[Federal Register Volume 70, Number 195 (Tuesday, October 11, 2005)]
[Proposed Rules]
[Pages 59182-59198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-20322]



[[Page 59181]]

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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 Part 411



Medicare Program; Physicians' Referrals to Health Care Entities With 
Which They Have Financial Relationships; Exceptions for Certain 
Electronic Prescribing and Electronic Health Records Arrangements; 
Proposed Rule

  Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / 
Proposed Rules  

[[Page 59182]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 411

[CMS-1303-P]
RIN 0938-AN69


Medicare Program; Physicians' Referrals to Health Care Entities 
With Which They Have Financial Relationships; Exceptions for Certain 
Electronic Prescribing and Electronic Health Records Arrangements

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

ACTION: Proposed rule.

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SUMMARY: As required by section 101 of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), this proposed rule 
would create an exception to the physician self-referral prohibition in 
section 1877 of the Social Security Act (the Act) for certain 
arrangements in which a physician receives necessary non-monetary 
remuneration that is used solely to receive and transmit electronic 
prescription drug information. In addition, using our separate legal 
authority under section 1877(b)(4) of the Act, we are proposing two 
separate regulatory exceptions for electronic health records software 
and directly related training services. These exceptions are consistent 
with the President's goal of achieving widespread adoption of 
interoperable electronic health records for the purpose of improving 
the quality and efficiency of health care, while maintaining the levels 
of security and privacy that consumers expect.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on December 12, 
2005.

ADDRESSES: In commenting, please refer to file code CMS-1303-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word.)
    2. By mail. You may 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-1303-
P, PO Box 8010, Baltimore, MD 21244-8010.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send 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-1303-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
(410) 786-9994 in advance to schedule your arrival with one of our 
staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 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 received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document. For information on 
viewing public comments, see the beginning of the SUPPLEMENTARY 
INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Linda Howard, (410) 786-5255.

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-1303-P] and the specific ``issue 
identifier'' that precedes the section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. CMS posts all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
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 1-800-
743-3951.
    Open Door Forum: We are planning to schedule an Open Door Forum 
early in the comment period to discuss the benefits and risks of 
donating electronic prescribing and electronic health records 
technology. Please note, however, that our planned Open Door Forum is 
in addition to, and not in lieu of, the public comment process 
discussed above. To be assured consideration, please forward your 
written comments by the close of the comment period.

I. Background

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

    Section 1877 of 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 interest or compensation arrangement), unless 
an exception applies; and (2) prohibits the entity from submitting 
claims to Medicare for those referred services, unless an exception 
applies. The statute establishes a number of exceptions and grants the 
Secretary the authority to create additional regulatory exceptions for 
financial relationships that do not pose a risk of program or patient 
abuse. When enacted in 1989, the physician self-referral law applied 
only to physician referrals for clinical laboratory services under 
Medicare when made to an entity with which the physician (or an 
immediate family member) had a financial relationship. In

[[Page 59183]]

1993 and 1994, the Congress expanded the prohibition to include ten 
additional DHS and added section 1903(s) of the Act, which extended 
aspects of the referral prohibition to the Medicaid program.
    Section 1877 of the Act, as it applies to referrals for eleven DHS, 
has been in effect and subject to enforcement since January 1, 1995. On 
August 14, 1995, we published a final rule with comment period in the 
Federal Register (60 FR 41914) that incorporated into regulations the 
physician self-referral prohibition as it applied to clinical 
laboratory services. That final rule did not address the other DHS. On 
January 9, 1998, we published a proposed rule in the Federal Register 
(63 FR 1659) to revise the regulations to cover the additional DHS and 
the Medicaid expansion. On January 4, 2001, we published the ``Phase 
I'' final rule with comment period in the Federal Register (66 FR 856). 
Phase I addressed the general prohibition on physician self-referrals 
and the statutory exceptions applicable to both ownership and 
compensation arrangements, defined key terms, and created a number of 
new regulatory exceptions. With two exceptions, the regulations 
published in Phase I became effective on January 4, 2002.\1\ On March 
26, 2004, we published the ``Phase II'' interim final rule with comment 
period in the Federal Register (69 FR 16054), which became effective on 
July 26, 2004. Phase II addressed the statutory exceptions related to 
ownership and investment interests, the statutory exceptions for 
certain compensation arrangements, and the reporting requirements. 
Phase II also created some new regulatory exceptions and addressed 
public comments on Phase I.
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    \1\ Revised Sec.  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)). In addition, the effective 
date of the final sentence of Sec.  411.354(d)(1) relating to the 
definition of ``set in advances'' was delayed several times. The 
sentence never went into effect and was deleted in the Phase II 
regulation, effective July 26, 2004.
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    Section 101 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) added a new section 
1860D to the Act establishing a prescription drug benefit in the 
Medicare program. As part of the new legislation, the Congress directed 
the Secretary in section 1860D-4(e)(4) of the Act to adopt standards 
for electronic prescribing in connection with the new prescription drug 
benefit with the objective of improving patient safety, quality of 
care, and efficiency in the delivery of care. (H.R. Conf. Rep. No. 108-
391, at 455, 456 (2003).) Section 1860D-4(e)(6) of the Act directs the 
Secretary, in consultation with the Attorney General, to create an 
exception to the physician self-referral prohibition and a safe harbor 
under the anti-kickback statute (section 1128B(b) of the Act) to 
protect certain arrangements involving the provision of non-monetary 
remuneration (consisting of items and services in the form of hardware, 
software, or information technology and training services) that is 
necessary and used solely to receive and transmit electronic 
prescription drug information in accordance with electronic prescribing 
standards published by the Secretary under section 1860D-4(e)(4) of the 
Act. We note that, depending on the circumstances, provisions in the 
existing physician self-referral regulations may provide sufficient 
protection for the donation of these items and services to physicians.
    This proposed rule sets forth the terms and conditions of the MMA-
mandated physician self-referral exception for certain arrangements 
involving the donation of electronic prescribing technology. The MMA-
mandated anti-kickback statute safe harbor is being implemented in a 
separate rulemaking by the Office of Inspector General (OIG). We have 
attempted to ensure as much consistency as possible between our 
proposed electronic prescribing exception and the corresponding safe 
harbor proposed by OIG, given the differences in the respective 
underlying statutes. We intend the final rules to be similarly 
consistent.
    Section 1877(b)(4) of the Act authorizes the Secretary to create 
regulatory exceptions for financial relationships that he determines do 
not pose a risk of program or patient abuse. Using this authority, this 
proposed rule also sets forth terms and conditions for two separate 
physician self-referral exceptions for certain arrangements involving 
the donation of electronic health records software and directly related 
training services. Information technology, and electronic health 
records in particular, supports treatment choices for consumers and 
enables better and more cost-effective care, while maintaining the 
levels of security and privacy that consumers expect. We seek to 
encourage the adoption of such technology through this proposed 
rulemaking. We also intend to monitor the progress made toward fully 
interoperable electronic health records systems, as we believe that 
systems that are fully interoperable and certified can mitigate many of 
our concerns regarding the potential anti-competitive effects of stand-
alone electronic health records systems.

