHS to 
the DHS entity and the entity may not

[[Page 16099]]

submit claims to Medicare for DHS provided in the event that such 
patients are nevertheless referred.

G. Certain Group Practice Arrangements with Hospitals (Section 
1877(e)(7) of the Act; Phase II; Sec.  411.357(h))

    Existing Law: Section 1877(e)(7) of the Act provides that an 
arrangement between a hospital and group under which DHS are furnished 
by the group but are billed by the hospital does not constitute a 
compensation arrangement for purposes of the prohibition on referrals 
if the following conditions are met:
     With respect to the services furnished to a 
hospital inpatient, the arrangement is for the provision of inpatient 
hospital services under section 1861(b)(3) of the Act. The arrangement 
began before December 19, 1989, and has continued in effect without 
interruption since that date.
     With respect to the DHS covered by the 
arrangement, substantially all of those services furnished to patients 
of the hospital are furnished by the group under the arrangement.
     The arrangement is set out in a written 
agreement that specifies the services to be furnished by the parties 
and the amount of compensation.
     The compensation paid over the term of the 
agreement is consistent with fair market value, and the compensation 
per unit of services is fixed in advance and is not determined in a 
manner that takes into account the volume or value of any referrals or 
other business generated between the parties.
     The compensation is provided under an agreement 
that would be commercially reasonable even if no referrals were made to 
the entity.
     The arrangement between the parties meets any 
other requirements the Secretary may impose by regulation as needed to 
protect against patient or Medicare program abuse.
    The 1995 final rule incorporated the provisions of section 
1877(e)(7) of the Act, as they relate to clinical laboratory services, 
into the regulations in Sec.  411.357(h), without imposing any 
additional requirements.
    Proposed Rule: The January 1998 proposed rule proposed to revise 
Sec.  411.357(h) to apply the provisions to all DHS, not just clinical 
laboratory services, and to make certain minor changes. In particular, 
the proposed rule proposed modifying the regulation to make clear that 
the arrangement for which the protection of the exception was sought 
had to have begun prior to December 19, 1989, and have continued in 
effect, without interruption, since that time. We also proposed 
interpreting the regulatory language to permit changes to the 
arrangement over time with respect to the services covered by the 
arrangement or the physicians providing those services. We also 
clarified that the ``substantially all'' test in section 
1877(e)(7)(A)(iii) of the Act required that at least 75 percent of the 
DHS covered under the arrangement furnished to patients of the hospital 
be furnished by the group under the arrangement.
    Final Rule: We received no comments to this provision. This interim 
final rule adopts the proposed rule.

H. Payments Made by a Physician for Items and Services (Section 
1877(e)(8) of the Act; Phase II; Sec.  411.357(i))

    Existing Law: Section 1877(e)(8) of the Act creates an exception 
for certain payments that a physician makes to a laboratory in exchange 
for clinical laboratory services or to an entity as compensation for 
other items or services, if the items or services are furnished at a 
price that is consistent with fair market value. The August 1995 final 
rule incorporated the provisions of section 1877(e)(8) of the Act into 
the regulations in Sec.  411.357(i).
    Proposed Rule: The January 1998 proposed rule proposed to interpret 
``other items or services'' to mean any kind of items or services that 
a physician might purchase, but not including clinical laboratory 
services, or any items or services specifically listed under other 
compensation exceptions (63 FR 1703). In other words, under the 
proposed rule, exceptions would be mutually exclusive. In the August 
1995 final rule, we had defined remuneration to include discounts and 
explained that the exception in section 1877(e)(8) of the Act would not 
be available if the remuneration included a discount that did not 
reflect fair market value. In the preamble to the January 1998 proposed 
rule (63 FR 1694), we clarified that a discount would meet the fair 
market value standard if it were made pursuant to an arm's-length 
transaction; were offered to all similarly situated individuals 
regardless of whether they make referrals; did not reflect the volume 
or value of past or future referrals; and were passed on to Medicare 
and other insurers. In addition, the January 1998 proposed rule 
proposed a new exception in Sec.  411.357(j) for discounts to 
physicians based on the volume of referrals, provided the discount is 
passed on in full to the patients or their insurers and does not 
benefit the physicians in any way. The proposed exception would not 
contain a fair market value standard.
    Final Rule: The final rule adopts the January 1998 proposed rule, 
without the proposed exception for discounts. Upon further 
consideration, we believe that legitimate discounts will fall within 
the range of values that is ``fair market value.'' In addition, 
pursuant to our authority under section 1877(b)(4) of the Act, we are 
extending the exception to cover payments by a referring physician's 
immediate family member. We believe the Congress did not intend that 
the fair market value purchase by immediate family members of items and 
services from health care entities would create a prohibited financial 
relationship such that the physician could not refer to the entity.
    Comment: Several commenters questioned the statutory authority for 
our determination that items or services that were potentially covered 
under another exception, such as a lease or personal service agreement, 
could not also be excepted under this provision. One commenter noted 
that in some instances, some payers will not pay separate physician and 
facility charges for certain hospital-based physician clinics because 
the physician payment includes practice expenses. In those situations, 
it is common for the hospital to charge the physician some amount for 
office space and equipment. However, those kinds of transactions cannot 
fit in the lease or services exceptions.
    Response: In the case of this particular exception, the 
determination that items and services addressed by another exception 
should not be covered in this exception is consistent with the overall 
statutory scheme and purpose and is necessary to prevent the ``payments 
by a physician'' exception from negating the statute. However, we are 
modifying the regulatory text to make clear that parties can use the 
fair market value exception, where applicable, which should address 
some of the issues raised by commenters.

XI. Definitions (Section 1877(h) of the Act; Phase I--66 FR 922-49; 
Sec.  411.351)

    [If you choose to comment on issues in this section, please include 
the caption ``Definitions'' at the beginning of your comments.]

A. Designated Health Services--General Principles (Section 1877(h)(6) 
of the Act; Phase I--66 FR 922)

    Section 1877(h)(6) of the Act lists eleven broad categories of DHS, 
but does not further define those categories. In response to requests 
for clear definitions of the various DHS, Phase I defined the entire 
scope of the following categories of DHS by reference to specific CPT 
and HCPCS codes: Clinical

[[Page 16100]]

laboratory services; physical therapy, occupational therapy, and 
speech-language pathology services; radiology and certain other imaging 
services; and radiation therapy services and supplies. The list of 
codes used to define these DHS categories appeared in an Attachment to 
Phase I and is updated on an annual basis in the physician fee schedule 
final rule and on the CMS Web site. For the convenience of the reader, 
we are also including this list of codes as an Attachment to this Phase 
II rule. Commenters generally responded favorably to our use of codes 
in defining DHS. Phase I defined the remaining DHS categories in 
regulatory descriptions that did not refer to a service-by-service list 
of CPT or HCPCS codes.
    In Phase I, we also published separate lists of CPT and HCPCS codes 
to identify DHS that may qualify for the new regulatory exceptions in 
Sec.  411.355(g) (regarding EPO and other dialysis-related outpatient 
prescription drugs furnished in or by an ESRD facility) and Sec.  
411.355(h) (regarding preventive screening tests, immunizations and 
vaccines). Services that qualify for one of these exceptions remain DHS 
for purposes of section 1877 of the Act; however, referrals may be made 
and claims may be submitted for these DHS if all of the conditions of 
the applicable exception are satisfied.
    As noted below in the comments and responses section, we received a 
number of comments from various providers advocating that we either 
exclude certain services from the definition of a particular DHS 
category or create an exception for financial arrangements involving 
those services because, in the commenters' view, the items or services 
pose a low risk of overutilization or abuse. For the reasons stated in 
Phase I (66 FR 922-923) and our responses below, we continue to decline 
to make service-by-service determinations of the risk of abuse. 
Accordingly, we are not adding any new regulatory exceptions for 
additional DHS in this Phase II rulemaking.
    Our responses to comments on the various DHS definitions follow in 
the order set forth in Phase I.
    Comment: Some commenters found it confusing to have a service 
included on both the list of codes used to define certain DHS and the 
list of codes that identifies certain services as ``excluded'' under 
either Sec.  411.355(g) or Sec.  411.355(h). These commenters suggested 
that such services be omitted from the DHS list.
    Response: If a particular service is a DHS, the fact that it 
potentially qualifies for an exception under Sec.  411.355 does not 
negate the fact that it is a DHS. The various exceptions serve to 
permit referrals and claims submission for DHS when certain enumerated 
conditions are satisfied. The exceptions do not convert DHS into 
services that are not DHS. Thus, we cannot omit from the DHS code lists 
those services that may be covered by a regulatory exception, such as 
the exception in Sec.  411.355(h) for certain preventive screening 
tests, immunizations and vaccines. However, with respect to certain 
definitions in the Attachment to Phase I regarding the codes that would 
be ``excluded'' under the exceptions in Sec.  411.355(g) and Sec.  
411.355(h), we are making a number of technical revisions to the 
definitions of DHS in Sec.  411.351 to more clearly reflect the 
regulatory scheme. In addition, in the December 31, 2002 physician fee 
schedule final rule (67 FR 79966), we have clarified that the codes 
listed under ``Drugs Used by Patients Undergoing Dialysis'' and 
``Preventive Screening Tests, Immunizations and Vaccines'' constitute 
items or services to which the physician self-referral prohibition does 
not apply if the items or services are furnished in compliance with all 
of the conditions listed in the exceptions at Sec.  411.355(g) and 
Sec.  411.355(h), respectively.
    Comment: One commenter urged us to define all categories of DHS by 
reference to specific CPT, HCPCS, or other relevant codes. In 
particular, the commenter was concerned about potential confusion 
regarding whether a supply is considered a DME, orthotic or prosthetic 
supply versus an ordinary supply.
    Response: As explained in the Phase I preamble (66 FR 923), some 
DHS are not amenable to definition through codes. For those services, 
we believe the definitions provided in Phase I are sufficiently clear 
to permit entities and physicians to identify them readily.
    With respect to the commenter's particular concern, we are unclear 
as to how or why the Phase I definitions of ``durable medical 
equipment'' and ``prosthetics, orthotics, and prosthetic devices and 
supplies'' generate any significant confusion. Phase I did not change 
any existing definitions for those terms. As discussed in the Phase I 
preamble (66 FR 932), the simplest way to determine the proper 
classification of these items is to consult the Durable Medical 
Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) fee schedule, 
which identifies such items by HCPCS code and is available on the CMS 
Web site at: http://cms.hhs.gov/providers/pufdownload/default.asp#dme. 
Most supplies paid under the DMEPOS benefit (as opposed to ordinary 
supplies used in physician offices) are listed on this Web site. In 
general, a supply is categorized as a DME supply or a prosthetic, 
prosthetic device, or orthotic supply if it is disposable in nature and 
necessary for the effective use of DME, a prosthetic, a prosthetic 
device, or orthotic equipment by the patient outside of the physician's 
office.

B. Professional Services as Designated Health Services (Phase I--66 FR 
924)

    Comment: Our DHS definitions, including the definition of 
``radiology and certain other imaging services'' at Sec.  411.351, 
encompass both the professional and technical components of a service. 
A commenter stated that including the professional component is 
contrary to the statute and creates a significant obstacle to the 
delivery of ultrasound services provided anywhere except in a 
physician's office. For example, according to the commenter, if a 
physician refers a hospital inpatient for an ultrasound, and a member 
of the referring physician's group practice interprets the ultrasound 
(that is, provides the professional component), the in-office ancillary 
services exception is not applicable and the group cannot bill for the 
professional service.
    Response: First, we do not find any evidence that the Congress 
intended to exclude all professional physician services from the list 
of DHS, for the reasons explained in the Phase I preamble (66 FR 924). 
Second, under the physician services exception (section 1877(b)(1) of 
the Act; Sec.  411.355(a)), the self-referral prohibition does not 
apply to physician services that are personally performed by, or under 
the supervision of, another physician who is in the same group practice 
as the referring physician. Unlike the in-office ancillary services 
exception, the physician services exception does not impose any ``same 
or centralized building'' requirement. Thus, a physician may refer a 
hospital inpatient for ultrasound services when the professional 
component is furnished in a hospital by, or under the supervision of, 
another physician in his or her group practice. In many other cases, 
physician services that are DHS will fall under one of the other 
exceptions or will be personally performed by the referring physician 
and therefore not constitute a ``referral'' for purposes of section 
1877 of the Act.

C. Clinical Laboratory Services (Phase I--66 FR 924)

    In Phase I, we defined the entire scope of ``clinical laboratory 
services'' by reference to codes ``as specifically

[[Page 16101]]

 identified by the CPT and HCPCS codes posted on the HCFA Web site * * 
* and in annual updates * * *, except as specifically excluded on the 
HCFA Web site and in annual updates.'' We are deleting the phrase 
``except as specifically excluded on the HCFA Web site and in annual 
updates'' in response to comments discussed in section XI.A addressing 
the distinction between items and services that do not constitute a DHS 
and items and services that are DHS but may qualify for an exception 
under Sec.  411.355. We are not making any other changes to the 
definition of ``clinical laboratory services.''
    Comment: One commenter urged us to exclude from the definition of 
``clinical laboratory services'' all laboratory tests for which the 
requirements of CLIA have been waived. The commenter stated that CLIA-
waived tests should not be considered DHS because they are an integral 
part of patient care furnished in the physician office setting.
    Response: We see no reason to exclude CLIA-waived tests from the 
definition of ``clinical laboratory services'' under Sec.  411.351. 
Under CLIA regulations, clinical laboratory tests are categorized based 
on complexity. The three categories are: waived tests, tests of 
moderate complexity, and tests of high complexity. The commenter is 
addressing the set of relatively simple tests that the CLIA rules 
categorize as waived tests. Under Sec.  493.15, waived tests must: (1) 
Be cleared by the Food and Drug Administration (FDA) for home use; (2) 
employ methodologies that are so simple and accurate as to render the 
likelihood of erroneous results negligible; or (3) pose no reasonable 
risk of harm to the patient if the test is performed incorrectly. None 
of these factors reduces the risk of overutilization or other abuse for 
purposes of section 1877 of the Act. To the extent waived tests are an 
integral part of patient care and are furnished during an office visit, 
they will likely fit in the in-office ancillary services exception at 
Sec.  411.355(b).

D. Physical Therapy Services (Phase I--66 FR 924-927)

    In Phase I (66 FR 924-27, 955), we defined ``physical therapy, 
occupational therapy, and speech-language pathology services'' as those 
particular services identified by the CPT and HCPCS codes on our Web 
site (and in annual updates published in the Federal Register), 
regardless of who provides them. We listed the codes for each of these 
services under a single category because they overlap (for example, a 
particular service that is associated with a single CPT or HCPCS code 
may be within the scope of practice of both physical therapists and 
occupational therapists). We believe that the list of CPT and HCPCS 
codes for these services represents what most clinicians would define 
as physical therapy/occupational therapy/speech-language pathology 
services. However, we are removing CPT code 94762 (measure blood oxygen 
level) from the list of physical therapy/occupational therapy/speech-
language pathology services because it is not a physical therapy 
service.
    We received the following comments.
    Comment: One commenter was concerned that our use of the phrase 
``regardless of who provides them'' might imply that people other than 
licensed physical therapists and physical therapist assistants could 
provide physical therapy services in a physician's office. The 
commenter believed that we should develop policies to avoid unlicensed 
or unqualified individuals from providing physical therapy services.
    Response: We do not intend for the description of ``Physical 
therapy, occupational therapy, and speech-language pathology services'' 
in Sec.  411.351 to have any effect on who is allowed to furnish 
physical therapy services to Medicare patients. Section 411.351 merely 
defines the scope of services included in the definition; it does not 
address the qualifications required to perform them. As noted in the 
preamble to Phase I final rule (66 FR 926), some physical therapy 
services can be performed by physicians, and we defer in this rule to 
existing Medicare policy concerning which professionals may provide a 
given service.
    Comment: A commenter stated that we should add two CPT codes to the 
list of physical therapy codes: 97601 for removal of devitalized tissue 
from wound without anesthesia and 97602 for non-selective debridement, 
without anesthesia.
    Response: We agree. In Phase I, we defined physical therapy 
services, as described in section 1861(p) of the Act, to include the 
following: (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; and 
(iii) the establishment of a maintenance therapy program for an 
individual whose restoration potential has been reached. Removing 
devitalized tissue and non-selective debridement without anesthesia are 
physical medicine modalities, and the CPT places the codes for these 
services within a series of codes for other physical therapy services. 
We are therefore including CPT codes 97601 and 97602 on the list of 
codes used to define physical therapy services.
    Comment: One commenter asserted that we should not interpret the 
term ``physical therapy services'' to include speech-language 
pathology. According to the commenter, neither section 1877 of the Act 
nor its legislative history indicates that the term ``physical 
therapy'' encompasses speech-language pathology. Another commenter 
asserted that the Congress intended speech-language pathology services 
and physical therapy services to be separate benefits. The commenter 
asserts that although speech therapy services are referenced in section 
1861(p) of the Act, the definition of these services is included in a 
separate statutory provision, section 1861(ll)(l) of the Act. The 
commenter noted that we also recognize speech-language pathology 
services as distinct from physical therapy.
    Response: As previously noted in Phase I (66 FR 926), the 
definition of ``outpatient physical therapy services'' in section 
1861(p) of the Act specifically states that ``[t]he 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 under an arrangement 
with, and under the supervision of, such provider, clinic, 
rehabilitation agency, or public health agency * * *.'' Thus, by 
definition, speech-language pathology services are a subset of 
outpatient physical therapy services under the Medicare statute. 
Although the term ``speech-language pathology services'' is defined 
elsewhere in the Act, and there may be different regulatory guidelines 
applicable to physical therapy services and speech-language pathology 
services, the statute clearly includes the latter within the definition 
of ``outpatient physical therapy services.''
    Comment: One commenter asserted that the Phase I preamble 
incorrectly stated that device mapping (the fine tuning of cochlear 
implants) is performed by speech-language pathologists (66 FR 935). 
According to the commenter, device mapping is not within the speech-
language pathology scope of practice. The commenter also asserted that 
CPT code 92507 (speech/hearing therapy) is not a designated health 
service and should be deleted from the code list.
    Response: In Phase I (Sec.  411.351; 66 FR 955), we described 
``speech-language

[[Page 16102]]

pathology services'' as services performed ``for the diagnosis and 
treatment of speech, language, and cognitive disorders that include 
swallowing and other oral-motor dysfunctions.'' We noted in the Phase I 
preamble (66 FR 935) that, although cochlear implants are considered 
prosthetic devices, cochlear rehabilitation services (billed under CPT 
code 92510) are considered speech-language pathology services for 
purposes of Medicare coverage and payment. The Phase I Attachment also 
included CPT codes 92506 (speech/hearing evaluation) and 92507-92508 
(speech/hearing therapy) as physical therapy/occupational therapy/
speech-language pathology services.
    We have removed CPT code 92506 (speech/hearing evaluation) from the 
list of codes used to define physical therapy, occupational therapy, 
and speech-language pathology services. CPT code 92506 is a diagnostic 
audiology service. Contrary to the commenter's request, we are not 
removing CPT code 92507 (speech/hearing therapy) because it is a 
speech-language pathology service. In addition, we note that we removed 
CPT 92510 (rehab for ear implant) from the code list in the December 
31, 2002 physician fee schedule final rule (67 FR 80017) because we no 
longer recognize this code as valid for payment purposes. The services 
formerly billed under this code may be billed under 92507-92508, which 
remain on the list of codes used to define physical therapy, 
occupational therapy, and speech-language pathology services.
    We did not intend to include audiology services within the scope of 
our description of speech-language pathology services. Accordingly, we 
are removing the following four codes, which were erroneously added to 
the DHS code list in the CY 2003 physician fee schedule update (67 FR 
79966, 80016, effective for services furnished on or after March 1, 
2003): CPT 92601 (cochlear implant f/up exam <7); 92602 (reprogram 
cochlear implant <7); 92603 (cochlear implant f/up exam 7); 
and 92604 (reprogram cochlear implant 7). All of these codes 
represent diagnostic audiology services.
    Comment: A commenter stated that there are two additional CPT codes 
that should be considered speech-language pathology services: CPT 92520 
(laryngeal function studies) and CPT 92511 (nasopharyngoscopy). 
According to the commenter, these services are clearly within the scope 
of practice of speech-language pathologists.
    Response: As we stated in Phase I (66 FR 925), we are defining this 
category of DHS using specific codes that correspond to services that 
we consider to be speech-language pathology services. The Medicare 
program does not currently recognize nasopharyngoscopy (CPT 92511) and 
laryngeal function studies (CPT 92520) as therapy services. We intend 
that the list of CPT/HCPCS codes will reflect existing Medicare 
coverage and payment policies for each DHS category on the list. To 
include the codes suggested by the commenter would be contrary to 
existing policy; therefore, we are not including these codes as DHS 
under the physician self-referral prohibition.

E. Occupational Therapy Services (Phase I--66 FR 926)

    We received no comments on this subject. Accordingly, we are not 
making any changes to the relevant portion of the definition of 
``physical therapy, occupational therapy, and speech-language pathology 
services.''

F. Radiology and Certain Other Imaging Services (Phase I-66 FR 931)

    Under section 1877(h)(6)(D) of the Act, ``radiology services, 
including magnetic resonance imaging, computerized axial tomography, 
and ultrasound services'' are DHS. Radiation therapy services and 
supplies are DHS under section 1877(h)(6)(E) of the Act. In the January 
1998 proposed rule, we proposed a single definition for both of these 
DHS categories. In Phase I, we took the following steps, among others, 
to define this category with greater clarity:
     We separately defined the DHS identified in 
section 1877(h)(6)(D) and section 1877(h)(6)(E) of the Act.
     We defined the category of services covered by 
section 1877(h)(6)(D) of the Act under the name ``radiology and certain 
other imaging services'' to make clear the Congress's intent to include 
some imaging services other than radiology.
     We defined the entire scope of DHS under section 
1877(h)(6)(D) of the Act in a list of CPT and HCPCS codes.
     We excluded the following services from the 
definition of ``radiology and other imaging services'': (i) X-ray, 
fluoroscopy, and ultrasound services that require the insertion of a 
needle, catheter, tube or probe; (ii) radiology procedures that are 
integral to the performance of, and are performed during, 
nonradiological medical procedures; and (iii) nuclear medicine 
procedures.
    We received a number of comments concerning radiology services, 
particularly with respect to nuclear medicine. We are deleting the 
parenthetical ``(except as otherwise specifically excluded on the CMS 
Web site and in annual updates)'' in response to comments discussed in 
section XI.A addressing the distinction between items and services that 
do not constitute a DHS and items and services that are DHS but may 
qualify for an exception under Sec.  411.355. In response to comments, 
we are modifying the definition to exclude certain radiology procedures 
performed immediately after a nonradiological medical procedure.
    Comment: Several commenters asked us to confirm their belief that 
the only services that constitute ``radiology and certain other imaging 
services'' for purposes of section 1877 of the Act are those 
represented by the codes listed in the Attachment to Phase I (66 FR 
963) and its subsequent updates.
    Response: The commenters are correct.
    Comment: One commenter asserted that echocardiograms should not be 
considered DHS because section 1877 does not include cardiology 
services as DHS. In addition, an association of cardiologists stated 
that the Congress's choice of language indicates that it intended to 
include only ultrasound services that are appropriately considered 
radiology services. That is, the commenter asserted that, although 
echocardiography is a diagnostic procedure using ultrasound technology, 
it should not be considered a radiology service because 
echocardiography is a service performed primarily by cardiologists, 
billed under cardiology CPT codes, and furnished to cardiology 
patients. In addition, the commenter asserted that echocardiography has 
not been identified as a service that poses a high risk of improper 
referrals, unlike other services appropriately included in the 
radiology services category. Another association of cardiologists 
asserted that we should exclude any ultrasound service not generally 
performed by radiologists, but instead performed by other specialists 
as part of their own specialties (such as cardiac, ophthalmic, and 
gynecologic ultrasound), just as we excluded nuclear medicine in Phase 
I.
    Response: In Phase I, we responded to public comments that 
questioned why cardiac, vascular, and obstetric ultrasound procedures 
should be considered radiology services. As we explained then, ``these 
services are subject to the physician self-referral provisions because 
section 1877(h)(6)(D) of the Act specifically includes ultrasound as a 
DHS, not because they are ordinarily considered to be `radiology 
services.' '' (66 FR 928). We see no reason to reconsider this

[[Page 16103]]

determination. As explained in Phase I, we do not believe the Congress 
intended for us to make service-by-service determinations with respect 
to the risk of overutilization or other abuse. In many cases, these 
services may qualify for the in-office ancillary services exception or 
another exception.
    Comment: The Phase I definition of ``radiology and other imaging 
services'' specifically states that the list of codes used to define 
these services excludes ``[r]adiology procedures that are integral to 
the performance of, and performed during, nonradiological medical 
procedures.'' One commenter preferred the language we used in the 
preamble to the January 1998 proposed rule to indicate our intention to 
exclude radiology services that are ``incidental'' or ``secondary'' to 
another procedure (63 FR 1676).
    Response: We decline to adopt the standard advocated by the 
commenter. Many of the comments we received on the January 1998 
proposed rule indicated that the ``incidental or secondary'' standard 
was confusing or ambiguous. As noted in Phase I (66 FR 928), ``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 procedure being an 
adjunct procedure) or whether the primary purpose was to take a picture 
with an imaging modality.'' Those who commented on the ``integral'' 
standard generally favored the new language.
    Comment: One commenter asserted that radiology services may be 
needed before a procedure to plan the manner in which a needle, 
catheter, or probe will be guided, and that radiology services may be 
performed after a procedure to assess whether the procedure was 
effective. Another commenter asserted that we should exclude all 
interventional radiology services, since in almost all cases, the 
physician making the referral performs part or all of the procedure.
    Response: We interpret the commenter to request that such pre- and 
post-procedure radiology services be considered ``integral to and 
performed during'' a procedure so as to qualify under the standard set 
forth at Sec.  411.351 (Radiology and other imaging services, subpara. 
(2)). We agree, in part, with the commenter. We have modified the 
definition of radiology and other imaging services at Sec.  411.351 to 
make clear that radiology services performed immediately after a 
procedure in order to confirm the placement of an item during the 
procedure are not DHS. Otherwise, we decline to change the regulations 
for the reasons set forth in Phase I (66 FR 928-929). In addition, 
depending on the circumstances, existing exceptions in the statute and 
regulations, such as the in-office ancillary services exception or the 
rural provider exception, may apply to radiology procedures furnished 
pre- or post-surgery.
    Comment: Two commenters addressed ophthalmic A-scans, and one of 
the commenters also addressed B-scans. According to the commenters, 
because A-scans (particularly CPT 76519) must be performed before 
cataract surgery to determine the appropriate power of the intraocular 
lens (IOL) to be implanted, these procedures are integral to cataract 
surgery even though they are not performed during the surgery. One 
commenter asserted that B-scans are performed only in support of 
another service or procedure. For example, the commenter stated that B-
scans may be used in certain cataract surgery cases to view the 
posterior segment or retina of the eye to determine if a structural 
pathology is present. Both commenters argued that the ``integral to and 
performed during'' standard should be changed to accommodate A-scans 
and B-scans. Alternatively, the commenters advocated that we create a 
special exception for A-scans on the grounds that they are sufficiently 
integral to another procedure and are subject to little or no 
overutilization or abuse. One of the commenters alleged that such an 
exception would be based on the same rationale as that which led us to 
create the exception in Sec.  411.355(g) regarding EPO and other 
dialysis-related drugs furnished in or by an ESRD.
    Response: We do not see a meaningful distinction between the A-
scans and B-scans described by the commenters and other radiology 
services ordered by surgeons in connection with surgeries; nor do we 
think that A-scans and B-scans pose no risk of abuse. Moreover, we do 
not believe that our rationale for creating the exception in Sec.  
411.355(g) pertains here. Unlike ESRD services, A-scans and B-scans are 
not necessarily performed in conjunction with services that are paid 
for under a composite rate, nor are they subject to strict utilization 
and coverage criteria. Nevertheless, we would expect that in many 
cases, the in-office ancillary services exception may apply to A-scans 
and B-scans.
    Comment: Commenters expressed concern that, in many cases, ASCs 
will not be able to provide radiology and ultrasound services that are 
not performed during surgery. These commenters urged that, if CMS 
continues to consider radiology and ultrasound services performed 
before or after surgery to be DHS, then the same reasons that support a 
special exception for prosthetic devices implanted in an ASC should 
also support a specific exception for these radiology services.
    Response: We are not persuaded that a special exception is 
warranted. The exception for implants in ASCs applies to the 
implantation of a device during a surgical procedure, rather than 
before or after it. In those circumstances, the implant is clearly 
integral (indeed, inseparable) from the surgery itself. Similarly, 
radiology included in the ASC composite rate for an ASC procedure is 
not a DHS for the reasons set forth in Phase I at 66 FR 923. We see no 
reason to treat radiology services that are furnished in an ASC, but 
are not paid for in the ASC composite rate, differently from radiology 
services provided by any other entity.
    Comment: One commenter advocated that we create an exception to 
permit interventional radiologists to order diagnostic, non-
interventional radiology or other imaging procedures from an entity 
with which they have a financial relationship prior to performing 
interventional radiology and related surgical procedures. The commenter 
noted that the professional component of the diagnostic procedure may 
be performed at a hospital or an ASC by another physician in the 
radiologist's group practice. According to the commenter, a limited 
exception would enable beneficiaries to benefit from interventional 
radiology.
    Response: We see no need for a new exception. The self-referral 
prohibition does not apply to a radiologist's request for diagnostic 
radiology tests pursuant to a consultation because the request is not a 
``referral'' for purposes of section 1877 of the Act. Our expansion of 
the definition of ``referral'' would permit a radiologist to order 
diagnostic radiology services that are supervised by another 
radiologist in the same group practice.
    If the request is not made pursuant to a consultation, the referral 
of the professional component may nevertheless qualify for another 
exception (such as the physician services exception). With respect to 
any technical component billed by a hospital or ASC, there are 
sufficient exceptions available in the statute and regulations to 
address legitimate financial relationships between physicians and these 
entities.
    Comment: A commenter urged us to amend the final rule to clarify 
that not only the ordering physician, but also other ``physicians in 
the group practice,'' may provide the professional component of a 
radiology service if all