II. Provisions of the Proposed Rule

    As required by section 101 of the MMA, this proposed rule would add 
new paragraph (v) to Sec.  411.357. New paragraph (v) would describe 
more specifically: (1) The items and services protected by the new 
electronic prescribing exception mandated under section 101 of the MMA; 
(2) the conditions under which offering these items and services to 
physicians would be protected; and (3) the DHS entities and referring 
physicians covered by the electronic prescribing exception.
    In addition, using our separate legal authority under section 
1877(b)(4) of the Act, we are proposing two separate exceptions at 
Sec.  411.357(w) and Sec.  411.357(x) for electronic health records 
software and training services that are not covered by the MMA-mandated 
exception. New paragraphs (w) and (x) would describe more specifically: 
(1) The items and services protected by the new electronic health 
records exceptions; (2) the individuals and entities that may provide 
the protected items and services; and (3) the conditions under which 
the provision of items and services to physicians would be protected.
    The proposed exceptions at Sec.  411.357(v), Sec.  411.357(w), and 
Sec.  411.357(x) would, if implemented, create independent grounds for 
protection under the physician self-referral prohibition. For the 
convenience of the public, we are providing the following chart that 
lays out schematically the overall structure and approach of these 
proposed regulations, details of which are provided below in Sections 
II.A. and B. of this proposed rule. Readers are cautioned that the 
exceptions contain additional conditions and information not summarized 
here.

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                                                    MMA-mandated                                    Post-
                                                     electronic       Pre-interoperability    interoperability
                                                     prescribing        electronic health     electronic health
                                                      exception         records exception     records exception
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Authority for Proposed Exception..............  Section 101 of the    Section 1877(b)(4)    Section 1877(b)(4)
                                                 Medicare              of the Social         of the Social
                                                 Prescription Drug,    Security Act.         Security Act.
                                                 Improvement, and
                                                 Modernization Act
                                                 of 2003.
Covered Technology............................  Proposed:             Proposed:             Proposed:
                                                 Items and     Software      Certified
                                                 services that are     used solely for the   electronic health
                                                 necessary and used    transmission,         records software
                                                 solely to transmit    receipt or            Directly-
                                                 and receive           maintenance of        related training
                                                 electronic            electronic health     services
                                                 prescription drug     records.              Software
                                                 information.          Directly-     must include an
                                                 Includes      related training      electronic
                                                 hardware, software,   services..            prescribing
                                                 internet              Software      component
                                                 connectvity, and      must include an       Could
                                                 training and          electronic            include billing and
                                                 support services.     prescribing           scheduling
                                                                       component.            software, provided
                                                                                             that the core
                                                                                             function of the
                                                                                             software is
                                                                                             electronic health
                                                                                             records.
Standards With Which Donated Technology Must    Proposed:             Proposed:             Proposed:
 Comply                                          Foundation    Electronic    Product
                                                 standards for         prescribing           certification
                                                 electronic            component must        criteria adopted by
                                                 prescribing as        comply with           the Secretary.
                                                 adopted by the        foundation            Electronic
                                                 Secretary.            standards for         prescribing
                                                                       electronic            component must
                                                                       prescribing as        comply with
                                                                       adopted by the        foundation
                                                                       Secretary.            standards for
                                                                                             electronic
                                                                                             prescribing as
                                                                                             adopted by the
                                                                                             Secretary, to the
                                                                                             extent these
                                                                                             standards are not
                                                                                             fully incorporated
                                                                                             into the product
                                                                                             certification
                                                                                             criteria.
Permissible Donors............................  Proposed:             Proposed:             Proposed:
                                                 As required   Hospitals     Hospitals
                                                 by statute,           to members of their   to members of their
                                                 hospitals (to         medical staffs.       medical staffs.
                                                 members of their      Group         Group
                                                 medical staffs),      practices to          practices to
                                                 group practices (to   physician members.    physician members.
                                                 physician members),   PDP           PDP
                                                 PDP sponsors and MA   sponsors..            sponsors.
                                                 organizations (to     MA            MA
                                                 Physicians).          organizations..       organizations.
Selection of Recipients.......................  Proposed:             Proposed:             Proposed:
                                                 Donors may    Donors may    Donors may
                                                 not take into         not take into         use criteria to
                                                 account the volume    account the volume    select recipients
                                                 or value of           or value of           that are not
                                                 referrals from the    referrals from the    directly related to
                                                 recipient or other    recipient or other    the volume or value
                                                 business between      business between      of referrals or
                                                 the parties.          the parties.          other business
                                                                                             generated between
                                                                                             the parties.
Value of Protected Technology.................  Proposed:             Proposed:             Proposed:
                                                 No specific   No specific   No specific
                                                 dollar amount         dollar amount         dollar amount
                                                 proposed for a cap    proposed for a cap    proposed for a cap
                                                 on the value of       on the value of       on the value of
                                                 protected             protected items and   protected items and
                                                 technology.           services.             services.
                                                                                             May be
                                                                                             greater than the
                                                                                             cap on
                                                                                             preinteroperability
                                                                                             donations.
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A. Exception for Certain Arrangements Involving Electronic Prescribing 
Technology: Sec.  411.357(v)

    [If you choose to comment on issues in this section, please include 
the caption ``Electronic Prescribing Exception: Sec.  411.357(v)'' at 
the beginning of your comment.]
    The Congress, in mandating the creation of an electronic 
prescribing exception under the physician self-referral law, recognized 
the value of electronic prescription programs as a vehicle to reduce 
medical errors and to improve efficiencies in the health care system. 
(H.R. Conf. Rep. No. 108-391, at 456 (2003).) We believe that promoting 
the rapid adoption of electronic prescribing for Medicare Part D is 
beneficial to both health care providers and patients, and we have 
interpreted the mandate accordingly.
1. Protected Non-Monetary Remuneration
    Section 1860D-4(e)(6) of the Act authorizes the creation of an 
exception only for the provision of items and services that are 
``necessary and used solely'' to transmit and receive electronic 
prescription drug information. This proposed rule would clarify the 
items and services that would qualify for the new exception 
(``qualifying electronic prescribing technology'').

a. ``Necessary'' Non-Monetary Remuneration

    First, consistent with the MMA mandate, the proposed exception 
would protect only items or services that are ``necessary'' to conduct 
electronic prescription drug transactions. This might include, for 
example, hardware, software, broadband or wireless internet 
connectivity, training, information technology support services, and 
other items and services used in connection with the transmission or 
receipt of electronic prescribing information. The exception would not 
protect arrangements in which DHS entities provide items or services 
that are technically or functionally equivalent to items that the 
receiving physician already possesses or services that the physician 
has already obtained. For example, we believe the exception would allow 
a hospital to provide a physician with a hand-held device capable of 
transmitting electronic prescribing information, even though the 
physician may already have a desktop computer that could also be used 
to send the same information. By contrast, the provision of a second 
hand-held device would not qualify for the exception if the physician 
already

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possesses a hand-held device that could run the new software. We do not 
interpret the term ``necessary'' to preclude upgrades of equipment or 
software that significantly enhance the functionality of the item or 
service.
    We believe that restricting the exception to ``necessary'' items 
and services is important to minimize the potential for abuse. However, 
we recognize that the donors of the items and services will not 
necessarily know which items and services the physician already 
possesses or has obtained. Accordingly, Sec.  411.357(v)(7)(iv) would 
require the physician to certify that the items and services provided 
are not technically or functionally equivalent to those that the 
physician already possesses or has already obtained. The physician must 
update the certification prior to the furnishing of any necessary 
upgrades or items and services not reflected in the original 
certification. We are concerned that the certification process would be 
ineffective as a safeguard against fraud and abuse if it is a mere 
formality or if physicians simply execute a form certification provided 
by the DHS entity. The certification must be truthful, and we are 
proposing at Sec.  411.357(v)(8) that the DHS entity must not have 
actual knowledge of, or act in reckless disregard or deliberate 
ignorance of, the fact that the physician possessed or had obtained 
items and services that were technically or functionally equivalent to 
those donated by the entity. We are soliciting comments about other 
ways to address this concern.
    We are also concerned that there may be a risk that physicians 
would intentionally divest themselves of functionally or technically 
equivalent technology that they already possess in order to shift costs 
to the DHS entity. We are soliciting public comments on how best to 
address this issue.

b. ``Used Solely''

    In addition to the ``necessary'' standard, section 1860D-4(e)(6) of 
the Act provides that the items and services must be ``used solely'' 
for the transmission or receipt of electronic prescribing information. 
We believe that the Congress included this requirement to safeguard 
against abusive arrangements in which the remunerative technology might 
constitute a payment for referrals because it might have additional 
value attributable to uses other than electronic prescribing. 
Accordingly, the proposed exception at Sec.  411.357(v) requires that 
the protected items and services be used solely to transmit or receive 
electronic prescribing information.
    We are concerned that DHS entities might provide free or reduced 
cost software that bundles valuable general office management, billing, 
scheduling, or other software with the electronic prescribing features. 
Such additional remuneration would not meet the ``used solely'' 
requirement and would not be protected by the proposed electronic 
prescribing exception. However, the physician would not be precluded 
from purchasing from the DHS entity for fair market value additional 
technology not protected by the proposed exception.
    We are mindful that hardware and connectivity services can be used 
for the receipt and transmission of a wide range of information 
services, including, but not limited to, electronic prescription 
information, and that many physicians may prefer to use a single, 
multi-functional device, especially a hand-held, rather than multiple 
single-use devices. Similarly, many physicians may prefer to use a 
single connectivity service. Accordingly, we are proposing to use our 
authority under section 1877(b)(4) of the Act to create an additional 
exception to protect the provision by DHS entities to physicians of 
hardware (including necessary operating system software) and 
connectivity services that are used for more than one function, so long 
as a substantial use of the item or service is to receive or transmit 
electronic prescription information. We propose to treat operating 
software as integral to the hardware and distinct from other software 
applications that are not necessary for the hardware to operate. Under 
this additional exception, protection would not extend to the provision 
of items or services that are only occasionally used for electronic 
prescribing. The additional exception would incorporate the definitions 
and conditions set forth in this proposed rulemaking and would also 
include conditions to address the additional risk of abuse posed by 
multi-functional items and services.
    We are soliciting public comment about the standards that should 
appear in an additional exception for multi-functional hardware 
(including necessary operating system software) or connectivity 
services. In particular, we are soliciting public comment on 
methodologies for quantifying or ensuring that a substantial use of 
hardware and connectivity services is for the receipt or transmission 
of electronic prescribing information. We have considered how to 
quantify ``substantial use'' with respect to other provisions of the 
Act and its implementing regulations; here, we are specifically seeking 
comments regarding an appropriate definition of ``substantial use'' in 
the context of electronic prescribing technology and its use. We are 
also soliciting public comment on the nature and amount of any cap that 
we should impose on the value of the donated multi-functional hardware 
or connectivity services.
2. Designated Health Services (DHS) Entities Protected by the Exception
    In addition to describing the kinds of electronic prescribing 
technology that can be protected, section 1860D-4(e)(6) of the Act 
limits the kinds of entities that may provide this assistance, and the 
persons to whom assistance can be provided. Specifically, the statutory 
provision protects the donation of qualifying electronic prescribing 
technology when the donation is made by hospitals to members of their 
medical staffs, by group practices to their physician members, and by 
prescription drug plan (PDP) sponsors and Medicare advantage (MA) 
organizations to pharmacies, pharmacists, and physicians and other 
prescribing health care professionals.
    The proposed regulation text largely mirrors the statutory language 
except where the statute refers to persons or entities other than 
physicians (that is, pharmacies, pharmacists, and non-physician 
prescribing health care professionals). We are proposing to limit the 
exception at Sec.  411.357(v) to remuneration provided to physicians, 
because section 1877 of the Act is not implicated when remuneration is 
provided to non-physician prescribing health care professionals or to 
pharmacists and pharmacies that are not otherwise affiliated with a 
referring physician. To the extent that a hospital has a financial 
relationship with these parties, no exception is necessary. However, 
arrangements that do not implicate section 1877 of the Act can still 
violate the anti-kickback statute.
    Proposed Sec.  411.357(v)(1)(i) would protect donations of 
qualifying electronic prescribing technology provided by a hospital to 
physicians on its medical staff. We intend to protect donations only to 
physicians who routinely furnish services at the hospital. We do not 
intend for this exception to protect remuneration used to induce 
physicians who already practice at other hospitals to join the medical 
staff of a different hospital. We are soliciting comments on this 
issue.
    Proposed Sec.  411.357(v)(1)(ii) would protect donations of 
qualifying electronic prescribing technology provided by a group 
practice to its physician members. For purposes of the new exception, 
we propose to apply the