[[Page 16104]]

the following conditions apply: (1) A physician in the group has 
ordered the technical component; (2) the professional component is 
provided at an institutional provider; and (3) the patient is either an 
outpatient or inpatient of the institution where the professional 
component is provided.
    Response: As explained in section II.D, above, we have expanded the 
consultation exception in the definition of ``referral'' in Sec.  
411.351 to permit supervision by another physician in the same group 
practice as the radiologist, as long as the request results from a 
consultation initiated by another physician and the other conditions of 
the exception are satisfied. Moreover, the physician services exception 
may apply in the circumstances described by the commenter.
    Comment: One commenter expressed concern that the exclusion of some 
interventional radiology codes for services such as angiographies, 
angiograms, cardiac catheterizations, and endoscopies might afford some 
physicians more incentive to refer for costly interventional tests that 
may not be medically necessary. Although these studies would be DHS 
under 1877(h)(6)(K) when performed as inpatient or outpatient hospital 
services, some will be performed at freestanding facilities and 
therefore not constitute a DHS. The commenter asked that we reassess 
our decision, or, in the alternative, instruct contractors to monitor 
utilization patterns for excluded interventional radiology services.
    Response: As explained in Phase I (66 FR 929), the services 
referenced by the commenter are not fundamentally radiological in 
nature because they do not involve an imaging service that is described 
in 1877(h)(6)(D) of the Act. These services are DHS when performed in a 
hospital inpatient or outpatient setting. Other statutes, including the 
Federal anti-kickback statute, are available even in instances where a 
particular item or service is not DHS under section 1877 of the Act.
    Comment: An association representing radiologists urged us to 
consider nuclear medicine a DHS because excluding nuclear medicine, as 
was done in Phase I, increases the risk of program abuse. The commenter 
asserted that nuclear medicine is a subspecialty of radiology and that 
radiologists perform and interpret the vast majority of nuclear 
medicine studies performed in the United States. The commenter also 
asserted that the exclusion of nuclear medicine has encouraged 
potentially abusive business arrangements involving physician financial 
relationships with entities to which they refer patients for positron 
emission tomography (PET) scans. Another commenter expressed concern 
that echocardiography is a DHS, while nuclear medicine procedures (some 
of which are commonly performed as a clinical alternative for stress 
echocardiography) are not. The comment suggested that a physician's 
financial interest in nuclear medicine modalities could influence the 
physician to select nuclear medicine procedures over echocardiography.
    Response: We are making no changes to the treatment of nuclear 
medicine procedures under the DHS definitions at this time. However, we 
are mindful of the issue raised by the commenter and are continuing to 
consider the application of section 1877 of the Act to nuclear medicine 
procedures. Moreover, parties should be mindful that arrangements 
involving nuclear medicine may violate the anti-kickback statute, 
depending on the circumstances.

G. Radiation Therapy Services and Supplies (Phase I--66 FR 931)

    Phase I indicated that the list of codes for radiation therapy 
services and supplies identified on our Web site and in annual updates 
is based on section 1861(s)(4) of the Act (42 U.S.C. Sec.  
1395(x)(s)(4)) and Sec.  410.35, but does not include nuclear medicine 
procedures. As explained above in the immediately preceding section 
concerning radiology services, we are continuing to consider the 
application of section 1877 of the Act to nuclear medicine procedures, 
but we are not changing the treatment of nuclear medicine procedures 
under the DHS definitions at this time.
    Comment: One commenter opposed our use of CPT and HCPCS codes to 
define the scope of ``radiation therapy services and supplies'' because 
Medicare has never used these codes to define such services.
    Response: As explained above, we used codes in Phase I to define 
various categories of DHS in response to public comments urging us to 
create ``bright line'' definitions for DHS. In general, commenters were 
pleased with this approach. The list of codes applies only to section 
1877 of the Act and the corresponding regulations. The list is updated 
annually, and we look to commenters to identify any specific codes that 
we have listed that should not be considered ``radiation therapy 
services and supplies.''
    Comment: One commenter stated that services that are furnished 
before or after radiation treatment (such as a consultation to plan the 
placement of radioactive elements or post-surgical dosimetry services) 
should not be considered radiation therapy services for physician self-
referral purposes. According to the commenter, these services are 
neither radiation therapy services nor inpatient or outpatient hospital 
services; they are physician services performed in a physician's 
office.
    Response: Pre-planning placement services (CPT codes 77300 and 
77305 through 77331) and normal follow-up post-surgical dosimetry 
services are professional physician services, as are many other 
radiation therapy services. To the extent that those services are 
billed as an outpatient hospital service, they would constitute a 
designated health service under section 1877(h)(6)(K) of the Act. We 
think that, in many cases, these services will be performed or 
supervised by a radiation oncologist pursuant to a consultation and 
therefore will not constitute a ``referral'' under Sec.  411.351. To 
the extent that a request for these services constitutes a referral, it 
would appear that the in-office ancillary services exception and the 
physician services exception could apply in many cases. However, these 
exceptions are not available for any technical component that is billed 
as an outpatient hospital service.
    Comment: One commenter asked us to reconsider our statement in the 
January 2001 final rule preamble (66 FR 931) that there is no logical 
or empirical evidence that physician ownership of brachytherapy centers 
improves quality of care.
    Response: The commenter offered no evidence or support for the 
proposition that physician ownership of brachytherapy centers improves 
quality of care. Our position remains the same.
    Comment: One commenter asked that we exclude from the list of codes 
that defines ``radiation therapy services and supplies'' the CPT codes 
for brachytherapy (CPT codes 77781 through 77784). The commenter stated 
that excluding brachytherapy from the list of DHS codes would be 
appropriate because the Congress did not intend to include as DHS 
invasive forms of radiation therapy. According to the commenter, when 
the Congress expanded section 1877 to apply to radiation therapy 
services and supplies, radiation therapy typically encompassed only the 
use of an external electron beam through the body without any invasive 
procedure. The commenter also noted that the definitions of 
``radiation'' and ``radiation therapy'' found in Stedman's Medical 
Dictionary

[[Page 16105]]

do not include treatments (such as brachytherapy) in which surgical 
means are necessary to insert radioactive isotopes into the body. See 
The American Heritage Stedman's Medical Dictionary, Houghton Mifflin 
Company, Boston, Massachusetts, October 1995 (defining ``radiation'' as 
the emission and propagation of energy in the form of rays or waves, 
and ``radiation therapy'' as the treatment of disease with radiation, 
especially selective irradiation with X-rays or other ionizing 
radiation and by ingestion of a radioisotope). The commenter asserted 
that the same logic that caused us to exclude certain invasive 
radiology procedures from the definition of ``radiology and certain 
other imaging services'' should persuade us to exclude brachytherapy 
from the definition of ``radiation therapy services and supplies.''
    Response: As noted in Sec.  411.351, the list of codes defining 
``radiation therapy services and supplies'' is based on section 
1861(s)(4) of the Act (authorizing Medicare payment for ``x-ray, radium 
and radioactive isotope therapy''). Brachytherapy involves the 
placement of radioactive isotopes under the skin for therapeutic 
purposes, and therefore is clearly within the scope of services 
identified in section 1861(s)(4) of the Act. Accordingly, brachytherapy 
is also within the scope of the DHS category of ``radiation therapy 
services and supplies.'' We find nothing in the statutory scheme or 
language to suggest that the Congress intended to exclude radiation 
therapy involving surgical or invasive procedures. We do not believe 
the Congress intended the definitions of DHS under the statute to be 
frozen in time, as this would eventually defeat the purpose of the 
statute. Just as new clinical laboratory tests are, and will continue 
to be, included in the definition of ``clinical laboratory tests,'' so, 
too should new radiation therapy services and supplies be included in 
the definition of ``radiation therapy and supplies.'' Moreover, in 
1993, when section 1877 of the Act was made applicable to radiation 
therapy services and supplies, the Congress would have understood that 
this category included brachytherapy services. AMA-approved 
brachytherapy codes have been in existence since 1983: One 
brachytherapy service (CPT code 77776) received a CPT code in 1983; ten 
brachytherapy services (CPT codes 77761-63; 77777-78; 77789; 77326-28; 
and 77799) received CPT codes in 1984; and four brachytherapy services 
(CPT codes 77781-84) received CPT codes in 1991. Finally, the AMA chose 
to place the codes for these brachytherapy items and services in the 
77000 section, a section for radiation therapy services.
    Comment: The same commenter argued in the alternative that we 
should use our authority pursuant to section 1877(b)(4) of the Act to 
create an exception for financial relationships involving brachytherapy 
services. According to the commenter, such financial relationships do 
not pose a risk of program or patient abuse because brachytherapy is 
not a diagnostic procedure; it is used only after a diagnosis of cancer 
has been made by the treating physician. In addition, the commenter 
asserted that, since brachytherapy can be performed only once on a 
patient, any abuse in the form of repetitive billing would be obvious. 
Finally, the commenter asserted that abuse is more likely to occur with 
other competing and more expensive procedures that have higher profit 
margins, such as radical prostatectomy or external beam radiation.
    Response: We are not persuaded that an additional exception is 
warranted. To the extent brachytherapy services and supplies are 
furnished by a radiation oncologist pursuant to a consultation, the 
consultation exception could apply. To the extent that a urologist 
provides the services, there are a number of exceptions that could be 
available, depending on the circumstances. We recognize that there 
would be no exception available for a facility fee billed by an entity 
owned by a urologist, unless the entity were located in a rural area or 
the DHS qualified under the in-office ancillary services exception. 
However, we continue to believe that brachytherapy may be subject to 
abuse. For example, a urologist who owns a brachytherapy facility may 
be more inclined to order brachytherapy rather than another radiation 
therapy treatment in which he or she may not have a financial interest. 
The statuory language and structure reflects the Congress' intent to 
curb physician ownership in DHS entities to which they refer because 
such ownership creates an inappropriate financial incentive to make 
referrals. With respect to the commenter's assertions regarding the 
nature of brachytherapy, all radiation therapy services and supplies 
are furnished only after a diagnosis of cancer is made; thus, we see no 
reason to differentiate among radiation therapy treatments on that 
basis. The fact that other treatments may be more expensive or have 
higher profit margins--and therefore may be more likely to be abused--
is not a basis for concluding that brachytherapy poses no risk of 
abuse.
    Comment: A commenter stated that brachytherapy is less invasive 
than other procedures for removing a tumor in the prostate gland and 
that including it as a designated health service will prohibit 
physicians in multiple specialties from collaborating to provide the 
service.
    Response: We are unclear from the comment as to why including 
brachytherapy as a DHS will prohibit collaboration on such services. 
While certain financial interests in brachytherapy services may be 
prohibited, nothing in the statute or regulations prohibits physicians' 
professional collaboration on patient care. A physician's personally 
performed service is not considered a referral for purposes of section 
1877 of the Act. Futhermore, physicians are free to refer to one 
another as long as they do not have a prohibited financial arrangement. 
Finally, we are not aware of a brachytherapy access problem in the 
United States.

H. Durable Medical Equipment (DME) and Supplies (Phase I--66 FR 931)

    We received only one comment regarding our definition of DME, in 
which we defined DME with reference to section 1861(n) of the Act and 
Sec.  414.202. We are not making any changes to this definition.
    Comment: The January 1998 proposed rule explicitly stated that home 
dialysis equipment and supplies do not constitute DME for the purposes 
of section 1877 of the Act. A commenter sought clarification that the 
ESRD benefit under section 1861(s)(2)(F) of the Act (providing coverage 
for home dialysis supplies and equipment) is distinct from the DME 
benefit in section 1861(s)(6) of the Act, and that home dialysis 
equipment and supplies are not covered as DME under Medicare.
    Response: The commenter is correct. Our position regarding home 
dialysis equipment and supplies remains the same: The DME and ESRD 
benefits are distinct, and home dialysis equipment and supplies are not 
DME, as defined in section 1861(n) of the Act and Sec.  414.202 of the 
regulations.

I. Parenteral and Enteral Nutrients, Equipment and Supplies (Phase I--
66 FR 932)

    We received only one comment on this subject and are making no 
change to the definition set forth in Phase I.
    Comment: A commenter stated that the Phase I preamble (66 FR 933) 
asserts incorrectly that enteral nutrition is widely available in 
grocery stores, drug stores, and other retail outlets. The statement 
was made in response to a

[[Page 16106]]

comment advocating that we exclude from the definition or create an 
exception for parenteral nutrition furnished by a physician group 
practice to its own patients.
    Response: We have received conflicting reports about the routine 
availability of enteral nutrition in grocery stores and drug stores. 
The commenter may be correct with respect to patients who are 
completely dependent on enteral formulas for nutrition. Regardless, the 
Congress specifically excluded the provision of parenteral and enteral 
nutrients from the in-office ancillary services exception in section 
1877(b)(2) of the Act. Accordingly, to the extent that the commenter 
would like us to reconsider our overall response to the original 
comment, we cannot do so.

J. Prosthetics, Orthotics, and Prosthetic Devices and Supplies (Phase 
I--66 FR 933)

    We received no comments on this subject and are making no 
substantive changes to the definition.

K. Home Health Services (Phase I--66 FR 936)

    We received no comments on this subject and are making no changes 
to the definition.

L. Outpatient Prescription Drugs (Phase I--66 FR 937)

    Phase I defined outpatient prescription drugs as ``all prescription 
drugs covered by Medicare Part B.'' We note that, effective January 1, 
2006, many additional outpatient prescription drugs will be covered 
under Medicare Part D, which was added to the Social Security Act by 
section 101 of MMA. In light of the expanded coverage, we will revisit 
the definition of ``outpatient prescription drugs'' in a future 
rulemaking. The MMA amended Title XVIII to include a definition for 
``covered Part D drug'' in section 1860D-2(e) of the Act. While we have 
no specific proposal at this time, we are interested in receiving 
comments regarding approaches to expanding the definition of 
``outpatient prescription drugs'' to reflect the definition of 
``covered Part D drug'' in the MMA. We received the following comments 
regarding outpatient prescription drugs.
    Comment: A commenter asked us to clarify that antigens are not 
``outpatient prescription drugs'' or, in the alternative, to clarify 
that a referral by a physician for antigens which he or she personally 
provides is not a ``referral'' within the meaning of section 1877 of 
the Act.
    Response: We responded to this comment in section V.A, noting that 
the provision of antigens may be protected under the physician services 
or in-office ancillary services exceptions. We also noted that when 
antigens are personally furnished by the referring physician, there is 
no ``referral'' for purposes of section 1877 of the Act.
    Comment: One commenter urged that any drug administered in a 
physician's office not be considered an ``outpatient prescription 
drug'' because the physician may not be required to write a 
prescription for that item. According to the commenter, section 1877 of 
the Act was intended to govern only the in-office dispensing (as 
opposed to administration) of drugs. In the alternative, the commenter 
believed that we should exclude all injectables from the definition of 
``outpatient prescription drugs,'' whether or not they would qualify as 
immunizations or vaccines. According to the commenter, the 
administration of injectable drugs is so integral to a physician 
service that physicians should be permitted to furnish injectables 
without complying with the in-office ancillary services exception.
    Response: We responded to similar comments in Phase I (66 FR 938). 
We continue to find no meaningful distinction between prescription 
drugs dispensed by pharmacies and those mixed and administered in a 
physician's office. Drugs administered in the physician office setting 
are outpatient prescription drugs; they are available only upon a 
physician's order and are provided in an outpatient setting. Phase I 
made clear that drugs administered in a physician's office may, and 
typically will, fit in the in-office ancillary services exception. If 
administered personally by the referring physician, there is no 
``referral'' for purposes of section 1877 of the Act. We are not 
convinced that creating an additional exception for all drugs 
administered in the physician office is either necessary or without any 
risk of fraud or patient abuse.

M. Inpatient and Outpatient Hospital Services (Phase I--66 FR 940)

    In the January 1998 proposed rule, we solicited comments on whether 
we should exclude lithotripsy from the DHS category of ``inpatient and 
outpatient hospital services.'' We received hundreds of comments urging 
us to exclude lithotripsy as a designated health service. We addressed 
these comments in the Phase I preamble (66 FR 940 through 941) and 
declined to exclude the service as an inpatient or outpatient hospital 
service. After the publication of Phase I, we received similar comments 
from two associations representing physicians with ownership interests 
in lithotriptors.
    Given the statutory language, we are not revising the regulatory 
definition. However, in light of the unique legislative history 
regarding the application of section 1877 of the Act to lithotripsy, we 
will not consider lithotripsy an ``inpatient or outpatient service'' 
for purposes of section 1877 of the Act. Contractual arrangements 
between hospitals and physicians or physician practices regarding 
lithotripsy nevertheless constitute a ``financial relationship'' under 
section 1877 of the Act. Accordingly, such contractual arrangements 
must comply with an exception if the physician will refer Medicare 
patients to the hospital for services that otherwise constitute an 
``inpatient or outpatient hospital service'' or another designated 
health service.

N. Other Definitions (Phase I--66 FR 942)

1. Consultation
    The definition of ``consultation'' is addressed in section III.B.2 
of the Phase I preamble (66 FR 873), in section II.D of this Phase II 
preamble (including comments and responses), and in the regulations in 
Sec.  411.351.
2. Entity
    The definition of ``entity'' is addressed in section VIII.N.2 of 
the Phase I preamble (66 FR 943) and in the regulations in Sec.  
411.351. Comments and our responses on the Phase I definition follow.
    Comment: Several commenters claimed that the definition of 
``entity'' was confusing. In particular, the commenters urged that the 
definition be restructured to be more clear and that the statement that 
certain organizations that employ a supplier or operate a facility that 
``could'' accept reassignment be changed to clarify whether such 
entities would, in fact, be deemed to provide DHS.
    Response: We have rewritten the language in an effort to provide 
greater clarity. The substance of the definition remains unchanged.
    Comment: A commenter representing independent practice associations 
urged that we exclude IPAs from the definition of ``entity'' when they 
furnish DHS directly, through employees or entities that they own.
    Response: We discern no reasonable basis to treat IPAs that furnish 
DHS differently from other entities that furnish the same services. If 
an IPA

[[Page 16107]]

furnishes DHS through employees or owned entities, then it is a DHS 
``entity'' for purposes of section 1877 of the Act.
3. Fair Market Value
    The definition of ``fair market value'' is addressed in section 
VIII.N.3 of the Phase I preamble (66 FR 944) and in the regulations in 
Sec.  411.351. The following are our responses to comments to the Phase 
I definition.
    Comment: A commenter expressed concern that the discussion of 
``fair market value'' in the Phase I preamble does not provide 
sufficiently clear guidance for determining ``fair market value.'' That 
commenter recommended that the regulations include a rebuttable 
presumption of reasonableness and ``fair market value'' when entities 
benchmark their arrangements to objective measures or when they obtain 
the opinion of independent third parties as to ``fair market value'' in 
a particular arrangement. The commenter suggested that the presumption 
be similar to that contained in the IRS's intermediate sanctions 
provisions.
    Response: We appreciate the commenter's desire for clear ``bright 
line'' guidance. However, the statute covers such a wide range of 
potential transactions that it is not possible to verify and list 
appropriate benchmarks or objective measures for each. Moreover, the 
definition of ``fair market value'' in the statute and regulation is 
qualified in ways that do not necessarily comport with the usage of the 
term in standard valuation techniques and methodologies. For example, 
the methodology must exclude valuations where the parties to the 
transactions are at arm's length but in a position to refer to one 
another. In addition, the definition itself differs depending on the 
type of transaction: leases or rentals of space and equipment cannot 
take into account the intended use of the rented item; and in cases 
where the lessor is in a position to refer to the lessee, the valuation 
cannot be adjusted or reflect the value of proximity or convenience to 
the lessor. Our Phase I discussion made clear that we will consider a 
range of methods of determining fair market value and that the 
appropriate method will depend on the nature of the transaction, its 
location, and other factors. While good faith reliance on a proper 
valuation may be relevant to a party's intent, it does not establish 
the ultimate issue of the accuracy of the valuation figure itself. With 
respect to valuing physician services, however, we are establishing 
several ``safe harbored'' methodologies discussed in more detail in 
section VIII.C.
    Comment: A commenter sought clarification that determinations of 
``fair market value'' could involve comparisons of national or regional 
data where appropriate. By way of example, the commenter suggested that 
the market for physician recruitment has become national.
    Response: Whether resort to national or regional data is 
appropriate will depend on the facts and circumstances of each case. 
The regulations necessarily cover a wide variety of arrangements, 
services, and markets, and no single means for determining ``fair 
market value'' will apply to all. For hourly physician compensation, we 
have added ``safe harbored'' methodologies for establishing fair market 
value that take into account national and regional data (section VIII.C 
of this preamble). If parties are using comparables to establish fair 
market value, they should take reasonable steps to ensure that the 
comparables are not distorted.
4. Group Practice
    The definition of ``group practice'' is addressed in section VI.C 
of the Phase I preamble (66 FR 894), in section V.C of this Phase II 
preamble, and in the regulations in Sec.  411.352.
5. Health Professional Shortage Area
    The definition of ``health professional shortage area'' is 
addressed in section VIII.N.5 of the Phase I preamble (66 FR 945) and 
in the regulations in Sec.  411.351. We received no comments on this 
definition and are making no changes to it.
6. Employee
    The definition of ``employee'' is addressed in section VIII.N.6 of 
the Phase I preamble (66 FR 946), in section VIII.B of this Phase II 
preamble, and in the regulations in Sec.  411.351.
7. Immediate Family Member
    The definition of ``immediate family member'' is addressed in 
section VIII.N.7 of the Phase I preamble (66 FR 946) and in the 
regulations in Sec.  411.351. We received no comments on this 
definition and are making no changes to it.
8. Referral
    The definition of ``referral'' is addressed in section III.B of the 
Phase I preamble (66 FR 871), section II.C of this Phase II preamble, 
and in the regulations in Sec.  411.351.
9. Remuneration and the Exceptions in Section 1877(h)(1)(C) of the Act
    The definition of ``remuneration'' (along with the exceptions) is 
addressed in section VIII.N.9 of the Phase I preamble (66 FR 946) and 
in the regulations in Sec.  411.351.
    The statute expressly excludes from the definition of 
``remuneration'' payments made by an insurer or 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 that insurer or by that self-insured 
plan. This might occur, for example, if a plan enrollee receives out-
of-network care in an emergency room. In practice, the application of 
this rule may not have the intended effect of excluding those payments 
from the definition of ``remuneration.'' This is because, in many 
cases, payments are made by downstream subcontractors of insurers or 
self-insured plans (for example, providers who have assumed risk under 
a plan), rather than the insurer or plan itself. Accordingly, we have 
revised the regulations to cover payments made by downstream 
subcontractors.
    In addition, we received the following comment:
    Comment: A commenter recommended that the items and services 
enumerated by the new exceptions for non-monetary compensation, medical 
staff incidental benefits, and compliance training be excluded from the 
definition of ``remuneration'' rather than included in various new 
exceptions.
    Response: We disagree. Most, if not all, of the items and services 
covered by the new exceptions fit squarely in the broad statutory 
definition of ``remuneration.'' The Congress included in the definition 
of ``remuneration'' a short list of specific items and services that it 
intended to exclude. The items and services covered by the new 
exceptions are not among them. Treating them as remuneration (that is, 
as creating compensation arrangements) and then excepting them is 
consistent with the statutory scheme and structure.
    We note that among the items specifically excluded from the 
definition of remuneration are items used to collect, transport, 
process, or store specimens. In the Phase I preamble, we indicated that 
sterile gloves do not fit in this category of items excluded from the 
definition of remuneration (66 FR 948). Our use of the term ``sterile 
gloves'' was intended to be illustrative, not exclusive, and other 
gloves similarly are not excluded from the definition of remuneration. 
As stated in the Phase I preamble, the provision of any free gloves 
would be remuneration and would need to fit in an exception.

[[Page 16108]]

10. Transaction and Isolated Transaction (Phase II--Sec.  411.357(f))
    The definitions of ``transaction'' and ``isolated transaction'' are 
addressed in section VIII.F of this Phase II preamble and in the 
regulations in Sec.  411.351.

XII. Regulatory Exceptions

    In Phase I, we created a number of new exceptions using the 
authority granted to the Secretary in section 1877(b)(4) of the Act. We 
are creating some additional exceptions under section 1877(b)(4) of the 
Act in Phase II.
    Several commenters to Phase I objected to the condition in these 
new regulatory exceptions that the arrangement in question not violate 
the anti-kickback statute. The commenters felt that this condition 
injected an unnecessary facts and circumstances test in what is 
intended to be a bright line area of law. If the requirement is 
retained, a commenter urged that the language used in all references to 
violation of the anti-kickback statute in the regulations be made 
consistent. One commenter claimed to be confused by the requirement in 
new exceptions that compensation arrangements comply with all billing 
and claims submission laws or regulations. The commenter pointed out 
that, in some cases, it is difficult to see how compensation 
arrangements implicate billing or claims filing.
    We have endeavored to craft bright line rules under these 
regulations wherever possible. However, our authority under section 
1877(b)(4) of the Act is expressly limited to arrangements that pose no 
risk of program or patient abuse. Thus, if an arrangement poses even a 
low risk, we cannot create a new exception. The statutory ``no risk'' 
standard is not limited to a determination of ``no risk'' under section 
1877 of the Act. Given this broad ``no risk'' standard, it would be 
impossible to create new exceptions for many arrangements without the 
anti-kickback statute condition. Many arrangements that might otherwise 
warrant an exception under section 1877 of the Act--a strict liability 
statute--pose some degree of risk under the anti-kickback statute; 
these arrangements cannot, therefore, be said to pose no risk. We are 
rectifying the lack of consistency in the language used in these 
regulations when referring to the anti-kickback statute by making 
technical changes to several provisions. We are also clarifying through 
a new definition at Sec.  411.351 that a party will be considered to 
have received a favorable advisory opinion from the OIG with respect to 
the anti-kickback statute if the opinion indicates that the OIG will 
not subject the party's arrangement to sanctions arising under the 
anti-kickback statute.
    The billing and claims submission condition was also included to 
satisfy the absolute no risk standard under section 1877(b)(4) of the 
Act. We agree that many compensation arrangements will not implicate 
billing or claims filing. However, some arrangements may, and the 
exceptions are designed to cover a wide scope of arrangements. 
Moreover, most referrals will implicate billing and claims submission 
for the referred item or service. If a particular arrangement does not 
implicate billing or claims submission in any way, then the parties 
need not be concerned with that condition. We have also revised the 
regulations to rectify the lack of consistency of the language used in 
this regard. Specifically, technical changes have been made to several 
provisions.
    We received one comment proposing a new exception that we are not 
promulgating. The request was for an exception for referrals in areas 
with a demonstrated community need (for example, areas lacking adequate 
health care facilities or providers, particularly inner city areas). 
The proposed exception would be comparable to the rural area exception 
and permit physician ownership of inner city DHS entities. We are 
unable to adopt the suggestion. The Congress clearly limited ownership 
of DHS entities in underserved areas to rural providers (section 
1877(d)(2) of the Act). We cannot conclude that ownership in inner city 
areas--which are proximate to more affluent urban areas from which to 
draw additional business--would be without risk. We are mindful of the 
difficulties some inner city areas experience in providing adequate 
health care to community residents. However, given the numerous 
statutory and regulatory exceptions--including the fair market value 
exception--we are not persuaded that section 1877 of the Act is a 
significant impediment.
    Comments and responses to new regulatory exceptions not already 
discussed in this preamble are set forth below.