[[Page 59186]]

existing regulatory definitions of the terms ``group practice'' and 
``member of a group practice'' (see Sec.  411.352 and Sec.  411.351, 
respectively). Further, the inclusion of paragraph Sec.  
411.357(v)(1)(ii) does not imply that the provision of the items and 
services by a group to its members necessarily requires a new 
exception, because the in-office ancillary services exception or the 
employment exception would apply in most circumstances, where needed. 
We believe the Congress included these relationships in section 1860D-
4(e)(6) of the Act simply to encourage group practices to adopt 
electronic prescribing technology. We are soliciting comments regarding 
whether and how a group practice may appropriately furnish qualifying 
electronic prescribing technology to a ``physician in the group 
practice,'' as defined at Sec.  411.351.
    Proposed Sec.  411.357(v)(1)(iii) would protect donations of 
qualifying electronic prescribing technology provided by a PDP sponsor 
or MA organization to prescribing physicians. We note that, in certain 
circumstances, donations of qualifying electronic prescribing 
technology may qualify for protection under the existing exception at 
Sec.  411.355(c). In addition, although section 1860D-4(e)(6) of the 
Act also applies to the provision of qualifying electronic prescribing 
technology by PDP sponsors and MA organizations to pharmacies, 
pharmacists, and non-physician prescribing health care professionals in 
the plans' networks, these financial relationships do not implicate 
section 1877 of the Act.
    We are soliciting comments on whether we should use our authority 
under section 1877(b)(4) of the Act to protect qualifying electronic 
prescribing technology provided to physicians by other DHS entities. 
Most other DHS services do not appear to involve substantial 
utilization of prescription drugs. We are interested in comments 
addressing the types of DHS entities that should be included, the 
degree of need for the protection, and the safeguards that should be 
imposed to protect against program or patient abuse.
3. Additional Limitations on the Provision of Electronic Prescribing 
Technology

a. Promoting Compatibility and Interoperability

    Section 1860D-4(e)(6) of the Act is integral to the electronic 
prescribing program established by section 101 of the MMA. Section 
1860D-4(e)(6) of the Act provides that, in order to qualify for the 
physician self-referral exception, the qualifying electronic 
prescription technology must be used to receive and transmit electronic 
prescription information in accordance with standards to be established 
by the Secretary for Part D electronic prescription drug programs. 
Consistent with section 1860D-4(e)(6) of the Act, proposed Sec.  
411.357(v)(2) would require that the items and services be provided as 
part of, or be used to access, an electronic prescription drug program 
that complies with the standards established by the Secretary for these 
programs. We are soliciting comments on whether the exception should 
permit qualifying electronic prescribing technology to be used for the 
transmission of prescription information regarding items and services 
that are not drugs (for example, supplies or laboratory tests).
    Interoperable systems have the technical capacity to transmit and 
receive information from other devices and applications in a secure and 
intelligible manner. We believe that interoperability can serve as an 
important safeguard against fraud and abuse, because a requirement that 
protected technology be fully interoperable would mitigate the risk 
that an entity could offer free or reduced price technology to a 
referring physician as a means of maintaining or increasing that 
physician's referrals to the entity. With interoperable electronic 
prescribing technology, the physician would be free to transmit 
prescriptions to any appropriate pharmacy.
    At this time, there are no regulatory standards to ensure that 
electronic prescription information products are interoperable with 
other products. However, we note that interoperability may be required 
in the future under final regulations regarding the standards for the 
Part D electronic prescription drug program. To the extent that either 
the hardware or software can be interoperable, we propose at Sec.  
411.357(v)(3) to prohibit donors or their agents from taking any 
actions to disable or limit that interoperability or otherwise impose 
barriers to compatibility. We believe this condition is necessary to 
limit the ability of a donor, such as a hospital, to use the provision 
of items or services to tie the physicians to the facility.
    We are considering defining the term ``interoperable'' to mean the 
ability of different information systems, software applications, and 
networks to communicate and exchange information in an accurate, 
secure, effective, useful, and consistent manner. (See generally 44 
U.S.C. Sec.  3601(6) (pertaining to the management and promotion of 
electronic government services).) We are soliciting public comment 
about this approach, our definition of the term ``interoperable,'' 
alternative means of ensuring the maximum level of interoperability, 
and the types of software currently available for electronic 
prescribing.

b. Value of Protected Technology

    We are considering whether to limit the aggregate fair market value 
of all items and services provided to a physician from a single donor. 
We believe a monetary limit is appropriate and reasonable to minimize 
the potential for fraud and abuse. We are soliciting public comment on 
the amount of a cap that would adequately protect the program against 
abuse, the methodology used to determine the cap (for example, fixed 
dollar amount, percentage of the value of the donated technology, or 
another methodology), whether the same cap would be adequate if there 
were protection for the donation of multi-functional hardware and 
connectivity services, whether the cap should be reduced over time, and 
whether the cap places a disadvantage on smaller entities that do not 
have the financial resources of larger chains or organizations.
    We are also interested in comments on the retail and nonretail 
costs of obtaining electronic prescribing technology and the degree to 
which physicians may already possess items or services that could be 
used for electronic prescribing. We have received varying estimates of 
the costs of implementing electronic prescribing through the comment 
process for our E-Prescribing and the Prescription Drug Program 
proposed rule published on February 4, 2005 in the Federal Register (70 
FR 6256). We also have explored the available literature on the costs 
of implementing electronic prescribing. (See section IV of this 
preamble.) We caution that the cost of implementing an electronic 
prescribing program will not correlate necessarily to the amount of any 
cap if one is established. Moreover, we do not expect that donors will 
wish necessarily to donate the total amount that the technology costs 
or, depending on the size of a cap, the total amount ultimately 
protected in the final rule. Although we are interested in obtaining 
detailed information about the costs of the full range of technology so 
as to be fully informed on this matter, we do not expect that the final 
regulations will protect all possible costs.

c. Other Conditions

    We seek to minimize the potential for abuse and to ensure that the 
protected technology furthers the congressional

[[Page 59187]]

purpose of promoting electronic prescribing as a means of improving the 
quality of care for all patients. We believe that any protected items 
and services must, to the extent possible, be usable by physicians for 
electronic prescribing for all patients to ensure that uninsured and 
non-Medicare patients receive the same benefits that the technology may 
engender, including reduction of errors and improvements in care. Some 
donated technology (such as software for tracking prescriptions or 
formularies of a particular MA organization's patients) may not be 
applicable to all patients. However, other technology (for example, 
hand-held devices and software that transmit prescriptions to 
pharmacies) is potentially usable for all patients, and physicians 
should not be restricted from using such technology for all patients. 
Accordingly, proposed Sec.  411.357(v)(4) would require that, where 
possible, physicians must be able to use the protected technology for 
all patients without regard to payor status.
    Proposed Sec.  411.357(v)(5) would provide that neither the 
physician nor the physician's practice (including employees and staff 
members) may make the donation of qualifying electronic prescribing 
technology items or services a condition of doing business with the 
entity.
    Proposed Sec.  411.357(v)(6) and (v)(7) would incorporate 
conditions that are consistent with the conditions in the other 
regulatory exceptions under the physician self-referral prohibition. 
Paragraph (v)(6) would provide that the eligibility of a physician to 
receive items and services from a DHS entity, and the amount and nature 
of the items and services received, may not be determined in a manner 
that takes into account the volume or value of the physician's 
referrals to the DHS entity or other business generated between the 
physician and the DHS entity. This does not preclude selection criteria 
that are based upon the total number of prescriptions written by a 
physician, but the proposed regulation would prohibit criteria based 
upon the volume or value of prescriptions written by the physician that 
are dispensed or paid by the donor, as well as any criteria based on 
any other business generated between the parties. We are interested in 
comments with respect to other potential criteria for selecting medical 
staff recipients of donated technology. Also, the exception would not 
protect arrangements that seek to induce a physician to change 
loyalties from other providers or plans to the donor (for example, a 
hospital using an electronic prescribing technology arrangement to 
induce a physician who is on the medical staff of another hospital to 
join the donor hospital's medical staff for a purpose of referring 
patients to the donor hospital). Proposed Sec.  411.357(v)(7) would 
require the arrangement to be in writing, to be signed by the parties, 
to identify with specificity the items or services being provided and 
the value of those items and services, and to include the certification 
described in section II.A.1 of this proposed rule. To permit effective 
oversight of protected arrangements, the written agreement must cover 
all of the qualifying electronic prescribing technology to be furnished 
to the physician by the DHS entity. For example, if a hospital provides 
a piece of hardware under one arrangement and then subsequently 
provides a software program, the agreement regarding the software would 
have to include a description of the previously donated hardware 
(including its nature and value). In addition, the written agreement 
must include a certification by the physician that the items and 
services are not technically or functionally equivalent to any items or 
services that he or she already possesses or has already obtained.
    Proposed Sec.  411.357(v)(8) would provide that the DHS entity must 
not have actual knowledge of, or act in reckless disregard or 
deliberate ignorance of, the fact that the physician possessed or had 
obtained items and services that were technically or functionally 
equivalent to those donated by the entity. In other words, the DHS 
entity would not be subject to sanctions under section 1877(g) of the 
Act if it did not know or have reason to suspect that the physician 
certification required under Sec.  411.357(v)(7)(iv) was false.

B. Exceptions for Certain Arrangements Involving Electronic Health 
Records Items and Services: Sec.  411.357(w) and Sec.  411.357(x)