A. Academic Medical Centers (Phase I--66 FR 915; Sec.  411.355(e))

[If you choose to comment on issues in this section, please include the 
caption ``Academic Medical Centers Exception'' at the beginning of your 
comments.]

    In Phase I, we added a new regulatory exception for academic 
medical center arrangements, using the authority granted the Secretary 
under section 1877(b)(4) of the Act. While most commenters praised the 
new exception in Sec.  411.355(e), many suggested ways to improve it. 
The most significant comments addressed the requirements in Sec.  
411.355(e)(1)(ii) relating to the referring physician's compensation. 
In particular, commenters observed that the requirement that a 
physician's compensation be ``set in advance'' precluded calculating 
any component of the compensation using a percentage-based methodology. 
In addition, the requirement that compensation not take into account 
``other business generated by the referring physician within the 
academic medical center'' potentially affected compensation based on a 
physician's professional services. Commenters viewed these provisions 
as more strict than the requirements for physician compensation paid by 
group practices under Sec.  411.352 or for other physician compensation 
arrangements.
    Other commenters requested modifications to various elements of the 
definition of an ``academic medical center'' in Sec.  411.355(e)(2). 
These commenters wanted greater flexibility as to the number and 
organization of affiliated practice plans, and they objected to the 
requirements that a majority of the affiliated hospital's medical staff 
be faculty members and a majority of the hospital's admissions come 
from faculty members.
    Our modification of the ``set in advance'' and the ``other business 
generated'' provisions (see section IV above) should address the 
concerns of many commenters. We are revising the rule to make it easier 
to qualify as an academic medical center or a component of an academic 
medical center, and we have clarified some of the exception's 
terminology. The particular changes are discussed in the responses to 
comments that follow.
    Comment: One commenter asked that we broaden the definition of an 
academic medical center in Sec.  411.355(e)(2) to eliminate the 
requirement that an academic medical center include an accredited 
medical school. According to the commenter, if a hospital has an 
approved medical education program, it should be enough to ensure that 
the hospital is part of an academic medical center. One commenter 
suggested including any hospital or health system that sponsors five or 
more medical education programs.
    Response: We agree that the definition is overly restrictive. We 
have modified the definition of an academic medical center in Sec.  
411.355(e)(2)(i) to permit hospitals or health systems that sponsor 
four or more approved medical education programs (for purposes of the

[[Page 16109]]

exception, an ``accredited academic hospital'') to qualify, provided 
they meet the other criteria in the exception. We think a requirement 
for four programs will adequately ensure that the hospital or health 
system has a substantial teaching mission. A hospital or health system 
meeting the requirement in Sec.  411.355(e)(2)(i) may be the same 
hospital that meets the ``affiliated hospital'' requirement of Sec.  
411.355(e)(2)(iii), and we have modified the regulation to reflect 
this. Finally, to reflect this broader reading of an ``academic medical 
center,'' we have revised the regulations to clarify that the referring 
physician may be on the faculty of the affiliated medical school or the 
accredited academic hospital.
    Comment: We received many comments related to various aspects of 
the affiliated faculty practice plan requirement in Sec.  
411.355(e)(2)(ii). A number of commenters objected to the requirement 
that the practice plan be a tax exempt organization under either 
section 501(c)(3) or 501(c)(4) of the Internal Revenue Service (IRS) 
Code. These commenters noted that many bona fide plans are organized as 
professional corporations or not-for-profit organizations under State 
law or are not separate legal entities. Other commenters sought 
clarification as to whether an academic medical center could have more 
than one affiliated faculty practice plan. Finally, several commenters 
asked whether the faculty practice plan could be affiliated with the 
teaching hospital, rather than the medical school.
    Response: We recognize that there are many variants of the basic 
academic medical center arrangement. We are eliminating the requirement 
that the faculty practice plan or plans be organized in any particular 
manner. As long as the other criteria of the exception can be met, 
there is sufficient assurance that the faculty practice plan is part of 
a bona fide academic medical center and that the practice plan supports 
the core teaching mission. We are also clarifying Sec.  
411.355(e)(2)(ii) to reflect that an academic medical center may have 
more than one affiliated faculty practice plan and that the faculty 
practice plans can be affiliated with the teaching hospital, the 
medical school, or the accredited academic hospital.
    Comment: A number of commenters questioned aspects of Sec.  
411.355(e)(2)(iii), especially the requirements that a majority of the 
affiliated hospital's medical staff be faculty members and that a 
majority of the hospital's admissions be made by faculty members. A 
number of commenters suggested that these requirements are unnecessary 
in light of Sec.  411.355(e)(1)(i), which contains the requirements for 
referring physicians. Some commenters sought clarification that 
residents and non-physician practitioners need not be counted when 
calculating the percentage of medical staff that are faculty members. 
Other commenters suggested that courtesy and volunteer faculty should 
count as faculty members for purposes of the tests in Sec.  
411.355(e)(2)(iii), even if they do not qualify as referring physicians 
under Sec.  411.355(e)(1)(i). One commenter on behalf of a children's 
hospital stated that children's hospitals frequently affiliate with 
several medical schools in their geographic area. The commenter 
suggested that we permit children's hospitals to aggregate the faculty 
members from all affiliated medical schools. Another commenter on 
behalf of children's hospitals asked that the tests be restructured to 
be alternatives, so that satisfying either test would be sufficient. 
One commenter asked that we include in the exception arrangements 
between a medical college and a hospital other than an affiliated 
teaching hospital by broadening the definition of an affiliated 
hospital; this commenter suggested that we include unaffiliated 
hospitals where otherwise bona fide faculty members of the academic 
medical center may be assigned by the medical school to perform 
services as part of their continued employment or appointment with the 
academic medical center. The commenter noted that these kinds of 
arrangements occur for a variety of practical reasons, ranging from 
availability of sophisticated specialty equipment to accommodating the 
needs of communities located near unaffiliated hospitals.
    Response: Given the breadth of the academic medical center 
exception, it is important to ensure that the relationship between the 
components is sufficiently focused on the academic medical center's 
core mission. We believe the tests for affiliated hospital faculty and 
admissions set forth in Sec.  411.355(e)(2)(iii) are strong indicators 
of that core relationship. A teaching hospital can include any faculty, 
including courtesy and volunteer faculty, in determining whether it 
qualifies under these tests. We are, however, revising the regulatory 
text to clarify (i) that the majority of physicians on the medical 
staff must be on the faculty, and (ii) that the aggregation of faculty 
from any affiliated medical school is permitted. We agree with the 
commenters that residents and non-physician professionals do not need 
to be included as medical staff for purposes of Sec.  
411.355(e)(2)(iii).
    Comment: Several commenters raised issues about the requirement in 
Sec.  411.355(e)(1)(i) that the referring physician must be an employee 
of a component of the academic medical center. Other commenters asked 
that volunteer faculty be included in the requirement. One commenter 
representing a State institution wanted primary care physicians 
included, even though they do not have substantial teaching 
responsibilities. One commenter asked that we clarify that the 
physician can be an employee of the hospital, as well as the medical 
school.
    Response: The purpose of the academic medical center exception is 
to provide protection under section 1877 of the Act for academic 
medical centers because they often have complex compensation 
arrangements with their faculty. If a physician is not an employee of 
any of the components of the academic medical center, we believe the 
relationship between the physician and the party paying the 
remuneration should not be sufficiently different from the usual 
arrangements of entities or organizations that are not academic medical 
centers, and one of the other exceptions under section 1877 of the Act 
should apply. For the same reasons, we are not including primary care 
physicians who do not perform substantial academic services or clinical 
teaching services. While we recognize that primary care services may be 
part of a State institution's mission, the primary care physicians are 
essentially in the same circumstances as employed physicians of any 
health system. Arrangements with those physicians can be structured to 
fit in other exceptions, including the fair market value exception or 
the personal services exception.
    The referring physician need not be an employee of the medical 
school, however. Section 411.355(e)(1)(i) requires only that the 
referring physician be a bona fide employee of a component of the 
academic medical center. A referring physician could be an employee of 
the teaching hospital and a volunteer faculty member, for example, as 
long as his or her employment encompasses substantial academic services 
or clinical teaching services.
    Comment: Several commenters also asked that we clarify what 
constitutes ``substantial academic or substantial clinical teaching 
services'' under Sec.  411.355(e)(1)(i)(D).
    Response: In the Phase I rule, we did not specify what constitutes 
``substantial academic services or

[[Page 16110]]

clinical teaching services'' because we believe it will vary with the 
precise duties of a given faculty member, and we wanted to provide 
academic medical centers with flexibility. Nevertheless, to provide 
added clarity, we are adding a ``safe harbor'' provision to Sec.  
411.355(e)(1)(i)(D) that will deem any referring physician who spends 
at least 20 percent of his or her professional time or, in the 
alternative, 8 hours per week providing academic services or clinical 
teaching services (or a combination of academic services and clinical 
teaching services) as fulfilling the requirement. This test is intended 
to be a ``safe harbor'', not an absolute requirement, and the 
regulation is being modified to make clear that physicians who do not 
qualify under this ``safe harbor'' may still be providing substantial 
academic services or clinical teaching services, depending on the 
circumstances. Academic medical centers should use a reasonable and 
consistent method for calculating a physician's academic services and 
clinical teaching services. We are also modifying the regulation text 
to clarify that the substantial services test can be met through either 
academic services (which would include, without limitation, both 
classroom and academic research services) or clinical teaching 
services, or a combination of both.
    Comment: One commenter asked that we clarify in which State the 
referring physician must be licensed.
    Response: The referring physician must be licensed in the States in 
which he or she practices.
    Comment: Many commenters objected to the requirements of Sec.  
411.355(e)(1)(ii) that the total compensation paid to the referring 
physician by all components of the academic medical center be ``set in 
advance'' and not take into account ``other business generated by the 
referring physician within the academic medical center.'' The 
commenters stated that many faculty practice plans, like many group 
practices, base some part of the physician's compensation on a 
percentage of collections or revenues attributable to the physician's 
personally performed services. Moreover, commenters were unclear as to 
what effect the requirement that the compensation not take into account 
``other business generated'' by the referring physician would have on a 
physician's personally performed services. The commenters generally 
thought that academic medical centers should be allowed to compensate 
referring physicians in the same manner as group practices or entities 
that employ physicians.
    Response: We believe the changes made to the definitions of ``set 
in advance'' and ``other business generated'' described in section IV 
above largely address the commenters' concerns. We are not persuaded 
that further changes are needed. Nor are we persuaded that academic 
medical center arrangements are more similar to group practices than to 
other contractual arrangements.
    Comment: Section 411.355(e)(l)(ii) (and the corresponding preamble 
discussion) refers to the referring physician's total compensation for 
the ``previous 12-month period (or fiscal year or calendar year).'' A 
commenter found this reference unclear insofar as compensation is 
generally set for a future period. Moreover, the commenter wondered how 
the ``set in advance'' requirement would be applied to compensation in 
a prior time period. The commenter suggested that the phrase ``previous 
12-month period'' be deleted and that the exception instead require 
that the compensation be fixed for a specified time period.
    Response: We are revising Sec.  411.355(e)(l)(ii) to delete ``the 
previous 12-month period (or fiscal year or calendar year)'' language. 
Upon further consideration, we do not believe that a time period 
requirement is necessary in light of the remaining conditions in Sec.  
411.355(e)(l)(ii) and the exception as a whole.
    Comment: One commenter asked us to clarify that in establishing a 
referring physician's compensation, an academic medical center is not 
limited to the fair market value at other academic medical centers if 
the fair market value for comparable private practice physicians in its 
area is higher.
    Response: The commenter is correct. An academic medical center can 
use either measure of fair market value.
    Comment: One commenter asked that the regulation except all 
transfers of funds between the components of an academic medical center 
and any other supporting organization, such as a foundation, as long as 
the supporting organization's primary purpose is supporting the 
nonprofit mission of the academic medical center, including health care 
services, education, research, and disease prevention.
    Response: We agree in part with the commenter, although we consider 
the commenter's proposed change to be overly broad in the context of 
this exception. We have revised the rule to include, in the list of 
possible components of an academic medical center, not-for-profit 
supporting organizations whose primary purpose is supporting the 
teaching mission of the academic medical center.
    Comment: A commenter asked that we clarify that the components of 
the academic medical center need not be separate legal entities.
    Response: We have made a clarifying change to Sec.  
411.355(e)(1)(i)(A).
    Comment: A number of commenters asked that we modify the 
requirement in Sec.  411.355(e)(1)(iii)(B) that the relationship among 
the components be set out in a written agreement. Some commenters asked 
that we permit the relationship to be set out in several separate 
documents. Others suggested that a course of conduct should be 
sufficient. A commenter representing an academic medical center with 
components all owned by a single legal entity noted that the 
relationship of its components is not reflected in written agreements 
among the components. This commenter suggested that transfers of funds 
documented in routine financial reports covering the components should 
suffice in lieu of written agreements.
    Response: We did not intend to restrict the written agreement to a 
single document. We have modified the regulatory text of Sec.  
411.355(e)(1)(iii)(B) to permit the relationship to be memorialized in 
multiple writings. In order to permit the government to verify an 
academic medical center's compliance with the exception, it is 
necessary that the relationship of the components be memorialized in 
writing or that there be a clearly established course of conduct that 
is appropriately documented. In the case of a single legal entity 
academic medical center, we agree that financial reports documenting 
the transfers of funds between components would be sufficient.
    Comment: One commenter asked us to revise the language in Sec.  
411.355(e)(1)(iii)(C) to permit use of research money for bona fide 
research, teaching, indigent care, and community service, the same 
missions listed in Sec.  411.357(e)(1)(iii)(A), as long as use of the 
funds is consistent with the terms and conditions of the research 
grant. The commenter explained that in many instances compensation paid 
to a physician under a research grant may properly be used for these 
purposes.
    Response: We agree that some additional flexibility in this area is 
warranted. We have modified the regulations to cover research money 
used for teaching, a core academic medical center function. However, 
while we recognize the importance of indigent care and community 
service, the commenter's proposal is overly broad in the context of 
research grants,

[[Page 16111]]

which can be an area subject to potential abuse. Payments to referring 
physicians for indigent care or community service may be structured to 
fit in other exceptions.

B. Services Furnished Under Certain Payment Rates (Sec.  411.355(d); 
Phase I--66 FR 924)

    Existing Law: In the August 1995 final rule, we took the position 
that clinical laboratory services furnished as part of a larger service 
paid by Medicare on a composite basis, such as surgery in an ambulatory 
surgical center (ASC) or treatment in an end-stage renal dialysis 
(ESRD) facility, was a referral to an entity providing clinical 
laboratory services. Accordingly, if the DHS entity and the referring 
physician had a prohibited financial relationship, any referral and 
corresponding claim would be tainted. However, under the authority 
granted in section 1877(b)(4) of the Act, the Secretary determined that 
referrals for certain clinical laboratory services furnished in ASCs or 
ESRD facilities or by a hospice do not pose a risk of Medicare program 
or patient abuse when payments for these services are included in the 
composite rates for those services. An exception for the services was 
included in the August 1995 final regulation at Sec.  411.355(d).
    Proposed Rule: The January 1998 proposed rule would have retained 
the exception for certain composite rate services, extending it to all 
DHS, with an amendment to allow the Secretary to except services 
furnished under other payment rates that the Secretary determines 
provide no financial incentive for either underutilization or 
overutilization or other risk of program or patient abuse. We 
specifically solicited comment on whether there are analogous composite 
rates under the Medicaid program.
    Final Rule: In the Phase I final rule, we defined designated health 
services'' to exclude services that are reimbursed by Medicare as part 
of a composite rate (for example, ASC services, skilled nursing 
facility (SNF) Part A services, or ESRD composite rate services), 
except to the extent the specifically enumerated DHS in section 
1877(h)(6) of the Act are themselves payable through a composite rate 
(that is, all services provided as home health services or inpatient or 
outpatient hospital services remain DHS.) (See Sec.  411.351.)
    Further, we created several exceptions for specific DHS often 
performed in association with services reimbursed on a composite rate, 
such as implants furnished in an ASC and certain drugs administered in 
or by an ESRD facility. Accordingly, we declined to extend Sec.  
411.355(d) beyond clinical laboratory services. Further, we indicated 
that we were reconsidering the need for Sec.  411.355(d) in light of 
the new DHS definition and additional regulatory exceptions, and 
specifically solicited comments on this issue (66 FR 924).
    Two commenters believe that the new composite rate exception 
rendered the prior exception unnecessary and potentially confusing 
insofar as it would suggest that a separate exception is needed or that 
clinical laboratory and other DHS would be subject to disparate 
treatment. One commenter conceded that the prior exception is redundant 
given the new composite rate rule, but asked that we nonetheless retain 
it and extend it to all DHS. The commenter stated that a clear, 
separate rule has been helpful for providers. On balance, we concur 
with the first two commenters. We are deleting the ASC/ESRD/Hospice 
exception, formerly in Sec.  411.355(d). We are persuaded that the risk 
of undue confusion outweighs any utility in having a repetitive 
exception.
    We note that services separately listed in section 1877(h) of the 
Act that are paid on a composite basis now or in the future (for 
example, home health and hospital services) are DHS, notwithstanding 
that they are paid on a composite basis. This concept was incorporated 
in the Phase I regulations at Sec.  411.351 (definition of ``designated 
health services'').

C. Implants in an ASC (Phase I--66 FR 934; Sec.  411.355(f))

    In Phase I, we established a new exception for implants furnished 
by an ASC as a DHS entity. The new exception was necessary because many 
implantable items are DHS, but are not bundled in the ASC composite 
rate. Accordingly, the ASC becomes a DHS entity when it furnishes the 
implants.
    Comment: A commenter sought clarification that the new exception 
for ASC implants applies whether the ASC bills the insurer or the 
physician bills.
    Response: The exception applies to a financial relationship between 
the physician and the ASC (as the DHS entity) and to a referral for an 
implant used during an ASC procedure. Accordingly, the exception 
applies when the implant is billed by the ASC. When a physician bills 
for an implant, the physician is the DHS entity (as defined in Sec.  
411.351), rather than the ASC. In other words, not all implants qualify 
for this exception; implants implanted in an ASC qualify only if the 
ASC is the entity furnishing the implant. When a physician bills for 
the implant, another exception would need to be satisfied, such as the 
in-office ancillary services exception.
    Comment: A commenter also sought confirmation that the exception 
applies to the implantation of radioactive seeds in the course of 
brachytherapy.
    Response: The exception in Sec.  411.355(f) applies only to 
``implanted prosthetics, implanted prosthetic devices, and implanted 
DME.'' Accordingly, the implantation of radioactive brachytherapy seeds 
cannot qualify for this exception.

D. Fair Market Value Exception (Phase I--66 FR 917; Sec.  411.357(l))

    In Phase I, we finalized an exception for fair market value 
arrangements originally proposed in the January 1998 proposed rule, 
with several modifications in response to comments. The fair market 
value exception applies to arrangements, in writing, for the provision 
of items and services by physicians (provided directly or through 
employees). Several commenters to the Phase I rule advocated expanding 
the exception to include remunerative relationships other than the 
provision of items or services. The commenters urged us to expand the 
exception to cover the transfer, lease or license of real property, 
intangible property, property rights, or a covenant not to compete. 
Moreover, in the commenters' view, the exception should apply equally 
when the entity provides the items, services, property rights, and so 
forth to the physician. A commenter pointed out that the fair market 
value exception does not apply to leases of space by entities to 
physicians, contrary to statements in the preamble suggesting that the 
exception could apply in such circumstances. According to one 
commenter, as long as the arrangement is commercially reasonable, 
serves a legitimate business purpose, and provides for fair market 
value compensation that is set in advance and does not take into 
account the volume or value of referrals, the arrangement would be free 
of the potential abuse addressed by section 1877 of the Act. In 
addition, some commenters asserted that a written agreement should not 
be necessary if there is equally effective alternative evidence that 
the arrangement meets all of the requirements of the exception.
    We are not persuaded to make substantive changes to the fair market 
value exception. We believe the other exceptions in the statute and 
regulations adequately address the various arrangements noted by the 
commenters, including arrangements in which physicians pay for items or 
services, such as office space. Moreover, we

[[Page 16112]]

believe that it would be difficult to expand the exception to be as 
comprehensive as the commenters advocate without posing a risk of fraud 
or abuse.

E. Non-Monetary Compensation up to $300 and Medical Staff Incidental 
Benefits (Phase I--66 FR 920; Sec.  411.357(k) and Sec.  411.357(m))

    In Phase I, we finalized the proposed exception for non-monetary 
compensation up to $300 and added a new exception for incidental 
benefits provided by a hospital to its medical staff. Our responses to 
comments to the Phase I regulations on this subject follow.
    Comment: A commenter suggested that we raise the $300 threshold in 
the non-monetary compensation exception to $600 to conform to IRS Code 
section 6041A(a), which requires businesses to report remuneration paid 
to service providers in excess of $600 per year. This change would 
enable providers to have a single tracking system for both purposes.
    Response: We decline to adopt the suggestion. We believe $600 is 
too high for purposes of section 1877 of the Act and would create a 
risk of abuse. We do not think it should be unduly burdensome for 
providers to track when they have met the $300 threshold.
    Comment: A commenter stated that the non-monetary compensation and 
medical staff incidental benefits exceptions imposed an undue burden on 
DHS entities by requiring them to keep track of the value of all items 
they provide to each physician in a given year. In addition, the 
commenter wondered whether an entity would risk having claims denied 
under section 1877 of the Act if it sends a $25 dollar holiday basket 
at the end of the year that inadvertently puts the total value of goods 
provided to the physician over the $300 limit.
    Response: Section 1877 of the Act is clearly intended to make DHS 
entities responsible for monitoring their compensation arrangements 
with physicians. DHS entities that are not providing a high volume of 
free items to referring physicians are unlikely to be much affected by 
the requirement that they not provide more than $300 worth of items a 
year, nor should tracking be problematic.
    Comment: Several commenters suggested that the $300 and $25 
thresholds in Sec.  411.357(k) and Sec.  411.357(m) be indexed for 
inflation, because otherwise the usefulness of the exceptions will 
diminish over time.
    Response: We agree that indexing is appropriate and have revised 
the regulations to reflect this change. The $300 limit for non-monetary 
compensation in Sec.  411.357(k) and the $25 limit in Sec.  411.357(m) 
will be adjusted annually for inflation to the nearest whole dollar 
effective January 1 of each year using the increase in the Consumer 
Price Index-Urban All Items (CPI-U) for the 12-month period that ends 
the previous September 30. As soon as possible after September 30 each 
year, we intend to display both the increase in the CPI-U for that 12-
month period and the new limits on the physician self-referral Web site 
at http://cms.hhs.gov/medlearn/refphys.asp.
    Comment: A commenter questioned the restriction in the non-monetary 
compensation exception on gifts conferred on group practices, rather 
than individual physicians, such as office parties, equipment, or 
supplies. The commenter thought that these gifts should be allowed as 
long as the value apportioned over each physician in the practice is 
less than $300. By precluding any compensation requested by a 
physician, the strict anti-solicitation provision reduces the risk that 
compensation might be solicited in exchange for referrals. Because this 
is an exception under section 1877(b)(4) of the Act, the exception must 
be drafted so that covered arrangements pose no risk of patient or 
program abuse. Consistent with the statutory scheme and structure, as 
well as the industry's expressed preference for bright line rules, the 
anti-solicitation provision applies to all physician requests for 
compensation, regardless of the purpose of the request.
    Response: We are retaining the restrictions. Our intent with 
respect to group gifts is to preclude high value gifts to group 
practices that may control referrals to the benefactor. The anti-
solicitation provision reduces the risk of abuse.
    Comment: Several commenters sought clarification of the ``on-
campus'' rule under the new regulatory exception for incidental 
benefits provided to a hospital's medical staff in Sec.  411.357(m). In 
particular, the commenters viewed the ``on campus'' rule as unduly 
restrictive with respect to electronic communications, internet access 
(for access to records and patient-related communications), and pagers 
or two-way radios offered by hospitals to their medical staff. A 
commenter also explained that many hospitals are developing integrated 
information systems that electronically link various components of a 
health care system, including physicians. As part of these programs, 
physicians may be provided with dedicated computers to allow remote 
access to a hospital's system in connection with hospital services 
provided to hospital patients. These systems allow physicians to order 
tests and medications for hospital patients, check test results, 
schedule surgery, and access treatment protocols and other decision 
support references from their own offices.
    A commenter also expressed concern about hospital Web sites that 
identify or list hospital-affiliated physicians. According to the 
commenter, these listings primarily benefit the hospital or health 
system and patients, but they may confer an incidental benefit on 
physicians that would be difficult to value and administratively 
difficult to track. The commenter urged that these listings be clearly 
excepted under the incidental benefits exception.
    Response: The ``on-campus'' requirement in the exception was 
intended to make clear that the new exception for medical staff 
incidental benefits was limited to benefits, such as parking, cafeteria 
meals, and the like, that are customarily provided by hospitals to 
their medical staff and that are incidental to services being provided 
by the medical staff at the hospital. The exception was not intended to 
cover the provision of tangential, off-site benefits, such as 
restaurant dinners or theater tickets, which must comply with the 
exception for nonmonetary compensation up to $300. As indicated in the 
Phase I preamble, it was clearly our intent to cover benefits in the 
form of computer and internet access that ``facilitates the maintenance 
of up-to-date medical records and the availability of cutting edge 
medical information'' (66 FR 921).
    Accordingly, we have modified Sec.  411.357(m) to make our intent 
clear. We are also modifying Sec.  411.357(m)(1) and Sec.  
411.357(m)(2) of the regulation by changing the word ``offered'' to 
``provided'' to be consistent with other paragraphs of the exception 
and by making clear that Sec.  411.357(m)(1) will be satisfied if the 
benefits are offered to all members of the medical staff practicing in 
the same specialty, even if some members do not accept them. Moreover, 
in the interest of clarity, we are changing the phrase ``performing 
other duties'' to ``are engaged in other services or activities.'' 
These changes will help clarify that dedicated electronic or Internet 
items or services can meet the requirement in Sec.  411.357(m)(2), 
since those items or services would be provided ``only during periods 
when the medical staff members are * * * engaged in other services or 
activities that benefit the

[[Page 16113]]

hospital or its patients.'' Similarly, the revised exception will cover 
dedicated pagers or two-way radios used to facilitate instant 
communication with physicians in emergency or other urgent patient care 
situations when they are away from the hospital campus.
    We also agree that the simple listing or identification of the 
medical staff on a hospital's Web site is an incidental benefit that 
should be excepted. We are revising the regulation to include listings 
of affiliated physicians in hospital advertising. However, advertising 
or promoting a physician's private practice on a hospital Web site is 
not covered; those arrangements would have to fit in the exception for 
non-monetary compensation under $300 or the hospital would have to 
charge the physician or practice a fair market value rate for the 
advertising. In light of all of the conditions contained in the 
exception, we do not believe that the arrangements that fit in the 
exception will pose a risk of program or patient abuse.
    A hospital's provision of a computer or other technology that is 
wholly dedicated to use in connection with hospital services provided 
to the hospital's patients would be for the hospital's benefit and 
convenience and would not constitute remuneration to a physician for 
purposes of section 1877 of the Act. Moreover, while we believe that 
the provision of valuable information technology, such as computer 
hardware or software, to physicians may be subject to abuse, using our 
authority under section 1877(b)(4) of the Act, we are creating a new 
regulatory exception at Sec.  411.357(u) for the provision of 
information technology items and services (including both hardware and 
software) by a DHS entity to a physician to participate in a community-
wide health information system designed to enhance the overall health 
of the community, so long as certain conditions are met. The health 
information system must be community-wide, that is, available to all 
providers, practitioners, and residents of the community who desire to 
participate. The health care system must be one that allows community 
providers and practitioners to access and share electronic health care 
records. In addition to health care records, the system may permit 
access to, and sharing of, complementary drug information systems, 
general health information, medical alerts, and related information for 
patients served by community providers and practitioners. The DHS 
entity may only provide information technology items and services that 
are necessary to enable the physician to participate in the health 
information system. Thus, for example, if a physician already owns a 
computer, it may only be necessary to provide software or training 
specific to the health information system. Likewise, it would not be 
considered necessary to provide Internet access to a physician who 
already has Internet service. In all cases, the information technology 
items or services furnished under the exception must principally be 
used by the physician as part of the community-wide health information 
system. The items and services may not be provided in any manner that 
takes into account the volume or value of referrals or other business 
generated by the physicians. Thus, the exception would not apply to the 
selective provision of items and services to referral sources. Finally, 
as with all exceptions under section 1877(b)(4) of the Act, the 
arrangement must not violate the anti-kickback statute and all claims 
and billing must comply with applicable Federal and State laws and 
regulations. Under these circumstances, we do not believe that an 
exception for the provision of community-wide information technology 
items and services poses a risk of program or patient abuse; however, 
we will revisit the terms of the exception if we become aware of 
abusive arrangements.
    Comment: A physician professional association asked that Sec.  
411.357(m)(5) be deleted from the exception for medical staff 
incidental benefits. Section 411.357(m)(5) requires that the incidental 
benefits be of a type offered to medical staff members at other local 
hospitals or by comparable hospitals in comparable regions. The 
commenter stated that this requirement imposed an unnecessary burden of 
inquiry on hospitals. The commenter believes that the $25 per 
occurrence limit was a sufficient safeguard.
    Response: Section 411.357(m)(5) was not intended to, and did not, 
impose any duty of inquiry on hospitals. We believe that most hospital 
administrators are familiar with customary medical staff benefits 
offered by other hospitals locally and farther afield. The provision 
was included to help limit the exception to the provision of customary 
and usual staff benefits, such as meals, lab coats, and parking. We are 
concerned that the exception not be misused to protect an ever-
increasing array of new ``incidental benefits'' that collectively are 
of considerable value to physicians. Nevertheless, we are persuaded 
that the other conditions in the exception sufficiently protect against 
such abuse. Accordingly, we are deleting Sec.  411.357(m)(5).
    Comment: One commenter considered the $25 per occurrence limit in 
the medical staff incidental benefits exception to be too low. The 
commenter suggested that the limit be deleted, or, in the alternative, 
raised to $100.
    Response: We are not persuaded that the limit is unnecessary or too 
low. Benefits of higher value may still be protected under the 
exception for non-monetary compensation up to $300. However, as with 
the exception for non-monetary compensation, we have revised the 
regulations to provide for annual inflation indexing.
    Comment: A commenter sought clarification regarding our statement 
in the Phase I preamble (66 FR 921) that we did not believe that 
medical transcription services were an incidental benefit of nominal 
value. The commenter found the statement ambiguous. In particular, the 
commenter asked us to confirm that the statement is limited to medical 
transcription services of non-hospital services (for example, services 
provided by physicians in their private offices).
    Response: We do not believe that transcription of hospital medical 
records dictated by an attending physician is a benefit--incidental or 
otherwise--to the physician. Thus, such services do not create a 
compensation arrangement. However, the provision of transcription 
services for the benefit of the physician, such as transcription of his 
private office records, does create a compensation arrangement between 
the hospital and the physician that would need to fit in an exception.
    Comment: An association representing hospitals inquired about the 
treatment under section 1877 of the Act of certain benefits provided to 
physicians that cannot fit in the non-monetary compensation exception, 
because they are worth more than $300; the medical staff incidental 
benefits exception, because they are worth more than $25 per 
occurrence; or the fair market value exception, because they do not 
involve a written contract.
    These examples include:
     Business meetings with physicians (sometimes 
including spouses) that include a meal (for example, attendance at a 
Board of Trustees meeting or dinner with a hospital administrator to 
discuss operation of a hospital department).
     A dinner to which hospital physicians (and 
sometimes spouses) are invited to meet and recruit a potential new 
physician for the staff.
     Free use of a dedicated computer terminal 
located at the physician's office but usable only in connection with 
hospital patients and services.

[[Page 16114]]

     Free continuing medical education (CME) or other 
training at the hospital. (The commenter notes that hospitals often 
obtain educational speakers free of charge, thus enabling them to 
provide low cost training.)
     Physician referral services to the community in 
which they reside for which the physician may or may not pay a fee.
    Response: The first two examples cited by the commenter involve 
scenarios that do not lend themselves to categorical answers. The 
statute defines ``remuneration'' broadly to include any remuneration, 
directly or indirectly, overtly or covertly, in cash or in kind 
(Section 1877(h)(1)(B) of the Act). Whether a remunerative arrangement 
between specific parties would fit in an exception would depend on the 
particular facts and circumstances. For example, some dinners and 
meetings might fit in the exception for non-monetary compensation at 
Sec.  411.357(k) or the exception for fair market value compensation at 
Sec.  411.357(l); others would not. Nothing in the statute precludes 
modest meals in connection with services provided by or to Boards of 
Trustees, Boards of Directors, or hospital administrators, and many of 
these activities can easily fit in an exception.
    The third example cited by the commenter--the free use of a 
dedicated computer terminal used only for the hospital patients and 
services strikes us as unlikely to involve remuneration to the 
physician so long as the computer terminal has no independent value to 
the physician. Alternatively, the free use of the computer may qualify 
for the exception for medical staff incidental benefits at Sec.  
411.357(m). The fourth example, the free CME, could constitute 
remuneration to the physician, depending on the content of the program 
and the physician's obligation to acquire CME credits. With respect to 
referral services, we believe these services should be excepted under 
section 1877 of the Act, and, accordingly, we are incorporating the 
safe harbor under the anti-kickback statute for referral services at 
Sec.  1001.952(f) into these regulations as a new exception at Sec.  
411.357(q). (We note that creation of a referral services exception was 
supported by a second commenter.)
    We recognize that our regulations do not address every possible 
relationship between physicians and DHS entities of the type addressed 
by the commenter, nor could they. In some cases, relationships clearly 
will not involve a transfer of remuneration and thus will not trigger 
section 1877 of the Act. In others, an activity might involve the 
transfer of remuneration, and there may be no readily apparent 
exception. We expect that questions of the kind posed by the commenter 
will arise with some frequency. Parties may submit advisory opinion 
requests about specific arrangements according to Sec.  411.370. We 
will also continue to evaluate whether remunerative arrangements exist 
for which additional exceptions are necessary and appropriate.
    Comment: A commenter urged that long-term care facilities be 
permitted to use all the exceptions available to other providers, 
including the medical staff incidental benefits and compliance training 
exceptions.
    Response: As noted in section XII.G, we are expanding the 
compliance training exception to include all entities. As for the 
medical staff incidental benefits exception, we agree that certain 
institutional entities, such as long-term care facilities, FQHCs, and 
other health care clinics, that have medical staffs should be permitted 
to provide incidental benefits to those staffs on the same terms and 
conditions as apply to hospitals under the exception. This exception 
applies only to bona fide medical staffs. Whether a facility has a bona 
fide medical staff will depend on the facts and circumstances. We have 
modified the regulations accordingly.
    Comment: A commenter urged that the Office of Inspector General 
(OIG) issue a statement that remuneration covered by the non-monetary 
compensation, medical staff incidental benefits, and compliance 
training exceptions does not violate the anti-kickback statute.
    Response: Whether to issue a statement of the sort requested by the 
commenter is a decision for the OIG and/or the Department of Justice 
and is outside the scope of this rulemaking. Parties may seek advisory 
opinions about their arrangements from the OIG pursuant to regulations 
at 42 CFR part 1008.

F. Risk-Sharing Arrangements (Phase I--66 FR 912-915; Sec.  411.357(n))

    We received several comments to the new risk-sharing arrangements 
exception in Sec.  411.357(n) established in Phase I. The risk-sharing 
arrangements exception applies to compensation (including, but not 
limited to, withholds, bonuses, and risk pools) between a managed care 
organization or an independent physician's association and a physician 
(either directly or indirectly through a subcontractor) for services 
provided to enrollees of a health plan.
    Comment: A commenter welcomed the new exception for risk-sharing 
arrangements, but requested a definition of the term ``managed care 
organization'' as used in the exception or clarification in preamble 
language that the new exception is meant to cover all risk-sharing 
compensation paid to physicians by an entity downstream of any type of 
health plan, insurance company, or health maintenance organization 
(HMO). A commenter sought clarification that the downstream entity 
could itself be an entity that furnishes DHS, such as a hospital.
    Response: The new exception is meant to cover all risk-sharing 
compensation paid to physicians by an entity downstream of any type of 
health plan, insurance company, HMO, or Independent Practice 
Association (IPA), provided the arrangement relates to enrollees and 
meets the conditions set forth in the exception. All downstream 
entities are included. We purposefully declined to define the term 
``managed care organization'' so as to create a broad exception with 
maximum flexibility.
    Comment: A physician association asked that the prepaid plans and 
risk-sharing arrangements exceptions be expanded to include referrals 
of patients to entities owned by a managed care organization, even if 
the patients are not enrollees in the managed care organization. The 
commenter gave as an example a referral to an orthopedic ASC owned by a 
managed care organization that is, in turn, owned by the referring 
physician. The commenter considered it illogical that the physician 
could refer a health plan enrollee to the ASC, but not a Medicare fee-
for-service patient.
    Response: Contrary to the commenter's perception, we discern 
nothing illogical in the result under the example provided. The fee-
for-service referral to a DHS entity in which the physician has an 
indirect ownership interest is precisely the kind of improper referral 
barred by the statute, whereas the statute includes an exception for 
referrals of Medicare managed care patients (Sec.  411.355(c)). (We 
assume, for purposes of responding to the example, that the ASC 
furnishes some designated health care service not covered by the ASC 
composite rate, since composite rate services are not DHS for purposes 
of section 1877 of the Act).

G. Compliance Training (Phase I--66 FR 921; Sec.  411.357(o))

    A number of commenters asked that we expand the new compliance 
training exception to include compliance training provided by entities 
other than

[[Page 16115]]

hospitals. A commenter asked that the exception be expanded to include 
training of the physician's office staff. We concur with both comments 
and have modified the exception in Sec.  411.357(o) to include 
compliance training provided by any entity that furnishes designated 
health care services to a physician or a physician's office staff. We 
are also modifying the regulations to include compliance training 
addressing the requirements of any Federal, State, or local law, 
regulation, or rule governing the conduct of the party for whom the 
training is provided. We do not consider continuing medical education 
(CME) to be compliance training for purposes of this exception, which 
is primarily intended to promote legal compliance. In many cases, the 
provision of CME to physicians could constitute a benefit of 
significant monetary value to physicians. CME may be covered under the 
non-monetary compensation up to $300 exception.

H. Anti-Kickback Safe Harbors (Phase II, Sec.  411.357(q) and Sec.  
411.357(r))

[If you choose to comment on issues in this section, please include the 
caption ``Anti-Kickback Safe Harbor Exception'' at the beginning of 
your comments.]

    In the Phase I preamble, we indicated that we were considering an 
exception for arrangements that fit squarely within an anti-kickback 
``safe harbor'' (Sec.  1001.952 (Exceptions)). We have been urged to do 
so by providers frustrated by having to apply two sets of conditions to 
their financial arrangements. Having carefully considered the issue and 
the industry perspective, we have concluded that a wholesale 
importation of the anti-kickback safe harbors into the exceptions in 
section 1877 of the Act would be problematic. In some cases, the 
statutory requirements of seemingly comparable ``safe harbors'' and 
exceptions vary. In other cases, the section 1877 exception and the 
anti-kickback statute ``safe harbor'' for similar conduct differ for 
reasons attributable to the difference in statutory scope and scheme, 
core prohibited conduct, or liability standards. In some cases, the 
section 1877 exception is broader; in other cases, it is narrower. Many 
of the anti-kickback ``safe harbors'' address activities that do not 
implicate section 1877 of the Act. In sum, while we are mindful of the 
concerns expressed by the commenters, we believe it is not feasible to 
except financial relationships solely because they fit in an anti-
kickback ``safe harbor.''
    Nevertheless, we have reviewed the existing list of ``safe 
harbored'' arrangements for which there are no section 1877 analogs and 
have concluded that the ``safe harbors'' for referral services (Sec.  
1001.952(f)) and obstetrical malpractice insurance subsidies (Sec.  
1001.952(o)) should be incorporated by reference into section 1877 of 
the Act. We are therefore creating new exceptions in Sec.  411.357(q) 
and Sec.  411.357(r) for these arrangements. As the anti-kickback 
``safe harbor'' regulations are amended and supplemented from time to 
time, we will consider whether any additional ``safe harbored'' 
arrangements should be incorporated as exceptions under section 1877 of 
the Act.
    A commenter has also suggested that we create a new exception for 
any arrangement approved in an OIG advisory opinion regarding the 
application of the anti-kickback statute to the arrangement. We decline 
to adopt the commenter's suggestion. OIG advisory opinions may not be 
relevant in all respects to a determination under section 1877 of the 
Act. For example, a favorable opinion from the OIG often concludes that 
a potential remunerative relationship exists, but that the OIG would 
exercise its discretion and decline to impose sanctions arising from 
the potential anti-kickback violation (which contains an intent 
requirement not applicable under section 1877 of the Act). These 
determinations are not appropriate for blanket protection under section 
1877 of the Act.

I. Professional Courtesy (Phase I--66 FR 922; Phase II; Sec.  
411.357(s))

[If you choose to comment on issues in this section, please include the 
caption ``Professional Courtesy Exception'' at the beginning of your 
comments.]

    A number of commenters responded to our call for comments on a 
possible exception for professional courtesy. These commenters pointed 
out that free or discounted ``professional courtesy'' to physicians and 
their family members is a longstanding tradition and remains a 
widespread practice. Most commenters supported creation of an 
exception. One commenter suggested the following conditions: The 
services are routinely provided without charge to physicians and their 
family members by the provider, without regard to referrals, as part of 
the provider's standard professional courtesy policy and notice is 
provided to all applicable public or private third party payers that 
the services were provided without charge to the physician as a 
professional courtesy (that is, the co-insurance obligation was 
waived). A commenter representing a radiology concern recommended that 
professional courtesy be limited to physicians and dependents for whom 
the physician would pay the medical bill and that the courtesy be 
further limited to free services for which no person or entity is 
billed. Further, the commenter wanted to limit the exception to 
circumstances where professional courtesy is the prevailing practice in 
a given marketplace.
    Another commenter suggested that the definition of ``professional 
courtesy'' be limited to partial ``out-of-pocket'' expense reductions 
(as opposed to total fee waivers or out-of-pocket cost waivers) offered 
by health care providers for health care services furnished to 
physicians and their family members who are not employed by the health 
care provider. The commenter excluded employees because discounts to 
employees could be protected under the employee exception. The 
commenter suggested limiting the exception to partial waivers because 
health care providers are more likely to offer partial waivers across 
the board; the commenter believed that health care providers are more 
likely to offer costly full waivers selectively based on referrals. As 
for specific conditions to apply under an exception, the commenter 
suggested the following: (1) The discount is offered to all physicians 
(whether or not affiliated with the health care provider) without 
regard to the volume or value of referrals or other business generated 
between the parties; (2) the professional courtesy policy is set out in 
writing and approved in advance by the governing body of the health 
care provider; (3) the discount is limited to 25 percent of what would 
otherwise have been the physician's out-of-pocket expense and subject 
to an annual cap; (4) the discount is not offered to a physician (or 
family member) who is a Federal health care program beneficiary (this 
condition addresses the beneficiary inducement problem raised by 
professional courtesy arrangements); (5) all discounts are reported as 
income to the physician in accordance with Federal and State tax 
requirements; and (6) to avoid insurance fraud, insurers are informed 
of any reduction of a co-insurance obligation. The commenter notes that 
providers may want to make an offer of professional courtesy contingent 
on the insurer's agreement to provide coverage notwithstanding.
    Yet another commenter, representing a physician association, 
suggested that the exception should cover professional courtesy, 
including fee waivers or discounts up to $300 per year

[[Page 16116]]

(consistent with the non-monetary compensation exception). One 
commenter expressed concern that providers not be required to offer 
professional courtesy, and that such arrangements should be entered 
into at the discretion of the parties.
    We are persuaded to promulgate an exception for certain services 
provided to a physician or his or her immediate family members. We are 
defining ``professional courtesy'' in Sec.  411.351 as the provision of 
free or discounted health care items or services to a physician or his 
or her immediate family members or office staff. To qualify for the new 
exception, the arrangement must meet the following conditions:
    1. The professional courtesy is offered to all physicians on the 
entity's bona fide medical staff or in the entity's local community 
without regard to the volume or value of referrals or other business 
generated between the parties;
    2. The health care items and services provided are of a type 
routinely provided by the entity;
    3. The entity's professional courtesy policy is set out in writing 
and approved in advance by the governing body of the health care 
provider;
    4. The professional courtesy is not offered to any physician (or 
immediate family member) who is a Federal health care program 
beneficiary, unless there has been a good faith showing of financial 
need;
    5. If the professional courtesy involves any whole or partial 
waiver of any coinsurance obligation, the insurer is informed in 
writing of that reduction so that the insurer is aware of the 
arrangement.
    6. The professional courtesy arrangement does not violate the anti-
kickback statute or any billing or claims submission laws or 
regulations.
    While professional courtesy discounts may be covered under the 
employee exception, nothing in this new exception precludes hospitals 
or other entities from extending their professional courtesy policies 
to employees, including non-physician employees, under the new 
exception. Nothing in these regulations should be construed as 
requiring or encouraging professional courtesy arrangements. Moreover, 
parties are cautioned that some professional courtesy arrangements may 
violate the anti-kickback statute or the civil monetary penalties law 
against giving inducements to Medicare and Medicaid beneficiaries 
(section 1128A(a)(5) of the Act). Concerns regarding those laws should 
be addressed to the OIG. Private insurers may also have concerns about 
professional courtesy in the form of coinsurance waivers. The 
requirement to notify private insurers of a professional courtesy 
arrangement may provide an additional check against abusive 
arrangements.

J. Charitable Donations by a Physician (Phase II; Sec.  411.357(j))

[If you choose to comment on issues in this section, please include the 
caption ``Charitable Donations'' at the beginning of your comments.]

    A commenter to the January 1998 proposed rule expressed concern 
about charitable contributions made by physicians to DHS entities, for 
example, the purchase of a hospital charity ball ticket or a donation 
to a charitable health care entity's general fund-raising campaign. The 
commenter noted that, under section 1877 of the Act, funds flowing from 
a physician to a DHS entity can create a financial relationship. 
However, no exception exists for a physician's bona fide charitable 
donations.
    We agree that charitable donations from a physician to a DHS entity 
involve remuneration as defined in the statute, thus creating a 
compensation arrangement between donor and donee and that an exception 
for bona fide charitable donations is appropriate. Under our authority 
in section 1877(b)(4) of the Act, we have added a new exception in 
Sec.  411.357(j) for bona fide charitable donations made by a physician 
(or immediate family member). To qualify, donations must be made to an 
organization exempt from taxation under the IRS Code (or to an exempt 
supporting organization, such as a hospital foundation). The new 
exception provides that the donation may not be solicited or made in 
any manner that reflects the volume or value of referrals or other 
business generated from one party for the other. Broad-based 
solicitations not targeted specifically at physicians, such as sales of 
charity ball tickets or general fund-raising campaigns, will qualify 
under this exception. Parties engaged in more selective or targeted 
fund-raising activities should ensure that those activities are not 
conducted in any manner that reflects or takes into account referrals 
or the generation of business between the parties. As with all new 
regulatory exceptions under section 1877(b)(4) of the Act, a protected 
arrangement must not violate the anti-kickback statute or billing or 
claims filing rules.

K. Preventive Screening Tests (Phase I--66 FR 923; Sec.  411.355(h))

[If you choose to comment on issues in this section, please include the 
caption ``Exceptions Preventive Screening'' at the beginning of your 
comments.]

    In the Phase I final rule, we used our authority under section 
1877(b)(4) of the Act to create a regulatory exception (Sec.  
411.355(h)) for certain preventive screening tests, immunizations and 
vaccines.
    Section 411.355(h)(2) of the exception requires that the preventive 
screening tests, immunizations, and vaccines be reimbursed by Medicare 
under a fee schedule. It has come to our attention that some of the 
vaccines covered by the exception may be paid by Medicare using 
different reimbursement methods. To avoid confusion, we are deleting 
the fee schedule requirement from the regulation. We believe the 
remaining conditions in the exception are sufficient to protect against 
abuse under section 1877 of the Act.
    In addition, we received the following comments.
    Comment: Two commenters representing pathologists inquired about 
the treatment of Pap tests under the final regulations. One association 
was concerned that only screening Pap tests, but not diagnostic Pap 
tests, could qualify for the preventive screening tests exception. 
Another association urged us not to except screening Pap tests because 
physicians would then have financial incentives to send all screening 
tests to clinical laboratories with which they have financial 
relationships and to send all diagnostic tests to different 
laboratories. In the commenter's view, this might endanger continuity 
of care and the ability to compare the findings of screening and 
diagnostic Pap tests.
    Response: We can discern no reason to expand the exception to 
protect referrals for diagnostic Pap tests. As noted above, we created 
the exception in Sec.  411.355(h) pursuant to our authority under 
section 1877(b)(4), which authorizes the Secretary to create additional 
exceptions for financial relationships that do not pose a risk of 
program or patient abuse. We are not persuaded that diagnostic Pap 
tests are any different from other diagnostic clinical laboratory tests 
to which the statutory prohibition applies.
    We are unclear as to how the potential use of two different 
laboratories for two different clinical laboratory tests will 
compromise continuity of patient care. Moreover, it is our 
understanding that screening and diagnostic Pap test results are not 
typically compared. We

[[Page 16117]]

continue to believe that the exception as set forth in Phase I is 
sufficiently limited to pose no risk of program or patient abuse. 
Accordingly, we are not removing the codes for screening Pap tests from 
the list of codes identifying those services that may qualify for the 
exception in Sec.  411.355(h).
    Comment: An association representing radiologists supported our 
decision to include screening mammography in the exception for 
preventive screening tests at Sec.  411.355(h), but was disappointed 
that the exception does not cover diagnostic mammography. The 
association disagreed with our statement that diagnostic mammography 
could be subject to abuse.
    Response: For the reasons stated in Phase I (66 FR 930), diagnostic 
mammography is treated similarly to all other diagnostic radiology 
services. In many cases, a radiologist who has performed a screening 
mammogram will also recommend a diagnostic mammogram. We do not see why 
diagnostic mammography performed after screening mammography is less 
subject to abuse than any other diagnostic service that is performed 
after a screening service. We note that a radiologist who orders a 
diagnostic mammography pursuant to a consultation does not make a 
``referral'' for purposes of section 1877 of the Act.
    Comment: A commenter stated that screening tests should not be 
considered DHS when performed either as screening tests or as part of a 
patient's ongoing care once a problem has been identified.
    Response: We disagree. Consistent with the statutory and regulatory 
scheme, we have created an exception for a subset of screening tests 
furnished under circumstances that do not pose a risk of abuse.
    Comment: In the Phase I Attachment, we listed the CPT and HCPCS 
codes for screening tests that may qualify for the exception in Sec.  
411.355(h) if all of the criteria for that exception are satisfied (66 
FR 965). We included in that list one code for a bone density test (CPT 
76977), which the Phase I Attachment also identified as a radiology 
service. Several commenters believed that the list should also include 
five other codes for bone density tests (CPT codes 76070, 76075, 76076, 
78350, and 78351).
    Response: Generally, a test performed for diagnostic reasons is 
subject to section 1877 of the Act. However, some tests performed as 
preventive screening tests are not subject to the physician self-
referral prohibition if all conditions of the exception in Sec.  
411.355(h) are satisfied. None of the five codes identified by the 
commenters is a screening test, as none is available to the general 
population without a pre-existing condition. Section 1861(rr) of the 
Act, which provides for the bone mass measurement benefit, identifies 
five specific categories of individuals with pre-existing conditions 
who qualify for the benefit. Accordingly, none of these five codes will 
be added to the list of codes that may qualify for the exception in 
Sec.  411.355(h). Also, we are removing CPT code 76977 from the list of 
services that may qualify for the exception in Sec.  411.355(h) for 
preventive screening tests because we had incorrectly identified it as 
a screening test.
    After careful review, we have determined that four of the bone 
density tests cited by the commenters (76070, 76075, 76076, and 78350), 
fall within the definition of ``radiology and certain other imaging 
services,'' yet were not included as such on the Phase I attachment or 
its updates. (Although CPT code 78351 would otherwise fall within the 
category of ``radiology and certain other imaging services,'' CPT code 
78351 is not a Medicare covered service and, thus, is not subject to 
the statute.)
    In the physician fee schedule final rule, published December 31, 
2002 (67 FR 79996), we added CPT code 76070 to the list of codes 
defining ``radiology and certain other imaging services.'' (At that 
time, we also added as ``radiology and certain other imaging services'' 
two other codes for bone density tests: CPT codes 76071 and 0028T.)
    We are now adding to the definitional code list for ``radiology and 
certain other imaging services'' the three remaining densitometry scans 
identified by the commenters (CPT codes 76075, 76076, and 78350) that 
were inadvertently omitted from the previous list of codes.
    Additionally, in reviewing the bone density test codes, we found 
two codes (CPT code 76078 and HCPCS code G0130) not identified by the 
commenters. We have determined that these two codes also fall within 
the category of ``radiology and certain other imaging services'' and 
are adding them to that category.
    The following is a complete list of the densitometry scans that 
will be included in the definitional code list for ``radiology and 
certain other imaging services'':

76070 Ct bone density, axial
76071 Ct bone density, peripheral
76075 Dexa, axial skeleton study
76076 Dexa, peripheral study
76078 Radiographic absorptiometry
76977 Us bone density measure
78350 Bone mineral, single photon
0028T Dexa body composition study
G0130 Single energy x-ray study

    As explained above, none of these tests qualifies for the exception 
in Sec.  411.355(h).

L. EPO and Other Dialysis-Related Outpatient Prescription Drugs 
Furnished in or by an ESRD Facility (Phase I--66 FR 939; Sec.  
411.355(g))

[If you choose to comment on issues in this section, please include the 
caption ``Exceptions-Dialysis Drugs'' at the beginning of your 
comments.]