    The implementation of electronic health information technology is a 
compelling national priority to improve our healthcare system. 
Interoperable electronic health information technology would allow 
patient information to be portable and to move with consumers from one 
point of care to another. This would require an infrastructure that can 
help clinicians gain access to critical health information when 
treatment decisions are being made, while keeping that information 
confidential and secure. We believe that the promise of a secure and 
seamless information exchange that reduces medical errors, improves the 
quality of patient care, and improves efficiency will be realized only 
when we have a standardized system that is open, adaptable, 
interoperable, and predictable.
    We believe that interoperable electronic health records technology, 
once implemented, has the potential to increase health care quality and 
improve efficiency, which are outcomes consistent with our goals in 
exploring Pay-for-Performance options. We believe it is important to 
promote these open, interconnected, interoperable electronic health 
records systems that help improve the quality of patient care and 
efficiency in the delivery of health care to patients, without 
protecting arrangements that hinder marketplace competition, serve as 
marketing platforms, or are mechanisms to influence inappropriately 
clinical decision-making.
    Accordingly, in addition to the electronic prescribing exception, 
we are proposing to use our legal authority under section 1877(b)(4) of 
the Act to promulgate two new exceptions, at Sec.  411.357(w) and Sec.  
411.357(x), to protect non-abusive arrangements involving the provision 
of software and directly related training services that are necessary 
and used to receive, transmit, and maintain the electronic health 
records of the entity's or physician's patients. The first exception 
would apply to donations made before the Secretary's adoption of 
product certification criteria, including criteria for the 
interoperability, functionality, and privacy and security of electronic 
health records technology (these criteria are referred to herein as 
``product certification criteria''), and would provide limited 
protection. For purposes of this rulemaking, we will refer to this 
exception as the ``pre-interoperability'' exception. The second 
exception would apply to donations made after product certification 
criteria are adopted by the Secretary. For purposes of this rulemaking, 
we will refer to this exception as the ``post-interoperability'' 
exception. In recognition of the reduction in the risk of fraud and 
abuse that may result from interoperable systems, the post-
interoperability exception would offer broader protection than the pre-
interoperability exception.
    We are concerned about the risk of program abuse that may be posed 
by a DHS entity's provision of valuable technology to physicians. We 
believe that this risk increases as the value of the technology to the 
physician increases. The provision of electronic health records 
technology to physicians poses greater risk of abuse than the provision 
of limited electronic

[[Page 59188]]

prescribing technology, because electronic health records technology is 
inherently more valuable to physicians in terms of actual cost, avoided 
overhead, and administrative expenses of an office practice. However, 
in light of the potential patient benefits of electronic health 
records, we have attempted to construct exceptions that include several 
criteria designed to ensure that the exceptions do not pose a risk of 
program or patient abuse. We will continue to evaluate the risks posed 
by the donation to physicians of electronic health records technology 
and may refine or add additional safeguards to the final rule to ensure 
that the exceptions do not pose a risk of program or patient abuse. We 
are requesting comments on whether hardware, connectivity and related 
items and services should also be protected under either or both these 
exceptions, and, if so, under what conditions.
1. Pre-Interoperability Exception
[If you choose to comment on issues in this section, please include the 
caption ``Pre-Interoperability Electronic Health Records Exception: 
Sec.  411.357(w)'' at the beginning of your comment.]

    We wish to recognize the innovative early adopters of electronic 
health records technology and establish an exception to protect 
donations of such technology made before the Secretary has adopted 
product certification criteria for electronic health records. However, 
as noted above in section II.A.3 with respect to electronic 
prescribing, it is important that protected electronic health records 
software be interoperable to the extent technologically feasible and 
that neither donors nor their agents take any actions to disable or 
limit interoperability or otherwise impose barriers to compatibility. 
Unlike electronic prescribing, at this time, there are no proposed 
Federal regulatory standards for electronic health records, nor are 
there any product certification criteria with which electronic health 
records software can comply. Nonetheless, while product certification 
criteria are being developed, we are proposing the narrow pre-
interoperability exception described below to protect certain donations 
of electronic health records technology in an effort to stimulate and 
promote the expansion of technology in the health care industry.

a. Covered Technology

    We are proposing to protect only electronic health records 
software, that is, software that is essential to and used solely for 
the transmission, receipt, or maintenance of patients' electronic 
health records. To be protected by this exception, the donated 
electronic health records software must have an electronic prescribing 
component. The required electronic prescribing component must consist 
of software that is used to receive and transmit electronically 
prescription drug information in accordance with electronic prescribing 
standards published by the Secretary under section 1860D-4(e)(4) of the 
Act. We are soliciting comments on whether the exception should permit 
the electronic prescribing component of electronic health record 
software to be used for the transmission of prescription information 
regarding items and services that are not drugs (for example, supplies 
or laboratory tests). Additionally, we are soliciting comments with 
respect to whether we should also or instead require that electronic 
health records software include a computerized provider order entry 
(CPOE) component. We are proposing at Sec.  411.357(w)(8) not to 
protect the provision of other types of technology, including, for 
example, hardware, connectivity services, billing or scheduling 
software, or software that might be used by a physician to conduct 
personal business or business unrelated to the physician's medical 
practice. Although the proposed exception would protect necessary 
training services in connection with the software, the exception would 
not protect the provision of staff to physicians or their offices.
    We are mindful that there may be particular constituencies, such as 
rural area providers, that lack sufficient hardware or connectivity 
services to implement effective electronic health records systems. We 
are soliciting comments addressing these special circumstances.
    In order to protect further against abuse, we are considering 
including in the final regulations a definition of ``electronic health 
records'' for purposes of the exception. We are soliciting comments on 
how we should draft this definition. In particular, we are interested 
in public comments that address the types of software that should be 
protected; the retail and nonretail cost of this software; the ways in 
which this software is currently marketed (for example, individual 
applications versus bundled software packages); methods for defining 
the scope of protected software; and safeguards that might be imposed 
(either in the definition or separately) to ensure that the exception 
does not pose a risk of program or patient abuse. Finally, we are 
soliciting public comment on whether and, if so, how to protect the 
provision of other kinds of electronic health information technology.
    We are proposing to interpret ``necessary'' in the new exception 
consistent with our interpretation of the term in section II.A.1 of 
this proposed rule and to include a comparable provision at Sec.  
411.357(w)(5)(iv) to ensure that the exception does not protect the 
provision of items or services that are technically and functionally 
equivalent to items and services the physician currently possesses or 
has obtained. As with electronic prescribing technology, we are 
concerned that there may be a risk that physicians would intentionally 
divest themselves of functionally or technically equivalent technology 
that they already possess to shift costs to donors and we are 
soliciting public comment on whether and how to address this situation.

b. Standards With Which Donated Technology Must Comply

    The pre-interoperability exception would require at Sec.  
411.357(w)(9) that any protected software must include an electronic 
prescribing component that complies with standards established by the 
Secretary for the Part D electronic prescription drug program. 
Moreover, as with the electronic prescribing exception discussed above, 
we would require at Sec.  411.357(w)(2) that neither donor entities nor 
their agents take any actions to disable or limit interoperability of 
any component of the software or otherwise impose barriers to 
compatibility. We are also considering requiring protected software to 
comply with relevant Public Health Information Network preparedness 
standards, such as those related to BioSense. We are soliciting 
comments on these and other appropriate standards.
    We are interested in comments addressing whether this pre-
interoperability exception may have the unintended effect of impeding 
the beneficial spread of interoperable electronic health records 
systems by promoting closed or isolated systems or systems that 
effectively tie physicians to particular providers or suppliers. For 
example, a hospital that donates expensive technology to a physician 
may exercise control over that physician sufficient to preclude or 
discourage other systems or health plans from having access to the 
physician for their own networks.

c. Permissible Donors

    Proposed Sec.  411.357(w) would protect the same categories of 
donors and physicians as the proposed exception

[[Page 59189]]

for electronic prescribing items and services at Sec.  411.357(v). We 
believe that donors should be limited to hospitals, group practices, 
PDP sponsors, and MA organizations because they have a direct and 
primary patient care relationship and therefore have a central role in 
the health care delivery infrastructure that justifies protection for 
the furnishing of electronic health records technology that would not 
be appropriate for other types of providers and suppliers, including 
providers and suppliers of ancillary services. Moreover, hospitals, 
group practices, PDP sponsors, and MA organizations are potentially in 
a better position to promote widespread use of electronic health 
records technology that has the greatest degree of openness and 
interoperability. We do not believe that providers and suppliers of 
ancillary services, such as laboratories, are well-positioned to 
advance the goal of widespread use of interoperable electronic health 
records for patients, nor would they have the same interest in doing 
so. Nevertheless, we are interested in comments regarding whether other 
categories of donors should be included and why. We are also interested 
in comments with respect to whether different or alternative conditions 
should apply to any category of donor. In addition, we note that some 
donations of electronic health records software and related training 
services may fit within existing exceptions, including those at Sec.  
411.352 (for group practices) and Sec.  411.355(c) (for certain prepaid 
health plans).

d. Selection of Recipients

    We are proposing at Sec.  411.357(w)(4) a condition, consistent 
with other regulatory exceptions, that the eligibility of a recipient 
to receive items and services from a donor, and the amount and nature 
of the items and services received, may not be determined in a manner 
that takes into account the volume or value of the recipient's 
referrals to the donor or other business generated between the parties. 
We are interested in comments with respect to potential criteria for 
selecting physician recipients of donated electronic health records 
software and related training services.

e. Value of Protected Technology

    We believe it would be appropriate to limit the aggregate value of 
the protected software and directly related training services that a 
DHS entity could provide to a physician under the exception. The cap 
under the proposed pre-interoperability exception would be directly 
related to any cap adopted in connection with the electronic 
prescribing exception discussed in section II.A.3. of this proposed 
rule. We believe this approach is consistent with the purpose of the 
physician self-referral prohibition and would also minimize any 
competitive disadvantage for smaller entities that do not have the 
financial resources or potential volume of technology business of 
larger chains or organizations.
    We are interested in comments regarding the appropriate amount and 
methodology of a limiting cap. In addition to an aggregate dollar cap, 
we are considering two alternative approaches: (1) A cap that would be 
set at a percentage of the value of the donated technology to the 
physician (thus requiring the physician to share the costs); or (2) a 
cap set at the lower of a fixed dollar amount or a percentage of the 
value of the technology to the physician. We are soliciting public 
comment about this approach, including comments on how a cap under this 
exception would relate to a cap under the exception proposed at Sec.  
411.357(v) and how the value of technology provided under the final 
exceptions would be aggregated. We are concerned that DHS entities may 
abuse the proposed exceptions for electronic prescribing items and 
services and electronic health records software and training services 
by selectively relying on both exceptions to maximize the value of 
technology provided to physicians as a means of disguising payments for 
referrals. We believe conditions should be included in the final 
regulation to prevent this abuse and are considering requiring an 
overall cap on value, as well as documentation requirements that 
integrate all technology provided under the final exceptions. We are 
interested in public comments that address the retail and nonretail 
costs (that is, the costs of purchasing from manufacturers, 
distributors, or other nonretail sources) of obtaining electronic 
health records software and training services necessary to promote the 
widespread adoption of electronic health records. We are also 
interested in comments that address the degree to which physicians may 
already possess items or services that could be used for electronic 
health records. In addition, we are soliciting comments on whether and, 
if so, how to take into account physician access to any software that 
is publicly available either free or at a reduced price.

f. Other Conditions

    To ensure further that this new exception does not pose a risk of 
program or patient abuse and for the reasons discussed in section 
II.A.3 of this proposed rule, we are incorporating in Sec.  411.357(w) 
certain other conditions described above in connection with Sec.  
11.357(v). These include a restriction at Sec.  411.357(w)(3) on 
conditioning business on the receipt of electronic health records 
technology, a restriction at Sec.  411.357(w)(4) on the provision of 
items and services related to the volume or value of referrals, a 
documentation requirement at Sec.  411.357(w)(5), and an all-payors 
requirement at Sec.  411.357(w)(7). Proposed Sec.  411.357(w)(10) would 
require that the arrangement 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. Because the provision of 
valuable items and services to a referral source can be used to induce 
or reward referrals, compliance with the anti-kickback statute is 
required to ensure that the protected arrangements do not pose a risk 
of abuse. This condition is consistent with the other regulatory 
exceptions to the physician self-referral law and was discussed in the 
interim final rule published on March 26, 2004 in the Federal Register 
(69 FR 16108). We believe that requiring compliance with the anti-
kickback statute is particularly important because of the high dollar 
value of electronic health records technology.

g. Sunset Provision

    We are also proposing a provision at Sec.  411.357(w)(11) that 
would sunset the pre-interoperability exception applicable to 
electronic health records software and training services at the time 
that the post-interoperability exception at Sec.  411.357(x) (see 
discussion in section II.B.2 of this proposed rule) becomes effective.
2. Post-Interoperability Electronic Health Records Exception
[If you choose to comment on issues in this section, please include the 
caption ``Post-Interoperability Electronic Health Records Exception: 
Sec.  411.357(x)'' at the beginning of your comment.]