    Phase I created a new exception for EPO and certain other dialysis-
related outpatient prescription drugs furnished in or by an ESRD 
facility. The drugs that may qualify for this exception were initially 
identified by CPT and HCPCS codes in the Phase I Attachment, and 
updates to that list appear on the CMS Web site and in annual updates 
published in the Federal Register.
    Comment: One commenter advocated that we expand the list of codes 
to include other drugs specifically related to ESRD services if those 
drugs are used specifically and exclusively for a patient's ESRD 
treatment. In particular, the commenter believed that the following 
drugs should be added to the list of drugs that may qualify for the 
exception in Sec.  411.355(g): heparin (heparin sodium); normal saline 
(0.9 percent sodium chloride) for catheter maintenance; paricalcitrol; 
carnitine; and albumin for injection.
    Response: We note that, according to section 3168.A of the Medicare 
Intermediary Manual, heparin and normal saline are included in the ESRD 
composite rate. Thus, these items do not constitute DHS when reimbursed 
under the composite rate and therefore did not need to appear on the 
list of codes that may qualify for the exception in Sec.  411.355(g). 
In addition, we added paricalcitol to this list of codes in Addendum E 
of the December 31, 2002 Federal Register final rule, Revisions to the 
Physician Fee Schedule for Calendar Year 2003 (67 FR 79966 and 80172). 
(Zemplar is the trade name for paricalcitol, which is often referred to 
as paricalcitrol.)
    With respect to the other drugs mentioned by the commenter, we 
agree that the list of drugs was not broad enough to include all the 
drugs that should be excepted. We believe it is appropriate to use our 
authority under section 1877(b)(4) of the Act and the exception at 
Sec.  411.355(g) to cover these and other outpatient prescription drugs 
that are required for the efficacy of dialysis, and are not self-
administered

[[Page 16118]]

(except for EPO and darbepoetin alfa (Aranesp)), provided that all 
other conditions of the exception are satisfied. Therefore, we are 
adding to our list albumin and levocarnitine, which is the intravenous 
form of carnitine.
    We are also adding several other drugs to the list. We are 
including darbepoetin alfa (Aranesp), which is a new drug that is 
functionally equivalent to EPO although not structurally identical. For 
physician self-referral purposes, we are using the term EPO to include 
both epoetin alfa and darbepoetin alfa (Aranesp). Both products use the 
same biological mechanism to produce stimulation of the bone marrow to 
produce red blood cells. In addition, we are adding an additional 
vitamin D drug (calcitonin-salmon), and three additional thrombolytics 
used to declot central venous catheters. These thrombolytics are 
streptokinase, urokinase, and retaplase.
    We believe that this exception does not pose a risk of patient or 
program abuse. First, as explained in the Phase I preamble (66 FR 938), 
we believe that this exception is appropriate because of the high 
correlation between the use of these drugs and dialysis. Second, strict 
utilization and coverage criteria for EPO and the other listed 
medically necessary drugs required for the efficacy of dialysis 
mitigates the risk of abuse. However, we intend to monitor use of this 
exception and, if we determine that the exception is abused, we would 
revisit it. Except as provided in this exception, we believe physician 
financial interests in the furnishing of self-administered drugs poses 
a risk of abuse. As we explained in the Phase I preamble (66 FR 938), 
this exception was never intended to protect drugs or supplies that 
patients use at home, except EPO in limited circumstances. Accordingly, 
we want to emphasize that this exception applies only to drugs that are 
not self-administered except when the facility furnishes EPO or Aranesp 
to the patient who dialyzes at home. Given the additions to the list of 
drugs, we are clarifying the regulation text in order to ensure that 
the exception will continue to pose no risk of program or patient 
abuse.

M. Intrafamily Referrals (Phase II; Sec.  411.355(j))

[If you choose to comment on issues in this section, please include the 
caption ``Exceptions Intrafamily Referrals'' at the beginning of your 
comments.]
    This exception is discussed in section VII.B of this preamble.

N. Exception for Certain Arrangements Involving Temporary Noncompliance 
(Phase II; Sec.  411.353(f))

[If you choose to comment on issues in this section, please include the 
caption ``Exceptions-Temporary Noncompliance'' at the beginning of your 
comments.]
    This exception is discussed in section II.A of this preamble.

O. Retention Payments in Underserved Areas (Phase I; Sec.  411.357(t))

[If you choose to comment on issues in this section, please include the 
caption ``Exceptions--Retention Payments in Underserved Areas'' at the 
beginning of your comments.]

    This exception is discussed in section VIII.E of this preamble.

P. Community-Wide Information Systems (Phase II; Sec.  411.357(w))

    [If you choose to comment on issues in this section, please include 
the caption ``Exceptions-Community-wide Information Services'' at the 
beginning of your comments.]
    This exception is discussed in section XII.E of this preamble.

XIII. Technical Corrections

    In Phase I, we indicated our intent to remove Sec.  411.360 
relating to physician attestations, but the regulatory text did not do 
so. We have removed Sec.  411.360. We have also changed references from 
HCFA to CMS, consistent with the final rule published July 31, 2001 (66 
FR 39450), which revised the references in accordance with the name 
change of the Health Care Financing Administration to the Centers for 
Medicare & Medicaid Services. In addition, we have updated references 
to Internet Web sites in the Phase I regulations.
    We have removed Sec.  411.354(c)(1)(ii) that specified that the 
shared compensation for consultations conducted via interactive 
telecommunications systems required by the Medicare program under Sec.  
414.65 was not a compensation arrangement. Section 414.65 was 
substantially revised in the November 1, 2001 physician fee schedule 
final rule (66 FR 55332). A consultant practitioner is no longer 
permitted to share payment with the referring practitioner, and thus, a 
provision for this situation is no longer necessary.
    In addition, pursuant to the Balanced Budget Act of 1997 (Pub. L. 
105-33) and the Medicare, Medicaid, and SCHIP Balanced Budget 
Refinement Act of 1999 (Pub. L. 106-113), we have replaced references 
to ``primary care rural hospitals'' with ``critical access hospitals'' 
in Sec.  411.351.
    We have deleted the mailing address and telephone number for the 
Superintendent of Documents and the National Technical Information 
Service from Sec.  411.351 since the Medicare Carriers Manual is 
available free of charge on the CMS Web site. In light of the recent 
and ongoing reorganization of CMS manuals, we have clarified that 
references to specific manual provisions incorporate any amendments to 
those provisions.
    We have also revised the title of subpart J to reflect the current 
scope of section 1877 of the Act and these regulations.
    Comment: One commenter noted that the references in Sec.  
411.352(d)(1) to Sec.  411.352(d)(2) and Sec.  411.352(d)(3) should be 
to Sec.  411.352(d)(3), Sec.  411.352(d)(4), and Sec.  411.352(d)(5).
    Response: The commenter is correct. We have made the technical 
correction. We have also made a technical correction in Sec.  
411.352(b) by changing the words ``this section'' at the end of Sec.  
411.352(b) to ``Sec.  411.351''.

XIV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
    The need for the information collection and its usefulness in 
carrying out the proper functions of our agency.
     The accuracy of our estimate of the information 
collection burden.
     The quality, utility, and clarity of the 
information to be collected.
     Recommendations to minimize the information 
collection burden on the affected public, including automated 
collection techniques.
    Therefore, we are soliciting public comments on each of these 
issues for the information collection requirements discussed below.
    The following information collection requirements and associated 
burdens are subject to the PRA.

Section 411.352 Group Practice

    Under paragraph (d), a covered entity is required to document the 
total time each member spends on patient care services, and to maintain 
and make available to the Secretary, upon request, documentation 
concerning compliance

[[Page 16119]]

with the substantially ``all test.'' This paragraph also requires that 
a new member's employment with, or ownership interest in, the group 
practice be documented in writing no later than the beginning of his or 
her new employment relationship or ownership or investment interest.
    The burden associated with these requirements is that of 
documentation and making available information to the Secretary. This 
documentation may be in the form of time cards, appointment schedules, 
personal diaries, or any alternative measure that is reasonable, fixed 
in advance of the performance of the services being measured, uniformly 
applied over time, and verifiable. This is not a new requirement to 
maintain or collect additional information because these types of 
records are usually kept by group practices in the normal course of 
business in order to allocate resources such as time, examination 
space, remuneration, and productivity bonuses. The documentation 
requirements reflect usual and customary business practices, and, as 
such, the burden is not subject to the PRA under 5 CFR 1320.3(b)(5); 
the burden of making the records available is exempt under 5 CFR 
1320.4(a) as that incurred during an administrative action, 
investigation, or audit involving an agency against specific 
individuals or entities. In addition, this burden was found to be 
exempt from the requirements of the PRA in Phase I (66 FR 856).

Section 411.354 Financial Relationship, Compensation, and Ownership or 
Investment Interest

    Paragraph (d)(4) of this section mandates that the requirement to 
make referrals to a particular provider, practitioner, or supplier be 
set forth in a written agreement signed by the parties.
    We do not believe this requirement imposes any additional burden. 
Where mandatory referral requirements are used, they are already 
routinely made part of a more comprehensive service agreement (for 
example, a contract between a physician and a managed care entity for 
the provision of physician services, or a preferred provider network 
agreement). We believe that this burden is a result of usual and 
customary business practice and, as such, is exempt from the PRA under 
5 CFR 1320.3(b)(5).

Section 411.355 General Exceptions to the Referral Prohibition Related 
to Both Ownership/Investment and Compensation

    Paragraph (e)(1)(iii) of this section requires that the 
relationship of the components of the academic medical center must be 
set forth in written agreement(s) or other written document(s) that 
have been adopted by the governing body of each component. If the 
academic medical center is one legal entity, this requirement will be 
satisfied if transfers of funds between components of the academic 
medical center are reflected in the routine financial reports covering 
the components.
    The burden associated with this requirement is that of documenting 
compliance, either in written documents or routine financial reports. 
The written documents, adopted by the governing body of each component, 
detailing the relationship of the components of the academic medical 
center may be any documents generated in the usual course of business, 
such as articles of incorporation or bylaws. In response to comments, 
we have decreased the minimal burden associated with this requirement 
for academic medical centers that consist of one legal entity. Those 
academic medical centers will satisfy the requirement if transfers of 
funds between components of the academic medical center are reflected 
in routine financial reports generated in the usual course of business. 
We believe that the burden imposed by Sec.  411.351(e)(1)(iii) is a 
result of usual and customary business practice and, as such, is exempt 
from the PRA under 5 CFR 1320.3(b)(5). In addition, this burden 
(without the relief granted in this interim final rule for certain 
academic medical centers) was found to be exempt from the requirements 
of the PRA in Phase I (66 FR 856, 949).

Section 411.357 Exceptions to the Referral Prohibition Related to 
Compensation Arrangements

    This section requires a written agreement signed by the parties for 
space and equipment rental agreements and arrangements for personal 
services, physician recruitment, certain group practice arrangements 
with a hospital, fair market value compensation, and indirect 
compensation. In addition, an entity's professional courtesy policy 
must be set out in writing if there is any whole or partial coinsurance 
reduction, and an entity must notify its insurers that the entity has a 
professional courtesy policy.
    The burden associated with these requirements is that of obtaining 
agreements in writing, setting out professional courtesy policies in 
writing and notifying insurers that an entity has a professional 
courtesy policy. The burden also includes a requirement that all 
separate personal service arrangements between an entity and a 
physician or an immediate family member of a physician must incorporate 
each other by reference or the entity must maintain centrally a master 
list of contracts that is updated and preserves the historical record 
of the personal service contracts. The lease of equipment is usually 
and routinely set forth in a written agreement, as are personal 
services arrangements, recruitment agreements, and contracts between 
group practices and hospitals. Therefore, the requirement that these 
arrangements be set forth in a written agreement does not impose an 
additional burden beyond usual business practices. In addition, the 
burden that direct and indirect compensation arrangements be set forth 
in writing was formerly found to be exempt from the requirements of the 
PRA in the Phase I final rule (66 FR 856). We believe that the burden 
of these written agreements is a result of usual and customary business 
practice and, as such, is exempt from the PRA under 5 CFR 1320.3(b)(5).
    The requirement to notify insurance companies that an entity has a 
professional courtesy policy under which coinsurance is reduced or not 
collected could be met by creating a model letter or applying an edit 
to a claim where professional courtesy applies. We estimate that a 
health care entity would have to spend approximately 25 minutes to 
draft the model letter and then 5 minutes to prepare a letter for each 
insurer. We do not know how many of the 1.2 million entities (including 
approximately 581,108 physicians) that furnish services to Medicare 
beneficiaries would offer professional courtesy to their bona fide 
medical staffs or to all physicians in the local community. However, 
traditionally, only hospitals and physicians have provided professional 
courtesy to physicians, their immediate family members, and sometimes 
the physician's staff. We do not expect this pattern to change 
significantly but, for purposes of this analysis, we estimate that 75 
percent of hospitals, 100 percent of physicians, and 10 percent of 
entities other than physicians and hospitals will offer professional 
courtesy. We also believe that these numbers are high but we

[[Page 16120]]

cannot satisfactorily reduce these estimates. That is, we do not 
believe that all physicians and all hospitals offer professional 
courtesy and we do not believe that even 10 percent of entities that 
have rarely offered professional courtesy will now start offering it.
    Most of the 581,108 physicians practice in group practices. Many 
physicians practice in very large groups, while many practice in multi-
specialty practices of 15 to 20 physicians or single specialty groups 
of fewer than 10 physicians. For purposes of this discussion, we assume 
that the median number of physicians practicing together is 10. 
Therefore, we assume there are 58,110 physician entities (groups or 
sole practitioners) that could and would offer professional courtesy. 
We also assume that 75 percent of all hospitals (6,018 x 75 percent = 
4,514) would offer professional courtesy.
    We assume that each hospital, physician group practice, and sole 
physician practice would have to notify 10 insurers the first year 
under this interim final rule and that the other health care entities 
would have to notify 5 insurers. Therefore, for physicians and 
hospitals that choose to use a model letter, 58,110 physician entities 
+ 4,514 hospitals would each spend a total of 75 minutes [25 minutes to 
prepare model letter + (10 insurers x 5 minutes for preparing each 
copy) = 75 minutes] to comply with the notification requirement. This 
would result in an estimated overall burden on physicians and hospitals 
of approximately 78,280 hours. The overall burden for entities other 
than hospitals and physicians should be 51,073 hours. (1,200,000 
entities - 581,108 physicians - 6,018 hospitals = 612,874 x (10 
percent) x [(25 minutes + (5 insurers x 5 minutes for preparing each 
copy)] = 51,073). In each subsequent year, we expect that there might 
be one notification per entity to two new insurance companies, which 
would amount to 10 minutes per entity x (58,111 physicians + 4,514 
hospitals + 612,874 other entities) = 102,898 hours.
    Although we have estimated that it would take 25 minutes for each 
entity to create a model letter, we expect that a chain of hospitals or 
other entities would choose to prepare one model letter for use by each 
of its members. Also, we expect that some individual may develop a 
model letter that would be used by many entities. Although the 
paperwork burden may seem large, overall, we expect that the burden on 
an individual entity would be relatively minimal. The provisions in the 
personal services arrangements exception in this section requires that 
all separate arrangements between an entity and a physician or an 
entity and a member of a physician's immediate family must incorporate 
each other by reference or all separate arrangements must be identified 
in a master list of contracts that is maintained and updated centrally. 
This requirement was suggested by the industry because it is less 
burdensome than the requirement in the proposed rule and because it 
more closely reflects current business practices (or practices that can 
be easily adapted). We added the requirements that the master list must 
be made available for review by the Secretary upon request and that the 
master list must be maintained in a manner that preserves the 
historical record. In the alternative, annual or other regular 
financial statements (such as quarterly statements) that clearly show 
parties, dates, payments, and purposes of payments separately for each 
personal service contract can qualify as a master list if the 
statements are appropriately cross-referenced in the agreement. An 
entity could meet this requirement by having several master lists that, 
taken together, cover all of the contracts with the referring physician 
and immediate family members.
    The ``master list'' alternative should impose minimal, if any, 
burden because it is a usual and customary business practice for a 
company to maintain records of its contracts. However, for those 
entities without a master list, multiple lists, or databases, creating 
a master list will take time. We request comments on these 
requirements.
    Of the approximately 677,002 health care entities (58,110 physician 
entities + 6,018 hospitals + 612,874 other entities), we estimate that 
one-quarter, 169,251, contract for personal services with physicians or 
their immediate family members. We expect that many of these entities 
are relatively small physician group practices, clinical laboratories 
or other suppliers that can easily furnish a master list of contracts 
with physicians and immediate family members or have one contract with 
a physician or family member that covers everything this individual 
performs for the small entity. We expect that larger entities can meet 
this recordkeeping requirement relatively easily by creating a master 
list of contracts. We recognize that it is possible that some large 
entities (for example, certain urban hospitals) may have multiple 
contracts with physicians and family members and not currently meet 
this requirement.
    We estimate that, on average, it would take a large entity 7 hours 
to meet this requirement and a small entity 2 hours. We assume that, 
since public commenters recommended the use of cross-referencing to a 
master list of contracts, many entities already have such a list. 
Therefore, we estimate that one-half of the 169,251 entities affected 
by this requirement will have to create a master list. Assuming that 
one-half of the entities are small and one half are large entities, we 
estimate that there will be a one-time burden of [(\1/2\ x 169,251 x 2 
hours) + (\1/2\ x 169,251 x 7 hours)] = 677,000 hours. We also estimate 
that it would take one-half of these entities \1/2\ hour annually to 
update the master list and it would take one-half of the entities 1 
hour annually to update the master list, resulting in an annual burden 
of 126,938 hours. We note that these are preliminary estimates, so we 
specifically request comments on these estimates.
    Although the overall burden in creating a master list or 
referencing all other contracts with a physician or immediate family 
member in each contract might appear sizable, the burden on an 
individual entity should be relatively minimal.
    Under paragraph (d)(2), which allows physician incentive plans 
under the personal services exception, the entity must give the 
Secretary access to the plan upon request.
    Making the information available (or giving access) to the 
Secretary should occur rarely and would be exempt from the PRA under 5 
CFR 1320.4(a) as information required during an administrative action, 
investigation, or audit involving an agency against specific 
individuals or entities.

Section 411.361 Reporting Requirements

    This section requires that, except for certain exceptions, all 
entities furnishing services for which payment may be made under 
Medicare must submit information to us concerning their financial 
relationships (as defined in the section), in the form, manner, and at 
the times that we specify.
    The information that we request can include the following:
    (1) The name and unique physician identification number (UPIN) of 
each physician who has a financial relationship with the entity.
    (2) The name and UPIN of each physician who has an immediate family 
member (as defined in Sec.  411.351) who has a financial relationship 
with the entity.
    (3) The covered services furnished by the entity.
    (4) With respect to specified physicians, the nature of the 
financial relationship (including the extent and/or value of the 
ownership or investment

[[Page 16121]]

interest or the compensation arrangement) as evidenced in records that 
the entity knows or should know about in the course of prudently 
conducting business, including records that the entity is already 
required to retain to comply with the rules of the Internal Revenue 
Service and the Securities and Exchange Commission and other rules of 
the Medicare and Medicaid programs.
    The first 3 requirements above are statutorily mandated. The fourth 
requirement was proposed in the proposed rule (63 FR 1659) and adopted 
in this rule with no changes.
    Entities that are subject to the requirements of this section must 
retain the information, and documentation sufficient to verify the 
information, and, upon request, must make that documentation available 
to us or to the OIG.
    The burden associated with these requirements is that of 
maintaining documentation and, if necessary, making it available to the 
Secretary. We believe that the information we are requiring the 
entities to maintain is information that they would have and maintain 
already. The proposed rule proposed that entities that are subject to 
requirements of this section must report to the agency on a prescribed 
form and thereafter report once a year all changes to the submitted 
information that occurred in the previous 12 months. In this rule, the 
requirement has been modified to require entities to make information 
available only upon request and to maintain the information only for 
the length of time specified by the applicable regulatory requirements 
for the information (that is, IRS, SEC, Medicare, Medicaid, or other 
programs). This substantially reduces the burden on entities, since 
this is information that is required to be maintained by other 
regulatory agencies in the usual course of business. We believe that 
this burden is a result of usual and customary business practice and, 
as such, is exempt from the PRA under 5 CFR 1320.3(b)(5).
    Making information available to the Secretary will rarely be 
necessary and the information will be collected during the conduct of 
an administrative action, investigation, or audit involving an agency 
against specific individuals or entities. It is thus exempt from the 
PRA under 5 CFR 1320.4(a).
    For those requirements that are not exempt from the PRA, we have 
quantified the burden associated with compliance and have set forth 
time estimates. The total time estimated to be necessary to comply with 
the requirements of this section is 806,353 hours for all entities in 
the country in the first year, and 229,836 hours annually thereafter.
    We have submitted a copy of this interim final rule with comment 
period to OMB for its review of the information collection requirements 
described above. These requirements are not effective until they have 
been approved by OMB.
    If you comment on any of these information collection and record 
keeping requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Division of Regulations Development 
and Issuances, Attn: Reports Clearance Officer, 7500 Security 
Boulevard, Baltimore, MD 21244-1850, Attn: John Burke, CMS-1810-IFC.
 and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, Desk Officer.

XV. Regulatory Impact Statement

A. Overall Impact

[If you choose to comment on issues in this section, please include the 
caption ``Impact'' at the beginning of your comments.]

    We have examined the impact of Phase II of this rulemaking as 
required by Executive Order 12866 (September 1993, Regulatory Planning 
and Review), the Regulatory Flexibility Act (RFA) (September 16, 1980, 
Pub. L. 96-354), section 1102(b) of the Social Security Act, the 
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive 
Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) 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 in any 1 year). 
Although we cannot determine with precise certainty the aggregate 
economic impact of Phase II of this rulemaking, we do not believe that 
the impact will approach $100 million or more annually. Physicians and 
DHS entities have been required to comply with the physician self-
referral prohibition for many years. The prohibition has applied to 
physician referrals for clinical laboratory services since 1992 and to 
referrals for all other DHS since 1995. Phase I interpreted the 
prohibition narrowly and the exceptions broadly, and established 
additional regulatory exceptions for legitimate arrangements that would 
otherwise violate the prohibition. Phase I covered the following:
     Sections 1877(a) and 1877(b) of the Act (the 
general prohibition and the exceptions applicable to both ownership and 
compensation arrangements);
     The statutory definitions at section 1877(h) of 
the Act;
     Certain additional regulatory definitions; and
     New regulatory exceptions promulgated under 
section 1877(b)(4) of the Act for certain arrangements involving the 
following--
     Academic medical centers;
     Implants furnished by an ambulatory surgery 
center;
     EPO and certain dialysis-related outpatient 
prescription drugs;
     Preventive screening tests, immunizations, and 
vaccines;
     Eyeglasses and contact lenses after cataract 
surgery;
     Non-monetary compensation up to $300;
     Fair market value compensation;
     Medical staff incidental benefits;
     Risk-sharing arrangements;
     Compliance training; and
     Indirect compensation arrangements.
    Phase II covers--
     The remaining provisions of section 1877 of the 
Act (namely, the exceptions for ownership and investment interests and 
the exceptions for various compensation arrangements);
     Additional regulatory definitions; and
     Additional new regulatory exceptions promulgated 
under section 1877(b)(4) of the Act for certain arrangements involving 
the following:
     Temporary noncompliance with an applicable 
exception;
     Intra-family rural referrals;
     Charitable donations by a physician;
     Referral services;
     Obstetrical malpractice insurance subsidies;
     Professional courtesy;
     Retention payments in underserved areas; and
     Community-wide health information systems.
    Phase II also addresses public comments on the Phase I regulations.

[[Page 16122]]

Among other things, Phase II revises the Phase I ``set in advance'' 
definition to permit percentage compensation arrangements; revises the 
Phase I exception for academic medical centers to make it easier to 
qualify as an academic medical center or a component of an academic 
medical center; revises the Phase I ``same building'' definition to 
provide a simpler, bright-line rule that will substantially decrease 
the regulatory burden on many physician practices; eliminates the 1998 
proposed restriction on productivity bonuses, thereby permitting 
employees to be paid based on personal productivity (but not ancillary 
referrals); expands the physician incentive plan exception to 
downstream contractors in the managed care context; and expands the 
physician recruitment exception to federally qualified health centers.
    Phase II does not generally unsettle existing financial 
relationships, and it offers sufficient exceptions to enable parties to 
restructure noncompliant arrangements. Wherever possible, we have 
accommodated legitimate financial relationships, thereby reducing the 
regulatory burden. For these reasons, we conclude that this is not a 
major rule with an economically significant effect of $100 million in 
any 1 year.
    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 because they are nonprofit organizations or because 
they generate revenues of $6 million to $29 million in any one year. 
Currently, there are approximately 1.2 million physicians, other health 
care practitioners, and medical suppliers that receive Medicare 
payment. For purposes of the RFA, according to the latest numbers from 
the Small Business Administration's North American Industrial 
Classification System, 95 per cent of offices of physicians in the U.S. 
have total revenues of $8.5 million or less and are considered small 
entities. Individuals and States are not included in the definition of 
a small entity. We determine that this interim final rule does not have 
a significant impact on small businesses because it does not increase 
regulatory burden, but rather reduces it. As noted above, we are 
generally interpreting the prohibition narrowly and the exceptions 
broadly. We are creating new exceptions where appropriate, conforming 
the regulation to existing Medicare payment and coverage policies, and 
minimizing the possibility of disrupting non-abusive arrangements. 
Overall, this rule is very accommodating to legitimate industry 
practices for hospitals and physicians.
    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 100 beds. For the same reasons identified above for small 
businesses, this rule does not significantly impact small rural 
hospitals. Moreover, rural hospitals benefit in this rule from a new 
exception permitting certain retention payments for physicians in 
health professional shortage areas (HPSAs), and a new exception for 
community-wide health information systems. This interim final rule also 
revises the physician recruitment exception to permit hospitals to 
recruit residents and physicians who have been in practice for less 
than one year but for whom recruitment does not require relocation. 
This benefits small rural hospitals, which often experience difficulty 
in recruiting physicians. In summary, this interim final rule does not 
have a substantial negative 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 one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $100 million. Phase II of this rulemaking does not 
have such an effect on the governments mentioned, and we do not believe 
the private sector costs meet the $110 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 II of this rulemaking 
will have a substantial effect on State or local governments.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because, for the reasons identified above, we have 
determined, and we certify, that this interim final rule 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. For the benefit of the public, we discuss below 
the anticipated effects of the rule and the alternative regulatory 
options we considered.

B. Anticipated Effects

    This interim final rule with comment period primarily affects 
physicians and health care entities that furnish items and services to 
Medicare beneficiaries. For the reasons stated above, we do not 
anticipate that this rule will have a significant economic impact on a 
substantial number of small entities. In fact, we expect that Phase II 
of this rulemaking will have a much smaller impact than the provisions 
we proposed. Nevertheless, we wish to inform the public of what we 
regard as the major effects of this rulemaking.
    In response to comments on the January 1998 proposed rule, we 
created in Phase I a more manageable regulation that included ``bright 
line'' rules to help the health care community determine more easily 
when a physician's referrals are in compliance with the law. In this 
interim final rule, we are continuing our efforts to establish ``bright 
line'' rules, and attempting to minimize the effect of this rule on 
physicians and DHS entities by interpreting the law in a practical and 
realistic manner. The result, we believe, is an overall approach that 
should have far less impact on the business relationships of physicians 
and DHS entities than the January 1998 proposed rule. We discuss below 
some of the possible economic effects upon physicians and DHS entities. 
We also briefly discuss the effects of the rules on Medicare 
beneficiaries.
1. Effects on Physicians
    The primary statutory sanctions for violating the physician self-
referral prohibition are nonpayment of claims for DHS furnished as the 
result of a prohibited referral and the corresponding obligation to 
refund any amounts collected on those claims. These sanctions target 
the entities that furnish DHS, including physician group practices. 
Referring physicians may be sanctioned with the imposition of civil 
monetary penalties (CMPs) only for knowing violations of the statutory 
prohibition. Nevertheless, although referring physicians are not the 
primary targets of the sanctions for violating the statute, their 
financial relationships with DHS entities must comply with the statute 
and implementing regulations. Accordingly, this interim final rule may 
affect a physician's or group practice's decision to enter into a 
particular

[[Page 16123]]

financial relationship and the manner in which the arrangement is 
structured.
    We received voluminous comments on the January 1998 proposed rule 
from or on behalf of physicians and DHS entities (especially 
hospitals). 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 conflicted with other longstanding policies on coverage and 
similar issues; that the rule was unclear in many areas; that ``bright 
line'' rules were essential in light of the severe statutory penalties 
(especially payment denial); 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 have made every effort in both Phase 
I and this Phase II rulemaking to address the concerns of physicians 
and physician group practices while remaining faithful to the statute. 
We discuss below the major provisions of this rule that affect 
physicians.
    a. Compensation. This interim final rule includes many 
clarifications and several new exceptions related to physician 
compensation. For example, this interim final rule revises the set-in 
advance definition to permit certain fluctuating compensation 
arrangements if the payment methodology is set in advance; eliminates 
the proposed restriction on productivity bonuses, and permits employees 
to be paid bonuses based on personal productivity (but not ancillary 
referrals). Moreover, the regulations permit group practice and 
employed physicians, like independent contractors, to be paid under 
risk-sharing arrangements. Phase II also clarifies the indirect 
compensation arrangements definition and exception, as well as the 
definitions of certain key concepts, such as ``volume and value of 
referrals'' and ``other business generated.'' Phase II also creates a 
physician hourly compensation ``deeming provision'' that deems certain 
hourly compensation to physicians to be fair market value for purposes 
of complying with various exceptions. All of these changes ease the 
burden and cost of complying with the statutory prohibition by creating 
or implementing clear rules in such a way that parties can determine 
more easily and with greater certainty whether their financial 
relationships comply with an exception. In addition, by expanding some 
definitions and exceptions, a greater number of legitimate arrangements 
can comply with the statute.
    b. In-office Ancillary Services. This interim final rule revises 
the in-office ancillary services exception. Specifically, this interim 
final rule eases the same building requirement by substituting simple, 
more expansive tests. The revised in-office ancillary services 
exception should also make it less burdensome for radiologists and 
oncologists to comply with the exception because the revised exception 
includes more definite standards. Thus, these physicians will have 
greater certainty that their arrangements comply with the statute.
    c. Physician Recruitment. This interim final rule revises the 
physician recruitment relocation exception to focus on relocation of 
the physician's office and percentage of new patients, rather than the 
physician's residence. The exception now provides for either a minimum 
move of the physician's office practice or a substantial percentage (75 
percent) of new patients. In addition, the relocation requirement in 
this exception does not apply to residents and physicians in practice 
for less than one year. It also now allows certain joint recruiting 
with existing group practices. Together, these changes permit a greater 
number of legitimate arrangements to comply with the statute.
    This interim final rule also adds an exemption for certain 
retention payments for physicians in health professional shortage areas 
(HPSAs) or in an area with demonstrated need for the retained physician 
as determined by the Secretary in an advisory opinion issued pursuant 
to section 1877(d)(6) of the Act. This new exception will permit a 
greater number of legitimate arrangements to comply with the law.
    d. Miscellaneous. This interim final rule contains a new exception 
for professional courtesy, and establishes an exception for certain 
inadvertent and temporary lapses in compliance with an existing 
exception, both of which should minimize the effect of the final rule. 
To the extent that new or expanded exceptions permit additional 
legitimate arrangements to comply with the law, the potential and 
significant costs of noncompliance (for example, overpayment refunds, 
civil monetary penalties) are avoided. In addition, these changes will 
require fewer arrangements to be restructured to comply with an 
exception, thus reducing the costs of compliance.
2. Effects on Other Health Care Providers and Suppliers
    As we stated above, Phase II 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 may also be subject to other sanctions, including fines and 
exclusion from Federal health care programs, if they knowingly submit a 
claim in violation of the prohibition. While all physicians and DHS 
entities are subject to this rule, we lack the data to determine the 
number of entities whose financial relationships with physicians must 
be terminated or revised to comply with this rule. However, we believe 
the number will be fewer than we had anticipated in the January 1998 
proposed rule and the January 4, 2001 Phase I final rule because, as 
with Phase I, we have interpreted the prohibition narrowly and the 
exceptions broadly.
    There are a few provisions that will be especially beneficial to 
hospitals and other DHS entities. The first of these is the creation of 
safe harbors for different types of hourly compensation. This minimizes 
the risk for physicians, their employers, and DHS entities that 
contract with physicians to provide services. This interim final rule 
sets forth a physician hourly compensation deeming provision that deems 
hourly payments to a physician to be fair market value if the payment 
equals (i) the community hourly rate for ER doctors, or (ii) the 
average hourly rate for specialties as determined by averaging certain 
national physician compensation surveys. This interim final rule also 
addresses the issue of reporting requirements by requiring that DHS 
entities retain relevant information and make it available upon request 
by the Secretary. By not requiring periodic reporting, we have 
significantly eased the cost and burden of compliance. In addition, 
Phase II includes ownership exceptions for publicly-traded securities 
and mutual funds, rural providers, and hospitals. Additional exceptions 
that benefit DHS entities include the intra-family referrals exception, 
the physician retention in underserved areas exception, the community-
wide health information systems exception, and the temporary grace 
period exception. Again, to the extent that new or expanded exceptions 
permit additional legitimate arrangements to comply with the law, the 
potential and significant costs of restructuring arrangements is 
reduced, and the costs of noncompliance are avoided entirely.

[[Page 16124]]

3. Effects on the Medicare and Medicaid Programs
    Section 1877 of the Act was enacted to address over-utilization, 
anti-competitive behavior, and other abuses of health care services 
that occur when physicians have financial relationships with certain 
ancillary services entities to which they refer Medicare or Medicaid 
patients. Physician financial arrangements may have some anti-
competitive effects to the extent that those relationships discourage 
other providers from entering a market in which patients are primarily 
referred to physician-owned entities or DHS entities that maintain 
generous compensation arrangements with physicians. Anti-competitive 
behavior can increase program costs if the DHS entities with which 
physicians have financial relationships are favored over other, more 
cost-efficient providers or providers that furnish higher quality care. 
Overutilization increases program costs because Medicare (or Medicaid) 
pays for more items or services than are medically necessary.
    We expect that Phase II of this rulemaking will result in savings 
to the program by minimizing anti-competitive business arrangements as 
well as over-utilization or other abuse of covered services. For 
example, the new ``same building'' definition will prohibit 
arrangements in which DHS are insufficiently tied to the referring 
physician's core medical practice and essentially constitute separate 
business enterprises. We have made clear that these arrangements, which 
could otherwise encourage overutilization and anti-competitive 
behavior, will not qualify for the in-office ancillary services 
exception. We cannot gauge with any certainty the extent of these 
savings to the program at this time.
    We note that while we have delayed rulemaking with respect to 
portions of the application of section 1903(s)(2) of the Act, the fact 
that most providers and suppliers of Medicaid services also furnish 
Medicare services means that the Medicaid programs should indirectly 
benefit from compliance on the Medicare side. Thus, Phase II of this 
rulemaking should result in savings to the Medicaid program, but we 
cannot gauge with any certainty the extent of these savings at this 
time.
4. Effects on Beneficiaries
    Some commenters thought the January 1998 proposed rule exceeded our 
statutory authority and imposed unnecessary and costly burdens on 
physicians and other health care providers/suppliers that would harm 
patient access to health care facilities and services. We have tried to 
ensure that this rule will not adversely impact the medical care of 
Federal health care program beneficiaries. Where we have determined 
that Phase II of this rulemaking may have an impact on 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 may continue to receive services in 
the same location. In almost all cases, we believe Phase II of this 
rulemaking should not require substantial changes in delivery 
arrangements. For the same reasons noted above under ``Effects on the 
Medicare and Medicaid Programs,'' we believe that this interim final 
rule will help minimize anti-competitive behavior that can affect where 
a beneficiary receives health care services and possibly the quality of 
the services furnished, and we believe this rule will minimize the 
number of medically unnecessary tests performed or items or services 
ordered on Federal health care program beneficiaries.

C. Alternatives Considered

    In drafting the January 1998 proposed rule, we interpreted the 
statute strictly and literally. After reviewing the voluminous number 
of comments we received, we considered in Phase I many alternatives to 
accommodate the practical problems that commenters raised, while still 
remaining true to the statutory language and intent. As noted 
throughout the Phase II preamble, we continued to consider alternatives 
raised in comments submitted on the January 1998 proposed rule and, 
where applicable, comments received on Phase I. For example, we 
received many comments requesting modifications to various provisions 
concerning academic medical centers. In Phase I, we added a new 
regulatory exception for academic medical center arrangements, pursuant 
to section 1877(b)(4) of the Act. In response to objections from Phase 
I commenters about the definition of an academic medical center in 
Sec.  411.355(e)(2), we are revising the definition in Phase II to more 
accurately reflect the nature of these entities. The new definition 
permits hospitals or health systems that sponsor four or more approved 
medical education programs to qualify as an academic medical center, 
provided they meet the other criteria in the exception. We considered 
requiring the hospital or health system to sponsor five or more 
approved medical education programs. However, after reviewing the issue 
more carefully, we decided that a requirement for four programs would 
adequately ensure that the hospital or health system has a substantial 
teaching mission and would not disqualify institutions that otherwise 
appeared to be bona fide academic medical centers.
    We received comments suggesting that we revise the ``same 
building'' requirement in the in-office ancillary services exception to 
allow non-abusive arrangements or to clarify terms that commenters 
claimed were ambiguous. We considered maintaining the Phase I ``same 
building'' test, but realized that we would be unable to protect 
legitimate arrangements involving the specialty groups that primarily 
furnish DHS such as oncology and radiology. For example, under the 
Phase I definition, 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. At the suggestion of commenters, we considered replacements for 
the term ``substantial,'' including ``any,'' ``more than incidental,'' 
``10 percent,'' and ``significant.'' Ultimately, we decided that these 
replacement terms were not sufficiently bright-line and would not 
necessarily protect legitimate arrangements involving radiologists and 
oncologists. We replaced the Phase I same building test with three 
separate options, one of which was specifically designed to permit 
legitimate arrangements involving radiologists and oncologists. Under 
that test, a designated health service is furnished in the ``same 
building'' if the building is one in which the referring physician or 
his or her group practice has an office that is normally open to their 
patients at least 35 hours per week, and the referring physician or one 
or more members of his or her group regularly practices medicine and 
furnishes physician services to patients in that office at least 30 
hours per week. However, the revised provision should not unsettle 
legitimate arrangements under the Phase I definition. In fact, the new 
``same building'' test should permit some legitimate arrangements not 
protected by Phase I.
    Many Phase I commenters objected to the definition of compensation 
that is ``set in advance'' because it did not permit certain percentage 
compensation arrangements. We considered maintaining the Phase I 
definition of ``set in advance,'' but realized that hospitals, academic 
medical centers, and other entities would have to renegotiate numerous 
legitimate contracts for physician services, potentially causing 
significant

[[Page 16125]]

disruption within the health care industry without a corresponding 
program integrity benefit. We were concerned that such disruption could 
unnecessarily inconvenience Medicare beneficiaries. Accordingly, 
reviewing this subject more thoroughly, we are revising the definition 
of ``set in advance.'' Compensation will be considered ``set in 
advance'' if the aggregate compensation, or a time-based or unit-of-
service-based (whether per-use or per-service) amount, or a specific 
formula for calculating certain fluctuating compensation, is set forth 
in the initial agreement between the parties (and before the furnishing 
of the items or services for which the compensation is to be paid).
    Commenters on the January 1998 proposed rule expressed considerable 
concern that the proposed reporting requirements were unduly 
burdensome. In response, we are making a number of changes to the 
reporting requirements. Most significantly, we are eliminating the 
requirement to report periodically information regarding financial 
relationships. Instead, we are requiring that entities retain certain 
information regarding their financial relationships with referring 
physicians and submit that information only upon request. The 
information required to be retained is that which the entity knows or 
should know about in the course of prudently conducting business, 
including records that the entity is already required to retain in 
accordance with the rules of the Internal Revenue Service, the 
Securities and Exchange Commission, and the Medicare and Medicaid 
programs. We are also specifying that ownership or investment interests 
in publicly-traded securities and mutual funds need not be reported if 
they satisfy the exceptions for such financial relationships in Sec.  
411.356(a) and Sec.  411.356(b).
    We considered maintaining the original reporting requirements, but 
decided that periodic reporting would not be particularly helpful to 
the agency. CMS and its contractors would be overwhelmed by the number 
of reports and financial relationships that would need to be analyzed. 
We decided that we would make better use of our available resources if 
we collected information on financial relationships in a more focused 
manner (such as during a fraud investigation of a particular provider 
or group of providers).
    In response to comments, we considered allowing a referring 
physician to ``stand in the shoes'' of his group practice or wholly-
owned professional corporation (PC) when the only intervening entity 
between the referring physician and the DHS entity is his or her PC. 
Under such a rule, what would otherwise be analyzed as an indirect 
compensation arrangement could instead be analyzed as a direct 
compensation arrangement. We recognize in this interim final rule that 
it is not necessary to treat a referring physician as separate from his 
or her wholly-owned PC, and we have revised the definition of 
``referring physician'' accordingly. However, we decided not to make 
any changes to the Phase I rule with respect to the issue of indirect 
compensation arrangements that are created when a group practice is an 
intervening entity in the chain between the DHS entity and the 
referring physicians who are members of the group. We believe that such 
a change would unnecessarily complicate the final rule and create 
confusion. Moreover, we believe such a change is unnecessary, since the 
knowledge standard in the indirect compensation arrangements definition 
and exception adequately protects DHS entities.
    We have created an exception for certain referrals from a referring 
physician to a DHS entity with which his or her immediate family member 
has a financial relationship, if the patient being referred resides in 
a rural area and there is no DHS entity available in a timely manner in 
light of the patient's condition to furnish the DHS to the patient in 
his or her home or within 25 miles of the patient's home. In creating 
this exception for intra-family rural referrals, we considered 
permitting such referrals regardless of whether the patient resides in 
a rural area. Although intra-family referrals may be relatively 
infrequent, we decided to limit the exception to rural referrals 
because we cannot create a new regulatory exception if it poses any 
risk of program or patient abuse. In drafting the exception, we also 
considered using a 15-mile standard. Ultimately, we decided that a 25-
mile standard would be more consistent with similar standards elsewhere 
in the regulation and would minimize any unfair competitive effect on 
non-physician owned DHS entities that may seek to provide services in 
rural areas.
    As these examples demonstrate, our approach in Phase II of this 
rulemaking is to address as many of the industry's concerns as 
possible. As noted throughout this preamble, we considered a variety of 
suggestions and alternatives, selecting only those that are consistent 
with the statute's goals and directives and that will protect Federal 
health care program beneficiaries' access to services.

XVI. Waiver of Proposed Rulemaking

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) provides that, effective December 8, 
2003, the Secretary, in consultation with the Director of the Office of 
Management and Budget (OMB), shall establish and publish a regular 
timeline for the publication of final regulations based on the previous 
publication of a proposed regulation or an interim final regulation. 
Section 902 further provides that the timeline may vary among different 
regulations, but shall not be longer than three years except under 
exceptional circumstances.
    Part of this Phase II rule finalizes portions of a proposed rule 
that was published in January 1998. Although we do not believe that 
section 902 prohibits the Secretary from finalizing every proposed rule 
that was published more than three years before December 8, 2003, we 
recognize that section 902 may be susceptible to more than one 
interpretation. Accordingly, out of an abundance of caution, we are not 
publishing this rule as a final rule. Instead, we are waiving notice of 
proposed rulemaking and publishing this rule as an interim final rule 
with comment period. Under the Administrative Procedures Act (5 U.S.C. 
553(b)), an agency may waive publication of a notice of proposed 
rulemaking if the agency finds good cause that the notice and comment 
procedure is impracticable, unnecessary, or contrary to the public 
interest and the agency incorporates into the rule a statement of, and 
the reasons for, such a finding. For the reasons discussed below, we 
find that it would be impracticable and contrary to the public interest 
to publish as a proposed rule approximately half of the material 
contained in this interim final rule with comment period.
    The physician self-referral prohibition is implicated in nearly 
every financial relationship between and among physicians and entities 
that furnish DHS. Violations of the law (regardless of the intent of 
the parties) have substantial financial consequences, including denial 
of payment (or refunding of payments received) for DHS claims; civil 
monetary penalties; and program exclusion. The imposition of these 
sanctions can result in multi-million dollar liability. Violations of 
the physician self-referral prohibition may also be pursued under the 
False Claims Act, 31 U.S.C. 3729-3733. Given the scope and strict 
liability nature of the prohibition and the significant financial 
consequences of noncompliance, the

[[Page 16126]]

industry has asked for ``bright-line'' rules and new regulatory 
exceptions for nonabusive arrangements.
    We believe it is impracticable and not in the public interest to 
offer what would essentially constitute a third opportunity to comment 
on much of the material in this rule and thereby delay finalizing 
useful exceptions and the many ``bright-line'' rules necessary either 
to protect the Medicare program from fraud and abuse or permit 
nonabusive arrangements. We have already issued a proposed rule, major 
portions of which were finalized upon publication of the Phase I final 
rule with comment period and became effective on January 4, 2002. This 
interim final rule responds to public comments received on the January 
1998 proposed rule as well as public comments received on Phase I. 
Phase I comments necessarily informed our rulemaking with respect to 
finalizing the remainder of the January 1998 proposed rule because 
those comments addressed definitions and other matters that apply 
throughout the regulatory scheme. To publish yet another proposed rule 
on this matter would prevent affected parties from using important new 
or expanded exceptions. Even if we were able to finalize a proposed 
rule in an expedited fashion, the inability to use the new or expanded 
exceptions could expose DHS entities to significant financial liability 
for otherwise nonabusive relationships. Moreover, the public will not 
be denied the opportunity to comment on this rule because we are 
publishing it as an interim final rule with comment period. In 
accordance with section 902 of MMA, we are obligated to consider 
comments on this interim final rule and publish a final rule addressing 
those comments within three years.
    In the Phase I preamble, we informed the public that we intended to 
publish a second final rule with comment period (Phase II) that would 
address the remainder of the proposed rule as well as comments on Phase 
I. The additional regulatory definitions and new regulatory exceptions 
in Phase II are inextricably intertwined with the Phase I final rule. 
The industry has patiently and eagerly awaited the publication of a 
single, comprehensive Phase II regulation that would provide the 
guidance and finality necessary for physicians and health care 
providers to structure their financial relationships in a manner that 
assures each party's compliance with the statutory prohibition. It 
would be contrary to the public interest to upset expectations by 
publishing another proposed rule thereby denying affected parties the 
clarity and finality they expected to obtain with this rule. In 
addition, to extract a significant portion of the material in this 
interim final rule (much, if not all, of which will not be 
controversial) and to publish it separately in another proposed rule 
would thwart our efforts to present the unified and complete regulatory 
scheme necessary to support both compliance and enforcement efforts.
    In addition, further delay could disrupt or hinder our programmatic 
objective of improving beneficiaries' access to care. For instance, 
this interim final rule with comment period creates a new exception for 
certain payments made by a hospital or federally qualified health 
center to a physician to retain the physician's medical practice in a 
health professional shortage area. In addition, this interim final rule 
creates an exception for intra-family rural referrals and obstetrical 
malpractice insurance subsidies. Beneficiary access to care in 
underserved or rural areas is a critical programmatic objective. It is 
not in the public interest to delay finalizing the new exceptions 
designed to serve this purpose.
    For the reasons explained above, we find good cause to waive notice 
of proposed rulemaking and to issue this rule as an interim final rule 
with comment period.
    In accordance with the provisions of Executive Order 12866, Phase 
II 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.

0
For the reasons set forth in the preamble, CMS amends 42 CFR chapter IV 
as set forth below:

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

0
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 Exclusion of Particular Services

0
2. In Sec.  411.1, paragraph (a) is republished 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--Financial Relationships Between Physicians and Entities 
Furnishing Designated Health Services

0
3. The heading for subpart J is revised as set forth above, and subpart 
J is revised to read as follows:
Subpart J--Financial Relationships Between Physicians and Entities 
Furnishing Designated Health Services
Sec.
411.350 Scope of subpart.
411.351 Definitions.
411.352 Group practice.
411.353 Prohibition on certain referrals by physicians and 
limitations on billing.
411.354 Financial relationship, compensation, and ownership or 
investment interest.
411.355 General exceptions to the referral prohibition related to 
both ownership/investment and compensation.
411.356 Exceptions to the referral prohibition related to ownership 
or investment interests.
411.357 Exceptions to the referral prohibition related to 
compensation arrangements.
411.361 Reporting requirements.

Subpart J--Financial Relationships Between Physicians and Entities 
Furnishing Designated Health Services


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

[[Page 16127]]

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 ownership, investment, or compensation 
arrangements in the form, in the manner, and at the times specified by 
CMS.


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 subpart 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 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 or supplier 
(for example, a diagnostic imaging facility) is not a centralized 
building for purposes of this subpart. This provision does not preclude 
a group practice from providing services to other providers or 
suppliers (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 List of CPT/HCPCS Codes. All services so identified on the List 
of CPT/HCPCS Codes are clinical laboratory services for purposes of 
this subpart. Any service not specifically identified as a clinical 
laboratory service on the List of CPT/HCPCS Codes is not a clinical 
laboratory service for purposes of this subpart.
    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 this subpart, the term ``designated 
health services'' or 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 (for example, all services 
provided as home health services or inpatient and outpatient hospital 
services are DHS).
    Does not violate the anti-kickback statute, as used in this subpart 
only, means that the particular arrangement--
    (1) Meets a safe harbor under the anti-kickback statute in Sec.  
1001.952 of this title, ``Exceptions'';
    (2) Has been specifically approved by the OIG in a favorable 
advisory opinion issued to a party to the particular arrangement (e.g., 
the entity furnishing DHS) with respect to the particular arrangement 
(and not a similar arrangement), provided that the arrangement is 
conducted in accordance with the facts certified by the requesting 
party and the opinion is otherwise issued in accordance with part 1008 
of this title, ``Advisory Opinions by the OIG''; or
    (3) Does not violate the anti-kickback provisions in section 
1128B(b) of the Act.
    A favorable advisory opinion for purposes of this definition means 
an opinion in which the OIG opines that--
    (1) The party's specific arrangement does not implicate the anti-
kickback statute, does not constitute prohibited remuneration, or fits 
in a safe harbor under Sec.  1001.952 of this title; or
    (2) The party will not be subject to any OIG sanctions arising 
under the anti-kickback statute (for example, under sections 1128(a)(7) 
and 1128a(b)(7) of the Act) in connection with the party's specific 
arrangement.
    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--
    (1) 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. An entity does not

[[Page 16128]]

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-
    (i) Is the person or entity to which CMS makes payment for the DHS, 
directly or upon assignment on the patient's behalf; or
    (ii) Is the person or entity to which the right to payment for the 
DHS has been reassigned pursuant to Sec.  424.80(b)(1) (employer), 
(b)(2) (facility), or (b)(3) (health care delivery system) of this 
chapter (other than a health care delivery system that is a health plan 
(as defined in Sec.  1001.952(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).
    (2) A health plan, MCO, PSO, or IPA that employs a supplier or 
operates a facility that could accept reassignment from a supplier 
pursuant to Sec.  424.80(b)(1) and (b)(2) of this chapter, with respect 
to any designated health services provided by that supplier.
    (3) For purposes of this subpart, ``entity'' does not include a 
physician's practice when it bills Medicare for a diagnostic test in 
accordance with Sec.  414.50 of this chapter (Physician billing for 
purchased diagnostic tests) and section 3060.4 of the Medicare Carriers 
Manual (Purchased diagnostic tests), as amended or replaced from time 
to time.
    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, 
where the price or compensation has not been determined in any manner 
that takes into account the volume or value of anticipated or actual 
referrals. With respect to rentals and leases described in Sec.  
411.357(a), (b), and (l) (as to equipment leases only), ``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 
this definition, 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.
    An hourly payment for a physician's personal services (that is, 
services performed by the physician personally and not by employees, 
contractors, or others) shall be considered to be fair market value if 
the hourly payment is established using either of the following two 
methodologies:
    (1) The hourly rate is less than or equal to the average hourly 
rate for emergency room physician services in the relevant physician 
market, provided there are at least three hospitals providing emergency 
room services in the market.
    (2) The hourly rate is determined by averaging the 50th percentile 
national compensation level for physicians with the same physician 
specialty (or, if the specialty is not identified in the survey, for 
general practice) in at least four of the following surveys and 
dividing by 2,000 hours. The surveys are:
     Sullivan, Cotter & Associates, Inc.--Physician 
Compensation and Productivity Survey
     Hay Group--Physicians Compensation Survey
     Hospital and Healthcare Compensation Services--
Physician Salary Survey Report
     Medical Group Management Association--Physician 
Compensation and Productivity Survey
     ECS Watson Wyatt--Hospital and Health Care 
Management Compensation Report
     William M. Mercer--Integrated Health Networks 
Compensation Survey
    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 ``critical access 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, 42 CFR Sec.  410.26, 
and section 2050 of the Medicare Carriers (CMS Pub. 14-3), Part 3--
Claims Process, as amended or replaced from time to time.
    Inpatient hospital services means those services defined in section 
1861(b) of the Act and Sec.  409.10(a) and (b) of this chapter and 
include inpatient psychiatric hospital services listed in section 
1861(c) of the Act and inpatient critical access 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. ``Inpatient hospital 
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 are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``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

[[Page 16129]]

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 means the list of CPT and HCPCS codes that 
identifies those items and services that are designated health services 
under section 1877 of the Act or that may qualify for certain 
exceptions under section 1877 of the Act. It is updated annually, as 
published in the Federal Register, and is posted on the CMS Web site at 
http://www.cms.gov/medlearn/refphys.asp.
    Locum tenens physician means a physician who substitutes (that is, 
``stands in the shoes'') in exigent circumstances for a physician, in 
accordance with applicable reassignment rules and regulations, 
including section 3060.7 of the Medicare Carriers Manual (CMS Pub. 14-
3), Part 3--Claims Process, as amended or replaced from time to time.
    Member of the group or member of a group practice means, for 
purposes of this subpart, 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 (unless the leased employee meets the definition of an 
``employee'' under this Sec.  411.351).
    Outpatient hospital services means the therapeutic, diagnostic, and 
partial hospitalization services listed under sections 1861(s)(2)(B) 
and (s)(2)(C) of the Act; outpatient services furnished by a 
psychiatric hospital, as defined in section 1861(f) of the Act; and 
outpatient critical access hospital services, as defined in section 
1861(mm)(3) of the Act. ``Outpatient hospital services'' do not include 
emergency services furnished by nonparticipating hospitals and covered 
under the conditions described in section 1835(b) of the Act and 
subpart G of part 424 of this chapter. ``Outpatient hospital services'' 
include services that are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``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).
    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 (CMS Pub. 6), as amended or 
replaced from time to time; 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 (CMS Pub. 6), as amended or replaced 
from time to time.
    Patient care services means any task(s) 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 so identified on the 
List of CPT/HCPCS Codes. All services so identified on the List of CPT/
HCPCS Codes are physical therapy, occupational therapy, and speech-
language pathology services for purposes of this subpart. Any service 
not specifically identified as physical therapy, occupational therapy 
or speech-language pathology on the List of CPT/HCPCS Codes is not a 
physical therapy, occupational therapy, or speech-language pathology 
service for purposes of this subpart. The list of codes identifying 
physical therapy, occupational therapy, and speech-language pathology 
services for purposes of this regulation 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

[[Page 16130]]

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) for 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 
must fit 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 (CMS 
Pub. 14-3), Part 3--Claims Process, as amended or replaced from time to 
time). Referrals from an independent contractor who is a physician in 
the group practice 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 (or downstream subcontractor) 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.
    Professional courtesy means the provision of free or discounted 
health care items or services to a physician or his or her immediate 
family members or office staff.
    Prosthetics, Orthotics, and Prosthetic Devices and Supplies means 
the following services (including all HCPCS level 2 codes for these 
items and 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 so identified on the List of CPT/HCPCS Codes. All 
services and supplies so identified on the List of CPT/HCPCS Codes are 
radiation therapy services and supplies for purposes of this subpart. 
Any service or supply not specifically identified as radiation therapy 
services or supplies on the List of CPT/HCPCS Codes is not a radiation 
therapy service or supply for purposes of this subpart. The list of 
codes identifying radiation therapy services and supplies is based on 
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 so identified on the List of CPT/HCPCS Codes. All services so 
identified on the List of CPT/HCPCS Codes are radiology and certain 
other imaging services for purposes of this subpart. Any service not 
specifically identified as radiology and certain other imaging services 
on the List of CPT/HCPCS Codes, is not a radiology or certain other 
imaging service for purposes of this subpart. The list of codes 
identifying radiology and certain other imaging services 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 Sec.  410.32 and Sec.  
410.34 of this chapter but does not include--
    (1) X-ray , fluoroscopy, or ultrasound 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 a 
nonradiological medical procedure and performed--
    (i) During the nonradiological medical procedure; or
    (ii) Immediately following the nonradiological medical procedure 
when necessary to confirm placement of an item placed during the 
nonradiological medical procedure; and
    (3) Diagnostic 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

[[Page 16131]]

    (ii) The tests or services are furnished by or under the 
supervision of the pathologist, radiologist, or radiation oncologist, 
or under the supervision of a pathologist, radiologist, or radiation 
oncologist, respectively, in the same group practice as 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. 
A referring physician and the professional corporation of which he or 
she is a sole owner are the same for purposes of this subpart.
    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 (or a 
subcontractor of the insurer or 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 (or a subcontractor of the insurer or 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 loading docks or parking garages. 
For purposes of this section, the ``same building'' does not include a 
mobile vehicle, van, or trailer.
    Specialty hospital means a subsection (d) hospital (as defined in 
section 1886(d)(1)(B)) that is primarily or exclusively engaged in the 
care and treatment of one of the following: Patients with a cardiac 
condition; patients with an orthopedic condition; patients receiving a 
surgical procedure; or any other specialized category of services that 
the Secretary designates as inconsistent with the purpose of permitting 
physician ownership and investment interests in a hospital. A 
``specialty hospital'' does not include any hospital--
    (1) Determined by the Secretary to be in operation before or under 
development as of November 18, 2003;
    (2) For which the number of physician investors at any time on or 
after such date is no greater than the number of such investors as of 
such date;
    (3) For which the type of categories described above is no 
different at any time on or after such date than the type of such 
categories as of such date;
    (4) For which any increase in the number of beds occurs only in the 
facilities on the main campus of the hospital and does not exceed 50 
percent of the number of beds in the hospital as of November 18, 2003, 
or 5 beds, whichever is greater; and
    (5) that meets such other requirements as the Secretary may 
specify.
    Transaction means an instance or process of two or more persons or 
entities doing business. An isolated transaction means one involving a 
single payment between two or more persons or entities or a transaction 
that involves integrally related installment payments provided that--
    (1) The total aggregate payment is fixed before the first payment 
is made and does not take into account, directly or indirectly, the 
volume or value of referrals or other business generated by the 
referring physician; and
    (2) The payments are immediately negotiable or are guaranteed by a 
third party, secured by a negotiable promissory note, or subject to a 
similar mechanism to assure payment even in the event of default by the 
purchaser or obligated party. 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 operating 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 be organized or 
owned (in whole or in part) by another medical practice, provided that 
the other medical practice is not an operating physician practice (and 
regardless of whether the medical practice meets the conditions for a 
group practice under this section). For purposes of this subpart, 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 
single legal entity may itself own subsidiary entities. A group 
practice operating in more than one State will be considered to be a 
single legal entity notwithstanding that it is composed of multiple 
legal entities, provided that--
    (1) The States in which the group practice is operating are 
contiguous (although each State need not be contiguous to every other 
State);
    (2) The legal entities are absolutely identical as to ownership, 
governance, and operation; and
    (3) Organization of the group practice into multiple entities is 
necessary to comply with jurisdictional licensing laws of the States in 
which the group practice operates.
    (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 Sec.  411.351.
    (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.

[[Page 16132]]

    (d) Services furnished by group practice members. (1) Except as 
otherwise provided in paragraphs (d)(3), (d)(4), (d)(5), and (d)(6) 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 a week 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'' set forth in paragraph (d)(1) of 
this section 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 ``substantially all'' test 
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 reorganizes.
    (6)(i) If the addition to an existing group practice of a new 
member who would be considered to have relocated his or her practice 
under Sec.  411.457(e)(2) would result in the existing group practice 
not meeting the ``substantially all'' test set forth in paragraph 
(d)(1) of this section, the group practice will have 12 months 
following the addition of the new member to come back into full 
compliance, provided that--
    (A) For the 12-month period the group practice is fully compliant 
with the ``substantially all'' test if the new member is not counted as 
a member of the group for purposes of Sec.  411.352; and
    (B) The new member's employment with, or ownership interest in, the 
group practice is documented in writing no later than the beginning of 
his or her new employment, ownership, or investment.
    (ii) This paragraph (d)(6) does not apply when an existing group 
practice reorganizes or admits a new member who is not relocating his 
or her practice.
    (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 section prevents a group practice from adjusting its compensation 
methodology prospectively, subject to restrictions on the distribution 
of revenue from DHS under Sec.  411.352(i).
    (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); and
    (ii) Consolidated billing, accounting, and financial reporting.
    (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 Sec.  411.352(i).
    (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 Sec.  411.352(i).
    (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. Overall profits should be 
divided in a reasonable and verifiable manner that is not directly 
related to the volume or value of the physician's referrals of DHS. 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.
    (3) A productivity bonus should be calculated in a reasonable and 
verifiable manner that is not directly related to the volume or value 
of the physician's referrals of DHS. A productivity bonus 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.
    (4) Supporting documentation verifying the method used to calculate 
the profit share or productivity bonus under paragraphs (i)(2) and 
(i)(3) of this section, and the resulting amount of

[[Page 16133]]

compensation, must be made available to the Secretary upon request.


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 and 
State laws, rules, and regulations.
    (f) Exception for certain arrangements involving temporary 
noncompliance. (1) Except as provided in paragraphs (f)(2), (f)(3), and 
(f)(4) of this section, an entity may submit a claim or bill and 
payment may be made to an entity that submits a claim or bill for a 
designated health service if--
    (i) The financial relationship between the entity and the referring 
physician fully complied with an applicable exception under Sec.  
411.355, Sec.  411.356, or Sec.  411.357 for at least 180 consecutive 
calendar days immediately preceding the date on which the financial 
relationship became noncompliant with the exception;
    (ii) The financial relationship has fallen out of compliance with 
the exception for reasons beyond the control of the entity, and the 
entity promptly takes steps to rectify the noncompliance; and
    (iii) The financial relationship does not violate the anti-kickback 
statute (section 1128B(b) of the Act), and the claim or bill otherwise 
complies with all applicable Federal and State laws, rules, and 
regulations.
    (2) Paragraph (f)(1) of this section applies only to DHS furnished 
during the period of time it takes the entity to rectify the 
noncompliance, which must not exceed 90 consecutive calendar days 
following the date on which the financial relationship became 
noncompliant with an exception.
    (3) This paragraph (f) may only be used by an entity once every 3 
years with respect to the same referring physician.
    (4) This paragraph (f) does not apply if the exception with which 
the financial relationship previously complied was Sec.  411.357(k) or 
(m).


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. (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, stock options other than those described in Sec.  
411.354(b)(3)(ii), 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 received as 
compensation until the stock options are exercised or the convertible 
securities are converted to equity (before this time the stock options 
or convertible securities 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'' with the hospital (such a contract 
is a compensation arrangement as defined in paragraph (c) of this 
section).
    (4) An ownership or investment interest that meets an exception set 
forth in Sec.  411.355 or Sec.  411.356 need not also meet an exception 
for compensation arrangements set forth in Sec.  411.357 with respect 
to profit distributions, dividends, or interest payments on secured 
obligations.
    (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; 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

[[Page 16134]]

ownership or investment interests) in the entity furnishing the DHS.
    (ii) An indirect ownership or investment interest exists even 
though the entity furnishing DHS does 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.
    (iii) Notwithstanding anything in this paragraph (b)(5), common 
ownership or investment in an entity does not, in and of itself, 
establish an indirect ownership or investment interest by one common 
owner or investor in another common owner or investor.
    (iv) An indirect ownership or investment interest requires an 
unbroken chain of ownership interests between the referring physician 
and the entity furnishing DHS such that the referring physician has an 
indirect ownership or investment interest in the entity furnishing DHS.
    (c) Compensation arrangement. A compensation arrangement is 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 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.)
    (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 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, regardless of whether the 
individual unit of compensation satisfies the special rules on unit-
based compensation under Sec.  411.354(d)(2) or (d)(3). 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 volume or 
value 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 subpart J 
of this part.
    (1) Compensation will be considered ``set in advance'' if the 
aggregate compensation, a time-based or per unit of service based 
(whether per-use or per-service) amount, or a specific formula for 
calculating the compensation is set in an agreement between the parties 
before the furnishing of the items or services for which the 
compensation is to be paid. The formula for determining the 
compensation must be set forth in sufficient detail so that it can be 
objectively verified, and the formula may not be changed or modified 
during the course of the agreement in any manner that reflects the 
volume or value of referrals or other business generated by the 
referring physician.
    (2) Unit-based 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) Unit-based 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 for items and services actually 
provided and does not vary during the course of the compensation 
arrangement in any manner that takes into account referrals or other 
business generated by the referring physician, including private pay 
health care business (except for services personally performed by the 
referring physician, which will not be considered ``other business 
generated'' by the referring physician).
    (4) A physician's compensation from a bona fide employer or under a 
managed care or other contract may be conditioned on the physician's 
referrals to a particular provider, practitioner, or supplier, so long 
as the compensation arrangement--
    (i) Is set 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) Otherwise complies with an applicable exception under Sec.  
411.355 or Sec.  411.357;
    (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 judgment; and
    (v) The required referrals relate solely to the physician's 
services covered by the scope of the employment or the contract and the 
referral requirement is reasonably necessary to effectuate the 
legitimate business purposes of the compensation relationship. In no 
event may the physician be required to make referrals that relate to 
services that are not provided by the physician under the scope of his 
or her employment or

[[Page 16135]]

contract. 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, sbull; physician 
services'' include 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, if the referring physician is in a group practice, 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 all of 
the conditions of paragraph (b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C) 
of this section are satisfied:
    (A)(1) The referring physician or his or her group practice (if 
any) has an office that is normally open to the physician's or group's 
patients for medical services at least 35 hours per week; and
    (2) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 30 hours per week. The 30 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (B)(1) The patient receiving the DHS usually receives physician 
services from the referring physician or members of the referring 
physician's group practice (if any);
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician regularly practices medicine and 
furnishes physician services to patients at least 6 hours per week. The 
6 hours must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (C)(1) The referring physician is present and orders the DHS during 
a patient visit on the premises as set forth in paragraph 
(b)(2)(i)(C)(2) of this section or the referring physician or a member 
of the referring physician's group practice (if any) is present while 
the DHS is furnished during occupancy of the premises as set forth in 
paragraph (b)(2)(i)(C)(2) of this section;
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 6 hours per week. The 6 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS.
    (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 are billed by one of the following:
    (i) The physician performing or supervising the service.
    (ii) The group practice of which the performing or supervising 
physician is a member under a billing number assigned to the group 
practice.
    (iii) The group practice if the supervising physician is a 
``physician in the group practice'' (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,

[[Page 16136]]

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 Federal or State 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 only, a private home 
does not include a nursing, long-term care, or other facility or 
institution, except that a patient may have a private home in an 
assisted living or independent living facility.
    (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 CMS under 
section 1876 of the Act and part 417, subparts J through M of this 
chapter.
    (2) A health care prepayment plan in accordance with an agreement 
with CMS 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 CMS under section 1857 of the Act and part 422 of this 
chapter.
    (6) A managed care organization (MCO) contracting with a State 
under section 1903(m) of the Act.
    (7) A prepaid inpatient health plan (PIHP) or prepaid ambulance 
health plan (PAHP) contracting with a State under part 438 of this 
chapter.
    (8) A health insuring organization (HIO) contracting with a State 
under part 438, subpart D of this chapter.
    (9) An entity operating under a demonstration project under 
sections 1115(a), 1915(a), 1915(b), or 1932(a) of the Act.
    (d) [Reserved]
    (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. (A ``component'' 
of an academic medical center means an affiliated medical school, 
faculty practice plan, hospital, teaching facility, institution of 
higher education, departmental professional corporation, or nonprofit 
support organization whose primary purpose is supporting the teaching 
mission of the academic medical center.) The components need not be 
separate legal entities;
    (B) Is licensed to practice medicine in the State(s) in which he or 
she practices medicine;
    (C) Has a bona fide faculty appointment at the affiliated medical 
school or at one or more of the educational programs at the accredited 
academic hospital; and
    (D) Provides either substantial academic services or substantial 
clinical teaching services (or a combination of academic services and 
clinical teaching services) for which the faculty member receives 
compensation as part of his or her employment relationship with the 
academic medical center. Parties should use a reasonable and consistent 
method for calculating a physician's academic services and clinical 
teaching services. A physician will be deemed to meet this requirement 
if he or she spends at least 20 percent of his or her professional time 
or 8 hours per week providing academic services or clinical teaching 
services (or a combination of academic services or clinical teaching 
services). A physician who does not spend at least 20 percent of his or 
her professional time or 8 hours per week providing academic services 
or clinical teaching services (or a combination of academic services or 
clinical teaching services) is not precluded from qualifying under this 
paragraph (e)(1)(i)(D).
    (ii) The total compensation paid by 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 written agreement(s) or other written 
document(s) that have been adopted by the governing body of each 
component. If the academic medical center is one legal entity, this 
requirement will be satisfied if transfers of funds between components 
of the academic medical center are reflected in the routine financial 
reports covering the components.
    (C) All money paid to a referring physician for research must be 
used solely to support bona fide research or teaching and must be 
consistent with the terms and conditions of the grant.
    (iv) The referring physician's compensation arrangement does not 
violate the anti-kickback statute (section 1128B(b) of the Act), or any 
Federal or State law or regulation governing billing or claims 
submission.
    (2) The ``academic medical center'' for purposes of this section 
consists of--
    (i) An accredited medical school (including a university, when 
appropriate) or an accredited academic hospital (as defined at Sec.  
411.355(e)(3));
    (ii) One or more faculty practice plans affiliated with the medical 
school, the affiliated hospital(s), or the accredited academic 
hospital; and
    (iii) One or more affiliated hospital(s) in which a majority of the 
physicians on the medical staff consists of physicians who are faculty 
members and a majority

[[Page 16137]]

of all hospital admissions are made by physicians who are faculty 
members. The hospital for purposes of this paragraph (e)(2)(iii) may be 
the same hospital that satisfies the requirement of paragraph (e)(2)(i) 
of this section. For purposes of this provision, a faculty member is a 
physician who is either on the faculty of the affiliated medical school 
or on the faculty of one or more of the educational programs at the 
accredited academic hospital. In meeting this paragraph (e)(2)(iii), 
faculty from any affiliated medical school or accredited academic 
hospital education program may be aggregated, and residents and non-
physician professionals need not be counted. Any faculty member may be 
counted, including courtesy and volunteer faculty.
    (3) An accredited academic hospital for purposes of this section 
means a hospital or a health system that sponsors four or more approved 
medical education programs.
    (f) Implants furnished by an ASC. Implants furnished by an ASC, 
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 implanted 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 paid by Medicare to the ASC as an ASC procedure under Sec.  
416.65.
    (3) The arrangement for the furnishing of the implant does not 
violate the anti-kickback statute (section 1128B(b) of the Act).
    (4) All billing and claims submission for the implants does not 
violate any Federal or State law or regulation governing billing or 
claims submission.
    (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 drugs furnished in or by an ESRD 
facility. EPO and other dialysis-related drugs 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 (g): ``EPO and other 
dialysis-related drugs'' means certain outpatient prescription drugs 
that are required for the efficacy of dialysis and identified as 
eligible for this exception on the List of CPT/HCPCS Codes; and 
``furnished'' means that the EPO or dialysis-related drugs are 
administered to a patient in the ESRD facility, or, in the case of EPO 
or Aranesp (or equivalent drug identified on the List of CPT/HCPCS 
Codes) only, are dispensed by the ESRD facility for use at home.
    (2) The arrangement for the furnishing of the EPO and other 
dialysis-related drugs does not violate the anti-kickback statute 
(section 1128B(b) of the Act).
    (3) All billing and claims submission for the EPO and other 
dialysis-related drugs does not violate any Federal or State law or 
regulation governing billing or claims submission.
    (4) The exception set forth in this paragraph (g) does not apply to 
any financial relationship 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 meet the 
following conditions:
    (1) The preventive screening tests, immunizations, and vaccines are 
subject to CMS-mandated frequency limits.
    (2) The arrangement for the provision of the preventive screening 
tests, immunizations, and vaccines does not violate the anti-kickback 
statute (section 1128B(b) of the Act).
    (3) All billing and claims submission for the preventive screening 
tests, immunizations, and vaccines does not violate any Federal or 
State law or regulation governing billing or claims submission.
    (4) The preventive screening tests, immunizations, and vaccines 
must be covered by Medicare and must be listed as eligible for this 
exception on the List of CPT/HCPCS Codes.
    (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 anti-kickback statute (section 1128B(b) of 
the Act).
    (3) All billing and claims submission for the eyeglasses or contact 
lenses does not violate any Federal or State law or regulation 
governing billing or claims submission.
    (j) Intra-family rural referrals. (1) Services provided pursuant to 
a referral from a referring physician to his or her immediate family 
member or to an entity furnishing DHS with which the immediate family 
member has a financial relationship, if all of the following conditions 
are met:
    (i) The patient who is referred resides in a rural area as defined 
in Sec.  411.356(c)(1);
    (ii) Except as provided in paragraph (j)(1)(iii) of this section, 
no other person or entity is available to furnish the services in a 
timely manner in light of the patient's condition within 25 miles of 
the patient's residence;
    (iii) In the case of services furnished to patients where they 
reside (for example, home health services or in-home DME), no other 
person or entity is available to furnish the services in a timely 
manner in light of the patient's condition; and
    (iv) The financial relationship does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission;
    (2) The referring physician or the immediate family member must 
make reasonable inquiries as to the availability of other persons or 
entities to furnish the DHS. However, neither the referring physician 
nor the immediate family member has any obligation to inquire as to the 
availability of persons or entities located farther than 25 miles from 
the patient's residence.


Sec.  411.356  Exceptions to the referral prohibition related to 
ownership or investment interests.

    For purposes of Sec.  411.353, the following ownership or 
investment interests do not constitute a financial relationship:
    (a) Publicly-traded securities. Ownership of investment securities 
(including shares or bonds, debentures, notes, or other debt 
instruments) that at the time the DHS referral was made could be 
purchased on the open market and that meet the requirements of 
paragraphs (a)(1) and (a)(2) of this section.
    (1) They are either--
    (i) Listed for trading on the New York Stock Exchange, the American 
Stock Exchange, or any regional exchange in which quotations are 
published on a daily basis, or foreign securities listed on a 
recognized foreign, national, or regional exchange in which quotations 
are published on a daily basis; or
    (ii) Traded under an automated interdealer quotation system 
operated

[[Page 16138]]

by the National Association of Securities Dealers.
    (2) They are in a corporation that had stockholder equity exceeding 
$75 million at the end of the corporation's most recent fiscal year or 
on average during the previous 3 fiscal years. ``Stockholder equity'' 
is the difference in value between a corporation's total assets and 
total liabilities.
    (b) Mutual funds. Ownership of shares in a regulated investment 
company as defined in section 851(a) of the Internal Revenue Code of 
1986, if the company had, at the end of its most recent fiscal year, or 
on average during the previous 3 fiscal years, total assets exceeding 
$75 million.
    (c) Specific providers. Ownership or investment interest in the 
following entities, for purposes of the services specified:
    (1) A rural provider, in the case of DHS furnished in a rural area 
by the provider. A ``rural provider'' is an entity that furnishes 
substantially all (not less than 75 percent) of the DHS that it 
furnishes to residents of a rural area and, for the 18-month period 
beginning on December 8, 2003 (or such other period as Congress may 
specify), is not a specialty hospital. A rural area for purposes of 
this paragraph (c)(1) is an area that is not an urban area as defined 
in Sec.  412.62(f)(1)(ii) of this chapter.
    (2) A hospital that is located in Puerto Rico, in the case of DHS 
furnished by such a hospital.
    (3) A hospital that is located outside of Puerto Rico, in the case 
of DHS furnished by such a hospital, if--
    (i) the referring physician is authorized to perform services at 
the hospital;
    (ii) effective for the 18-month period beginning on December 8, 
2003 (or such other period as Congress may specify), the hospital is 
not a specialty hospital; and
    (iii) the ownership or investment interest is in the entire 
hospital and not merely in a distinct part or department of the 
hospital.


Sec.  411.357  Exceptions to the referral prohibition related to 
compensation arrangements.

    For purposes of Sec.  411.353, the following compensation 
arrangements do not constitute a financial relationship:
    (a) Rental of office space. Payments for the use of office space 
made by a lessee to a lessor if there is a rental or lease agreement 
that meets the following requirements:
    (1) The agreement is set out in writing, is signed by the parties, 
and specifies the premises it covers.
    (2) The term of the agreement is at least 1 year. To meet this 
requirement, if the agreement is terminated during the term with or 
without cause, the parties may not enter into a new agreement during 
the first year of the original term of the agreement.
    (3) The space rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee (and is not shared with or used by the lessor or any 
person or entity related to the lessor), except that the lessee may 
make payments for the use of space consisting of common areas if the 
payments do not exceed the lessee's pro rata share of expenses for the 
space based upon the ratio of the space used exclusively by the lessee 
to the total amount of space (other than common areas) occupied by all 
persons using the common areas.
    (4) The rental charges over the term of the agreement are set in 
advance and are consistent with fair market value.
    (5) The rental charges over the term of the agreement are not 
determined in a manner that takes into account the volume or value of 
any referrals or other business generated between the parties.
    (6) The agreement would be commercially reasonable even if no 
referrals were made between the lessee and the lessor.
    (7) A holdover month-to-month rental for up to 6 months immediately 
following an agreement of at least 1 year that met the conditions of 
this paragraph (a) will satisfy this paragraph (a), provided the 
holdover rental is on the same terms and conditions as the immediately 
preceding agreement.
    (b) Rental of equipment. Payments made by a lessee to a lessor for 
the use of equipment under the following conditions:
    (1) A rental or lease agreement is set out in writing, is signed by 
the parties, and specifies the equipment it covers.
    (2) The equipment rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee and is not shared with or used by the lessor or any 
person or entity related to the lessor.
    (3) The agreement provides for a term of rental or lease of at 
least 1 year. To meet this requirement, if the agreement is terminated 
during the term with or without cause, the parties may not enter into a 
new agreement during the first year of the original term of the 
agreement.
    (4) The rental charges over the term of the agreement are set in 
advance, are consistent with fair market value, and are not determined 
in a manner that takes into account the volume or value of any 
referrals or other business generated between the parties.
    (5) The agreement would be commercially reasonable even if no 
referrals were made between the parties.
    (6) A holdover month-to-month rental for up to 6 months immediately 
following an agreement of at least 1 year that met the conditions of 
this paragraph (b) will satisfy this paragraph (b), provided the 
holdover rental is on the same terms and conditions as the immediately 
preceding agreement.
    (c) Bona fide employment relationships. Any amount paid by an 
employer to a physician (or immediate family member) who has a bona 
fide employment relationship with the employer for the provision of 
services if the following conditions are met:
    (1) The employment is for identifiable services.
    (2) The amount of the remuneration under the employment is--
    (i) Consistent with the fair market value of the services; and
    (ii) Except as provided in paragraph (c)(4) of this section, is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any referrals by the referring physician.
    (3) The remuneration is provided under an agreement that would be 
commercially reasonable even if no referrals were made to the employer.
    (4) Paragraph (c)(2)(ii) of this section does not prohibit payment 
of remuneration in the form of a productivity bonus based on services 
performed personally by the physician (or immediate family member of 
the physician).
    (d) Personal service arrangements. (1) General--Remuneration from 
an entity under an arrangement or multiple arrangements to a physician, 
an immediate family member of the physician, or to a group practice, 
including remuneration for specific physician services furnished to a 
nonprofit blood center, if the following conditions are met:
    (i) Each arrangement is set out in writing, is signed by the 
parties, and specifies the services covered by the arrangement.
    (ii) The arrangement(s) covers all of the services to be furnished 
by the physician (or an immediate family member of the physician) to 
the entity. This requirement will be met if all separate arrangements 
between the entity and the physician and the entity

[[Page 16139]]

and any family members incorporate each other by reference or if they 
cross-reference a master list of contracts that is maintained and 
updated centrally and is available for review by the Secretary upon 
request. The master list should be maintained in a manner that 
preserves the historical record of contracts. A physician or family 
member can ``furnish'' services through employees whom they have hired 
for the purpose of performing the services; through a wholly owned 
entity; or through locum tenens physicians (as defined in Sec.  
411.351, except that the regular physician need not be a member of a 
group practice).
    (iii) The aggregate services contracted for do not exceed those 
that are reasonable and necessary for the legitimate business purposes 
of the arrangement(s).
    (iv) The term of each arrangement is for at least 1 year. To meet 
this requirement, if an arrangement is terminated during the term with 
or without cause, the parties may not enter into the same or 
substantially the same arrangement during the first year of the 
original term of the arrangement.
    (v) The compensation to be paid over the term of each arrangement 
is set in advance, does not exceed fair market value, and, except in 
the case of a physician incentive plan, is not determined in a manner 
that takes into account the volume or value of any referrals or other 
business generated between the parties.
    (vi) The services to be furnished under each arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates any State or Federal law.
    (2) Physician incentive plan exception. In the case of a physician 
incentive plan (as defined in Sec.  411.351) between a physician and an 
entity (or downstream subcontractor), the compensation may be 
determined in a manner (through a withhold, capitation, bonus, or 
otherwise) that takes into account directly or indirectly the volume or 
value of any referrals or other business generated between the parties, 
if the plan meets the following requirements:
    (i) No specific payment is made directly or indirectly under the 
plan to a physician or a physician group as an inducement to reduce or 
limit medically necessary services furnished with respect to a specific 
individual enrolled with the entity.
    (ii) Upon request of the Secretary, the entity provides the 
Secretary with access to information regarding the plan (including any 
downstream subcontractor plans), in order to permit the Secretary to 
determine whether the plan is in compliance with paragraph (d)(2) of 
this section.
    (iii) In the case of a plan that places a physician or a physician 
group at substantial financial risk as defined in Sec.  422.208, the 
entity (and/or any downstream contractor) complies with the 
requirements concerning physician incentive plans set forth at Sec.  
422.208 and Sec.  422.210 of this chapter.
    (e) Physician recruitment. (1) Remuneration provided by a hospital 
to recruit a physician that is paid directly to the physician and that 
is intended to induce the physician to relocate his or her medical 
practice to the geographic area served by the hospital in order to 
become a member of the hospital's medical staff, if all of the 
following conditions are met:
    (i) The arrangement is set out in writing and signed by both 
parties;
    (ii) The arrangement is not conditioned on the physician's referral 
of patients to the hospital;
    (iii) The hospital does not determine (directly or indirectly) the 
amount of the remuneration to the physician based on the volume or 
value of any actual or anticipated referrals by the physician or other 
business generated between the parties; and
    (iv) The physician is allowed to establish staff privileges at any 
other hospital(s) and to refer business to any other entities (except 
as referrals may be restricted under a separate employment or services 
contract that complies with Sec.  411.354(d)(4)).
    (2) The ``geographic area served by the hospital'' is the area 
composed of the lowest number of contiguous zip codes from which the 
hospital draws at least 75 percent of its inpatients. A physician will 
be considered to have relocated his or her medical practice if--
    (i) The physician moves his or her medical practice at least 25 
miles; or
    (ii) The physician's new medical practice derives at least 75 
percent of its revenues from professional services furnished to 
patients (including hospital inpatients) not seen or treated by the 
physician at his or her prior medical practice site during the 
preceding 3 years, measured on an annual basis (fiscal or calendar 
year). For the initial ``start up'' year of the recruited physician's 
practice, the 75 percent test in the preceding sentence will be 
satisfied if there is a reasonable expectation that the recruited 
physician's medical practice for the year will derive at least 75 
percent of its revenues from professional services furnished to 
patients not seen or treated by the physician at his or her prior 
medical practice site during the preceding 3 years.
    (3) Residents and physicians who have been in practice 1 year or 
less will not be subject to the relocation requirement of this 
paragraph, except that the recruited resident or physician must 
establish his or her medical practice in the geographic area served by 
the hospital.
    (4) In the case of remuneration provided by a hospital to a 
physician either indirectly through payments made to another physician 
or physician practice, or directly to a physician who joins a physician 
practice, the following additional conditions must be met:
    (i) The written agreement in Sec.  411.357(e)(1) is also signed by 
the party to whom the payments are directly made;
    (ii) Except for actual costs incurred by the physician or physician 
practice in recruiting the new physician, the remuneration is passed 
directly through to or remains with the recruited physician;
    (iii) In the case of an income guarantee made by the hospital to a 
recruited physician who joins a physician or physician practice, the 
costs allocated by the physician or physician practice to the recruited 
physician do not exceed the actual additional incremental costs 
attributable to the recruited physician;
    (iv) Records of the actual costs and the passed through amounts are 
maintained for a period of at least 5 years and made available to the 
Secretary upon request;
    (v) The remuneration from the hospital under the arrangement is not 
to be determined in a manner that takes into account (directly or 
indirectly) the volume or value of any actual or anticipated referrals 
by the recruited physician or the physician practice (or any physician 
affiliated with the physician practice) receiving the direct payments 
from the hospital;
    (vi) The physician or physician practice may not impose additional 
practice restrictions on the recruited physician other than conditions 
related to quality of care; and
    (vii) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (5) This paragraph (e) applies to remuneration provided by a 
federally qualified health center in the same manner as it applies to 
remuneration provided by a hospital, so long as the arrangement does 
not violate the anti-kickback statute (section 1128B(b) of the Act), or 
any Federal or State law or

[[Page 16140]]

regulation governing billing or claims submission.
    (f) Isolated transactions. Isolated financial transactions, such as 
a one-time sale of property or a practice, if all of the following 
conditions are met:
    (1) The amount of remuneration under the isolated transaction is--
    (i) Consistent with the fair market value of the transaction; and
    (ii) Not determined in a manner that takes into account (directly 
or indirectly) the volume or value of any referrals by the referring 
physician or other business generated between the parties.
    (2) The remuneration is provided under an agreement that would be 
commercially reasonable even if the physician made no referrals.
    (3) There are no additional transactions between the parties for 6 
months after the isolated transaction, except for transactions that are 
specifically excepted under the other provisions in Sec.  411.355 
through Sec.  411.357 and except for commercially reasonable post-
closing adjustments that do not take into account (directly or 
indirectly) the volume or value of referrals or other business 
generated by the referring physician.
    (g) Certain arrangements with hospitals. Remuneration provided by a 
hospital to a physician if the remuneration does not relate, directly 
or indirectly, to the furnishing of DHS. To qualify as ``unrelated,'' 
remuneration must be wholly unrelated to the furnishing of DHS and must 
not in any way take into account the volume or value of a physician's 
referrals. Remuneration relates to the furnishing of DHS if it--
    (1) Is an item, service, or cost that could be allocated in whole 
or in part to Medicare or Medicaid under cost reporting principles;
    (2) Is furnished, directly or indirectly, explicitly or implicitly, 
in a selective, targeted, preferential, or conditioned manner to 
medical staff or other persons in a position to make or influence 
referrals; or
    (3) Otherwise takes into account the volume or value of referrals 
or other business generated by the referring physician.
    (h) Group practice arrangements with a hospital. An arrangement 
between a hospital and a group practice under which DHS are furnished 
by the group but are billed by the hospital if the following conditions 
are met:
    (1) With respect to services furnished to an inpatient of the 
hospital, the arrangement is pursuant to the provision of inpatient 
hospital services under section 1861(b)(3) of the Act.
    (2) The arrangement began before, and has continued in effect 
without interruption since, December 19, 1989.
    (3) With respect to the DHS covered under the arrangement, at least 
75 percent of these services furnished to patients of the hospital are 
furnished by the group under the arrangement.
    (4) The arrangement is in accordance with a written agreement that 
specifies the services to be furnished by the parties and the 
compensation for services furnished under the agreement.
    (5) The compensation paid over the term of the agreement is 
consistent with fair market value, and the compensation per unit of 
service is fixed in advance and is not determined in a manner that 
takes into account the volume or value of any referrals or other 
business generated between the parties.
    (6) The compensation is provided in accordance with an agreement 
that would be commercially reasonable even if no referrals were made to 
the entity.
    (i) Payments by a physician. Payments made by a physician (or his 
or her immediate family member)--
    (1) To a laboratory in exchange for the provision of clinical 
laboratory services; or
    (2) To an entity as compensation for any other items or services 
that are furnished at a price that is consistent with fair market 
value, and that are not specifically excepted under another provision 
in Sec.  411.355 through Sec.  411.357 (including, but not limited to, 
Sec.  411.357(l)). ``Services'' in this context means services of any 
kind (not just those defined as ``services'' for purposes of the 
Medicare program in Sec.  400.202).
    (j) Charitable donations by a physician. Bona fide charitable 
donations made by a physician (or immediate family member) to an entity 
if all of the following conditions are satisfied:
    (1) The charitable donation is made to an organization exempt from 
taxation under the Internal Revenue Code (or to a supporting 
organization);
    (2) The donation is neither solicited, nor made, in any manner that 
takes into account the volume or value of referrals or other business 
generated between the physician and the entity; and
    (3) The donation arrangement does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (k) Non-monetary compensation up to $300. (1) 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:
    (i) 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.
    (ii) The compensation may not be solicited by the physician or the 
physician's practice (including employees and staff members).
    (iii) The compensation arrangement does not violate the anti-
kickback statute (section 1128B(b) of the Act) or any Federal or State 
law or regulation governing billing or claims submission.
    (2) The $300 limit in this paragraph (k) will be adjusted each 
calendar year to the nearest whole dollar by the increase in the 
Consumer Price Index-Urban All Items (CPI-U) for the 12-month period 
ending the preceding September 30. CMS intends to display as soon as 
possible after September 30 each year, both the increase in the CPI-U 
for the 12-month period and the new non-monetary compensation limit on 
the physician self-referral Web site: http://cms.hhs.gov/medlearn/refphys.asp.
    (l) Fair market value compensation. 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.  411.352) 
for the provision of items or services by the physician (or an 
immediate family member) or group of physicians to the entity, if the 
arrangement is set forth in an agreement that meets the following 
conditions:
    (1) The arrangement is in writing, signed by the parties, and 
covers only identifiable items or services, all of which are specified 
in the agreement.
    (2) The writing 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) The writing specifies the compensation that will be provided 
under the arrangement. The compensation must be set in advance, 
consistent with fair market value, and not determined in a manner that 
takes into account the volume or value of referrals or other business 
generated by the referring physician.
    (4) The arrangement would be commercially reasonable (taking into 
account the nature and scope of the

[[Page 16141]]

transaction) and furthers the legitimate business purposes of the 
parties.
    (5) It does not violate the anti-kickback statute (section 1128B(b) 
of the Act), or any Federal or State law or regulation governing 
billing or claims submission.
    (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 provided to all members of the medical 
staff practicing in the same specialty (but not necessarily accepted by 
every member to whom it is offered) without regard to the volume or 
value of referrals or other business generated between the parties.
    (2) Except with respect to identification of medical staff on a 
hospital Web site or in hospital advertising, the compensation is 
provided only during periods when the medical staff members are making 
rounds or are engaged in other services or activities 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. Compensation, 
including, but not limited to, Internet access, pagers, or two-way 
radios, used away from the campus only to access hospital medical 
records or information or to access patients or personnel who are on 
the hospital campus, as well as the identification of the medical staff 
on a hospital Web site or in hospital advertising, will meet the ``on 
campus'' requirement of this paragraph (m).
    (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 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). The $25 limit in this paragraph (m)(5) will be 
adjusted each calendar year to the nearest whole dollar by the increase 
in the Consumer Price Index-Urban All Items (CPI-U) for the 12-month 
period ending the preceding September 30. CMS intends to display as 
soon as possible after September 30 each year both the increase in the 
CPI-U for the 12-month period and the new limits on the physician self-
referral Web site: http://cms.hhs.gov/medlearn/refphys.asp.
    (6) 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.
    (7) The compensation arrangement does not violate the anti-kickback 
statute, (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (8) Other facilities and health care clinics (including, but not 
limited to, federally qualified health centers) that have bona fide 
medical staffs may provide compensation under this paragraph (m) on the 
same terms and conditions applied to hospitals under this paragraph 
(m).
    (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 anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State 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 an entity 
to a physician (or to the physician's immediate family member or office 
staff) who practices in the entity'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); specific training regarding the 
requirements of Federal and State health care programs (for example, 
billing, coding, reasonable and necessary services, documentation, 
unlawful referral arrangements); or training regarding other Federal, 
State, or local laws, regulations, or rules governing the conduct of 
the party for whom the training is provided (but not including 
continuing medical education).
    (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 and not 
determined in any manner that takes 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 (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (q) Referral services. Remuneration that meets all of the 
conditions set forth in Sec.  1001.952(f) of this title.
    (r) Obstetrical malpractice insurance subsidies. Remuneration to 
the referring physician that meets all of the conditions set forth in 
Sec.  1001.952(o) of this title.
    (s) Professional courtesy. Professional courtesy (as defined in 
Sec.  411.351) offered by an entity to a physician or a physician's 
immediate family member or office staff if all of the following 
conditions are met:
    (1) The professional courtesy is offered to all physicians on the 
entity's bona fide medical staff or in the entity's local community or 
service area without regard to the volume or value of referrals or 
other business generated between the parties;
    (2) The health care items and services provided are of a type 
routinely provided by the entity;
    (3) The entity's professional courtesy policy is set out in writing 
and approved in advance by the entity's governing body;
    (4) The professional courtesy is not offered to a physician (or 
immediate family member) who is a Federal health care program 
beneficiary, unless there has been a good faith showing of financial 
need;
    (5) If the professional courtesy involves any whole or partial 
reduction of any coinsurance obligation, the insurer is informed in 
writing of the reduction; and

[[Page 16142]]

    (6) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (t) Retention payments in underserved areas. (1) Remuneration 
provided by a hospital or federally qualified health center directly to 
a physician on the hospital's or federally qualified health center's 
medical staff to retain the physician's medical practice in the 
geographic area served by the hospital or federally qualified health 
center (as defined in paragraph (e)(2) of this section), if all of the 
following conditions are met:
    (i) Paragraphs 411.357(e)(1)(i) through 411.357(e)(1)(iv) are 
satisfied;
    (ii) The geographic area served by the hospital or federally 
qualified health center is a HPSA (regardless of the physician's 
specialty) or is an area with demonstrated need for the physician as 
determined by the Secretary in an advisory opinion issued according to 
section 1877(g)(6) of the Act;
    (iii) The physician has a bona fide firm, written recruitment offer 
from a hospital or federally qualified health center that is not 
related to the hospital or the federally qualified health center making 
the payment, and the offer specifies the remuneration being offered and 
would require the physician to move the location of his or her practice 
at least 25 miles and outside of the geographic area served by the 
hospital or federally qualified health center making the retention 
payment;
    (iv) The retention payment is limited to the lower of--
    (A) The amount obtained by subtracting (1) the physician's current 
income from physician and related services from (2) the income the 
physician would receive from comparable physician and related services 
in the bona fide recruitment offer, provided that the respective 
incomes are determined using a reasonable and consistent methodology, 
and that they are calculated uniformly over no more than a 24-month 
period; or
    (B) The reasonable costs the hospital or federally qualified health 
center would otherwise have to expend to recruit a new physician to the 
geographic area served by the hospital or federally qualified health 
center in order to join the medical staff of the hospital or federally 
qualified health center to replace the retained physician;
    (v) Any retention payment is subject to the same obligations and 
restrictions, if any, on repayment or forgiveness of indebtedness as 
the bona fide recruitment offer;
    (vi) The hospital or federally qualified health center does not 
enter into a retention arrangement with a particular referring 
physician more frequently than once every 5 years and the amount and 
terms of the retention payment are not altered during the term of the 
arrangement in any manner that takes into account the volume or value 
of referrals or other business generated by the physician;
    (vii) The arrangement otherwise complies with all of the conditions 
of this section; and
    (viii) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (2) The Secretary may waive the relocation requirement of paragraph 
(t)(1) of this section for payments made to physicians practicing in a 
HPSA or an area with demonstrated need for the physician through an 
advisory opinion issued according to section 1877(g)(6) of the Act, if 
the retention payment arrangement otherwise complies with all of the 
conditions of this paragraph.
    (u) Community-wide health information systems. Items or services of 
information technology provided by an entity to a physician that allow 
access to, and sharing of, electronic health care records and any 
complementary drug information systems, general health information, 
medical alerts, and related information for patients served by 
community providers and practitioners, in order to enhance the 
community's overall health, provided that--
    (1) The items or services are available as necessary to enable the 
physician to participate in a community-wide health information system, 
are principally used by the physician as part of the community-wide 
health information system, and are not provided to the physician in any 
manner that takes into account the volume or value of referrals or 
other business generated by the physician;
    (2) The community-wide health information systems are available to 
all providers, practitioners, and residents of the community who desire 
to participate; and
    (3) The arrangement does not violate the anti-kickback statute, 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission. Sec.  411.361 
Reporting requirements.
    (a) Basic rule. Except as provided in paragraph (b) of this 
section, all entities furnishing services for which payment may be made 
under Medicare must submit information to CMS or to the Office of 
Inspector General (OIG) concerning their reportable financial 
relationships (as defined in paragraph (d) of this section), in the 
form, manner, and at the times that CMS or OIG specifies.
    (b) Exception. The requirements of paragraph (a) of this section do 
not apply to entities that furnish 20 or fewer Part A and Part B 
services during a calendar year, or to any Medicare covered services 
furnished outside the United States.
    (c) Required information. The information requested by CMS or OIG 
can include the following:
    (1) The name and unique physician identification number (UPIN) of 
each physician who has a reportable financial relationship with the 
entity.
    (2) The name and UPIN of each physician who has an immediate family 
member (as defined in Sec.  411.351) who has a reportable financial 
relationship with the entity.
    (3) The covered services furnished by the entity.
    (4) With respect to each physician identified under paragraphs 
(c)(1) and (c)(2) of this section, the nature of the financial 
relationship (including the extent and/or value of the ownership or 
investment interest or the compensation arrangement) as evidenced in 
records that the entity knows or should know about in the course of 
prudently conducting business, including, but not limited to, records 
that the entity is already required to retain to comply with the rules 
of the Internal Revenue Service and the Securities and Exchange 
Commission and other rules of the Medicare and Medicaid programs.
    (d) Reportable financial relationships. For purposes of this 
section, a reportable financial relationship is any ownership or 
investment interest, as defined in Sec.  411.354(b) or any compensation 
arrangement, as defined in Sec.  411.354(c), except for ownership or 
investment interests that satisfy the exceptions set forth in Sec.  
411.356(a) or Sec.  411.356(b) regarding publicly-traded securities and 
mutual funds.
    (e) Form and timing of reports. Entities that are subject to the 
requirements of this section must submit the required information, upon 
request, within the time period specified by the request. Entities are 
given at least 30 days from the date of the request to provide the 
information. Entities must retain the information, and documentation 
sufficient to verify the information, for the length of time specified 
by the applicable regulatory requirements for the information, and, 
upon request, must make that

[[Page 16143]]

information and documentation available to CMS or OIG.
    (f) Consequences of failure to report. Any person who is required, 
but fails, to submit information concerning his or her financial 
relationships in accordance with this section is subject to a civil 
money penalty of up to $10,000 for each day following the deadline 
established under paragraph (e) of this section until the information 
is submitted. Assessment of these penalties will comply with the 
applicable provisions of part 1003 of this title.
    (g) Public disclosure. Information furnished to CMS or OIG under 
this section is subject to public disclosure in accordance with the 
provisions of part 401 of this chapter.

PART 424--CONDITIONS FOR MEDICARE PAYMENT

0
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

0
2. In Sec.  424.22, paragraph (d) is republished to read as set forth 
below.


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 
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; and Program No. 93.774, Medicare-
Supplementary Medical Insurance Program)

    Dated: February 13, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: October 23, 2003.
Tommy G. Thompson,
Secretary.

    Note: The following attachment will not appear in the Code of 
Federal Regulations.

Attachment--List of CPT \1\/HCPCS Codes for Purposes of Section 1877 of 
the Social Security Act--Effective July 26, 2004

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:
---------------------------------------------------------------------------

    \1\ CPT codes and descriptions only are copyright 2003 American 
Medical Association. All rights are reserved and applicable FARS/
DFARS clauses apply.

86890 Autologous blood process
86891 Autologous blood, op salvage
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 the following CPT and HCPCS level 2 codes for other 
clinical laboratory services:

0010T TB test, gamma interferon
0023T Phenotype drug test, hiv 1
0026T Measure remnant lipoproteins
0030T Antiprothrombin antibody
0041T Detect ur infect agnt w/cpas
0043T Co expired gas analysis
0058T Cryopreservation, ovary tiss
0059T Cryopreservation, oocyte
G0001 Drawing blood for specimen
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 Scr c/v cyto, thinlayer, rescr
G0144 Scr c/v cyto, thinlayer, rescr
G0145 Scr c/v cyto, thinlayer, rescr
G0147 Scr c/v cyto, automated sys
G0148 Scr c/v cyto, autosys, rescr
G0306 CBC/diffwbc w/o platelet
G0307 CBC without platelet
G0328 Fecal blood scrn immunoassay
P2028 Cephalin floculation test
P2029 Congo red blood test
P2033 Blood thymol turbidity
P2038 Blood mucoprotein
P3000 Screen pap by tech w md supv
P3001 Screening pap smear by phys
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, and 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
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
97601 Wound(s) care, selective
97602 Wound(s) care, nonselective
97703 Prosthetic checkout
97750 Physical performance test
97755 Assistive technology assess
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
92507 Speech/hearing therapy
92508 Speech/hearing therapy
92526 Oral function therapy
92597 Oral speech device eval
92607 Ex for speech device rx, 1hr
92608 Ex for speech device rx addl
92609 Use of speech device service
92610 Evaluate swallowing function
92611 Motion fluoroscopy/swallow
92612 Endoscopy swallow tst (fees)
92614 Laryngoscopic sensory test
92616 Fees w/laryngeal sense test
93797 Cardiac rehab
93798 Cardiac rehab/monitor
94667 Chest wall manipulation
94668 Chest wall manipulation
95831 Limb muscle testing, manual
95832 Hand muscle testing, manual
95833 Body muscle testing, manual
95834 Body muscle testing, manual

[[Page 16144]]

95851 Range of motion measurements
95852 Range of motion measurements
96000 Motion analysis, video/3d
96001 Motion test w/ft press meas
96002 Dynamic surface emg
96003 Dynamic fine wire emg
96105 Assessment of aphasia
96110 Developmental test, lim
96111 Developmental test, extend
96115 Neurobehavior status exam
0029T Magnetic tx for incontinence

    Include HCPCS level 2 codes for the following physical therapy/
occupational therapy/speech-language pathology services:

G0279 Excorp shock tx, elbow epi
G0280 Excorp shock tx other than
G0281 Elec stim unattend for press
G0283 Elec stim other than wound

Radiology and Certain Other Imaging Services

    Include the following codes in the CPT 70000 series:

70100 X-ray exam of jaw
70110 X-ray exam of jaw
70120 X-ray exam of mastoids
70130 X-ray exam of mastoids
70134 X-ray exam of middle ear
70140 X-ray exam of facial bones
70150 X-ray exam of facial bones
70160 X-ray exam of nasal bones
70190 X-ray exam of eye sockets
70200 X-ray exam of eye sockets
70210 X-ray exam of sinuses
70220 X-ray exam of sinuses
70240 X-ray exam, pituitary saddle
70250 X-ray exam of skull
70260 X-ray exam of skull
70300 X-ray exam of teeth
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
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 Chest x-ray
71015 Chest x-ray
71020 Chest x-ray
71021 Chest x-ray
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 X-ray exam of breastbone
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 X-ray exam of spine
72020 X-ray exam of spine
72040 X-ray exam of neck spine
72050 X-ray exam of neck spine
72052 X-ray exam of neck spine
72069 X-ray exam of trunk spine
72070 X-ray exam of thoracic spine
72072 X-ray exam of thoracic spine
72074 X-ray exam of thoracic spine
72080 X-ray exam of trunk spine
72090 X-ray exam of trunk spine
72100 X-ray exam of lower spine
72110 X-ray exam of lower spine
72114 X-ray exam of lower spine
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 X-ray exam of pelvis
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
72198 Mr angio pelvis w/o & w/dye
72200 X-ray exam sacroiliac joints
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 X-ray exam of shoulder
73030 X-ray exam of shoulder
73050 X-ray exam of shoulders
73060 X-ray exam of humerus
73070 X-ray exam of elbow
73080 X-ray exam of elbow
73090 X-ray exam of forearm
73092 X-ray exam of arm, infant
73100 X-ray exam of wrist
73110 X-ray exam of wrist
73120 X-ray exam of hand
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 X-ray exam of hip
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 X-ray exam of ankle
73610 X-ray exam of ankle
73620 X-ray exam of foot
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 jnt of lwr extre w/o dye
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 X-ray exam of abdomen
74010 X-ray exam of abdomen
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 dye
74210 Contrst x-ray exam of throat
74220 Contrast x-ray, esophagus
74230 Cine/vid x-ray, throat/esoph
74240 X-ray exam, upper gi tract
74241 X-ray exam, upper gi tract
74245 X-ray exam, upper gi tract
74246 Contrst x-ray uppr gi tract
74247 Contrst x-ray uppr gi tract
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

[[Page 16145]]

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 X-rays, bone survey
76062 X-rays, bone survey
76065 X-rays, bone evaluation
76066 Joint survey, single view
76070 Ct bone density, axial
76071 Ct bone density, peripheral
76075 Dexa, axial skeleton study
76076 Dexa, peripheral study
76078 Radiographic absorptiometry
76082 Computer mammogram add-on
76083 Computer mammogram add-on
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 Cine/video x-rays
76125 Cine/video x-rays add-on
76150 X-ray exam, dry process
76370 Ct scan for therapy guide
76375 3d/holograph reconstr add-on
76380 CAT scan follow-up study
76400 Magnetic image, bone marrow
76499 Radiographic procedure
76506 Echo exam of head
76511 Echo exam of eye
76512 Echo exam of eye
76513 Echo exam of eye, water bath
76514 Echo exam of eye, thickness
76516 Echo exam of eye
76519 Echo exam of eye
76536 Us Exam of head and neck
76604 Us exam, chest, b-scan
76645 Us exam, breast(s)
76700 Us exam, abdom, complete
76705 Echo exam of abdomen
76770 Us exam abdo back wall, comp
76775 Us exam abdo back wall, lim
76778 Us exam kidney transplant
76800 Us exam, spinal canal
76801 Ob us < 14 wks, single fetus
76802 Ob us < 14 wks, add'l fetus
76805 Ob us /= 14 wks, sngl fetus
76810 Ob us /= 14 wks, addl fetus
76811 Ob us, detailed, sngl fetus
76812 Ob us, detailed, addl fetus
76815 Ob us, limited, fetus(s)
76816 Ob us, follow-up, per fetus
76818 Fetal biophys profile w/nst
76819 Fetal biophys profil w/o nst
76825 Echo exam of fetal heart
76826 Echo exam of fetal heart
76827 Echo exam of fetal heart
76828 Echo exam of fetal heart
76856 Us exam, pelvic, complete
76857 Us exam, pelvic, limited
76870 Us exam, scrotum
76880 Us exam, extremity
76885 Us exam infant hips, dynamic
76886 Us exam infant hips, static
76970 Ultrasound exam follow-up
76977 Us bone density measure
76999 Echo examination procedure

    Include the following CPT codes for echocardiography and 
vascular ultrasound:

93303 Echo transthoracic
93304 Echo transthoracic
93307 Echo exam of heart
93308 Echo exam of heart
93320 Doppler echo exam, heart [if used in conjunction with 93303-
93308]
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 Extracranial study
93880 Extracranial study
93882 Extracranial study
93886 Intracranial study
93888 Intracranial study
93922 Extremity study
93923 Extremity study
93924 Extremity study
93925 Lower extremity study
93926 Lower extremity study
93930 Upper extremity study
93931 Upper extremity study
93965 Extremity study
93970 Extremity study
93971 Extremity study
93975 Vascular study
93976 Vascular study
93978 Vascular study
93979 Vascular study
93980 Penile vascular study
93981 Penile vascular study
93990 Doppler flow testing

    Include the following CPT and HCPCS level 2 codes:

51798 Us urine capacity measure
78350 Bone mineral, single photon
91110 Gi tract capsule endoscopy
0028T Dexa body composition study
0042T Ct perfusion w/contrast, cbf
G0130 Single energy x-ray study
G0202 Screening mammography digital
G0204 Diagnostic mammography digital
G0206 Diagnostic mammography digital
G0288 Recon, CTA for surg plan
R0070 Transport portable x-ray
R0075 Transport port x-ray multipl

Radiation Therapy Services and Supplies

    Include the following codes in the CPT 70000 series:

77261 Radiation therapy planning
77262 Radiation therapy planning
77263 Radiation therapy planning
77280 Set radiation therapy field
77285 Set radiation therapy field
77290 Set radiation therapy field
77295 Set radiation therapy field
77299 Radiation therapy planning
77300 Radiation therapy dose plan
77301 Radiotherapy dose plan, imrt
77305 Teletx isodose plan simple
77310 Teletx isodose plan intermed
77315 Teletx isodose plan complex
77321 Special teletx port plan
77326 Brachytx isodose calc simp
77327 Brachytx isodose calc interm
77328 Brachytx isodose plan compl
77331 Special radiation dosimetry
77332 Radiation treatment aid(s)
77333 Radiation treatment aid(s)
77334 Radiation treatment aid(s)
77336 Radiation physics consult
77370 Radiation physics consult
77399 External radiation dosimetry
77401 Radiation treatment delivery
77402 Radiation treatment delivery
77403 Radiation treatment delivery
77404 Radiation treatment delivery
77406 Radiation treatment delivery
77407 Radiation treatment delivery
77408 Radiation treatment delivery
77409 Radiation treatment delivery
77411 Radiation treatment delivery
77412 Radiation treatment delivery
77413 Radiation treatment delivery
77414 Radiation treatment delivery
77416 Radiation treatment delivery
77417 Radiology port film(s)
77418 Radiation tx delivery, imrt
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 Hyperthermia treatment
77605 Hyperthermia treatment
77610 Hyperthermia treatment
77615 Hyperthermia treatment
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 interstit radiat compl
77781 High intensity brachytherapy
77782 High intensity brachytherapy
77783 High intensity brachytherapy
77784 High intensity brachytherapy
77789 Apply surface radiation
77790 Radiation handling
77799 Radium/radioisotope therapy

    Include the following CPT and HCPCS level 2 codes classified 
elsewhere:

31643 Diag bronchoscope/catheter
50559 Renal endoscopy/radiotracer
55859 Percut/needle insert, pros
61770 Incise skull for treatment
61793 Focus radiation beam
92974 Cath place, cardio brachytx
G0173 Stereo radiosurgery, complete
G0242 Multisource photon ster plan
G0243 Multisour photon stero treat
G0251 Linear acc based stero radio
G0338 Linear accelerator stero pln
G0339 Robot lin-radsurg com, first
G0340 Robt lin-radsurg fractx 2-5

EPO and Other Dialysis-Related Drugs

    The physician self-referral prohibition does not apply to the 
following codes for EPO and other dialysis-related drugs furnished 
in or by an ESRD facility if the conditions in Sec.  411.355(g) are 
satisfied:

J0630 Calcitonin salmon injection
J0636 Inj calcitriol per 0.1 mcg
J0895 Deferoxamine mesylate inj
J1270 Injection, doxercalciferol
J1750 Iron dextran
J1756 Iron sucrose injection
J1955 Inj levocarnitine per 1 gm
J2501 Paricalcitol
J2916 Na ferric gluconate complex
J2993 Reteplase injection
J2995 Inj streptokinase /250000 IU
J2997 Alteplase recombinant
J3364 Urokinase 5000 IU injection
P9041 Albumin (human), 5%, 50ml
P9045 Albumin (human), 5%, 250ml
P9046 Albumin (human), 25%, 20ml

[[Page 16146]]

P9047 Albumin (human), 25%, 50ml
Q4054 Darbepoetin alfa, esrd use
Q4055 Epoetin alfa, esrd use

Preventive Screening Tests, Immunizations and Vaccines

    The physician self-referral prohibition does not apply to the 
following tests if they are performed for screening purposes and 
satisfy the conditions in Sec.  411.355(h):

76083 Computer mammogram add-on
76092 Mammogram, screening
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 Scr c/v cyto, thinlayer, rescr
G0144 Scr c/v cyto, thinlayer, rescr
G0145 Scr c/v cyto, thinlayer, rescr
G0147 Scr c/v cyto, automated sys
G0148 Scr c/v cyto, autosys, rescr
G0202 Screening mammographydigital
G0328 Fecal blood scrn immunoassay
P3000 Screen pap by tech w md supv
P3001 Screening pap smear by phys

    The physician self-referral prohibition does not apply to the 
following immunization and vaccine codes if they satisfy the 
conditions in Sec.  411.355(h):

90655 Flu vaccine, 6-35 mo, im
90657 Flu vaccine, 6-35 mo, im
90658 Flu vaccine, 3 yrs, im
90732 Pneumococcal vaccine
90740 Hepb vacc, ill pat dose im
90743 Hep b vacc, adol, 2 dose im
90744 Hepb vacc ped/adol 3 dose im
90746 Hepb vaccine, adult, im
90747 Hepb vacc, ill pat 4 dose im

[FR Doc. 04-6668 Filed 3-25-04; 8:45 am]
BILLING CODE 4120-03-P