    We realize that variable (that is, non-standardized) adoption of 
electronic health records systems could discourage market forces and 
competition from improving healthcare. Interoperability could mitigate 
many of our concerns regarding the potential anti-competitive effects 
of stand-alone electronic health records. We recognize that stand-alone 
electronic health records systems, even if widely adopted, may not 
deliver the error reductions, cost savings or marketplace changes 
necessary to meet the Secretary's goals, and could even shift the 
market toward more

[[Page 59190]]

fragmentation. We believe that only open, interconnected, interoperable 
electronic health records systems will allow for the free flow of 
information necessary to realize the full potential benefits of this 
technology.
    We anticipate that a process to identify product certification 
criteria, including uniform industry standards for interoperability, 
functionality, and privacy and security, may be completed in the next 
year. The health information technology contractors and the American 
Health Information Community (AHIC) will be considering processes to 
set standards and to certify and inspect electronic health records 
technology; these processes and standards will be recommended to the 
Secretary for recognition and adoption. A certified product will meet 
all of the criteria adopted by the Secretary, including criteria for 
interoperability, functionality, and privacy and security, through the 
process recognized by the Secretary. The post-interoperability 
exception will protect only the donation of certified electronic health 
records technology. We are soliciting comments on how these processes 
under development might impact the scope of a final exception for 
electronic health records.
    Once the Secretary adopts product certification criteria for 
interoperable electronic health records technology, we intend to 
finalize the exception described below, which offers broader protection 
specific to the donation of certified electronic health records 
systems. We discuss below an expanded exception for the donation of 
electronic health records software that is certified in accordance with 
the product certification criteria and process adopted by the 
Secretary.

a. Covered Technology

    We are proposing to expand the scope of covered software, 
potentially including other kinds of software, provided that the core 
functions of the donated software are electronic prescribing and 
electronic health records. It is our intent that electronic prescribing 
and electronic health records be the core functions of the protected 
donated technology, but we also want to ensure that integrated packages 
that could positively impact patient care are not excluded from the 
post-interoperability exception. We intend to protect systems that 
improve patient care rather than systems comprised solely or primarily 
of technology that is incidental to the core functions of electronic 
prescribing and electronic health records. Although the proposed 
exception would protect necessary training services in connection with 
the software, we specify at Sec.  411.357(x)(8) that the exception 
would not protect the provision of staff to physicians or their offices 
or the provision of items or services used by a physician solely to 
conduct personal business or business unrelated to the physician's 
medical practice. We are soliciting public comments on what types of 
software should be protected under the post-interoperability exception 
and methods for ensuring that electronic prescribing and electronic 
health records are the core functions of the donated technology. As 
with the pre-interoperability exception, we propose at Sec.  
411.357(x)(9) that the technology protected under this exception must 
include an electronic prescribing component, and we are soliciting 
comments with respect to whether we should also or instead require that 
electronic health records software include a CPOE component.

b. Standards With Which Donated Technology Must Comply

    We are proposing in Sec.  411.357(x)(2) that the donated electronic 
health records software must be certified in accordance with the 
product certification criteria adopted by the Secretary. In addition, 
we propose at Sec.  411.357(x)(9) that the electronic prescribing 
component must comply with electronic prescribing standards established 
by the Secretary under the Part D program, to the extent those 
standards are not incorporated into the product certification criteria 
adopted by the Secretary. Accordingly, no protection would be available 
under the post-interoperability exception until product certification 
criteria are adopted.

c. Permissible Donors

    In new Sec.  411.357(x)(1), we are proposing to protect the same 
categories of donors protected under the pre-interoperability exception 
as discussed in section II.B.1 of this proposed rule. We are also 
considering whether to protect additional categories of donors and 
whether different or alternative conditions should apply to any 
category of permissible donor. We are interested in comments addressing 
the types of individuals and entities that should be protected, the 
degree of need for protection, and the safeguards that should be 
imposed to protect against fraud and abuse.

d. Selection of Recipients

    Because certified, interoperable systems would offer enhanced 
protection against some types of fraud and abuse, we are proposing to 
permit donors to use selective criteria for choosing recipients, 
provided that neither the eligibility of a recipient, nor the amount or 
nature of the items or services, is determined in a manner that 
directly takes into account the volume or value of the referrals or 
other business generated between the parties. Proposed Sec.  
411.357(x)(4) would enumerate several selection criteria that would be 
deemed not to be directly related to volume or value of referrals or 
other business generated between the parties. For example, selection 
criteria that are based upon the total number of prescriptions written 
by a physician would not be precluded, but the proposed regulation 
would prohibit criteria based upon the number or value of prescriptions 
written by the physician and dispensed or paid by the DHS entity, as 
well as criteria based on any other business generated between the 
parties. Also, the exception would not protect arrangements that seek 
to induce a physician to change loyalties from other providers or plans 
to the DHS entity.
    We expect that this approach will ensure that donated technology 
can be targeted at physicians who use it the most, in order to promote 
a public policy favoring adoption of the technology, while discouraging 
problematic direct correlations with Medicare referrals (for example, a 
hospital offering a physician 10 new computers for every 500 referrals 
of Medicare payable procedures). We caution, however, that outside of 
the context of electronic health records, as specifically addressed in 
this proposed rule, and except as permitted in Sec.  411.352(i) 
(special rules for productivity bonuses and profit shares distributed 
to group practice physicians), both direct and indirect correlations 
between the provision of goods or services and the volume or value of 
referrals or other business generated between the parties are 
prohibited. We are interested in public comments about this approach, 
including whether there may be unintended consequences that would 
inhibit the adoption of interoperable technology or lead to abusive 
arrangements and, if so, whether more or less restrictive conditions 
would be preferable. We are also soliciting public comments on other 
possible criteria that would be an acceptable basis for selecting 
recipients of the donated technology.

[[Page 59191]]

e. Value of Protected Technology

    We are considering whether a larger cap on the value of the donated 
software would be appropriate. In the discussion of the pre-
interoperability exception at section II.B.1 of this preamble, we noted 
various alternatives we are considering in connection with a limiting 
cap and outlined issues about which we are soliciting comments. We are 
considering similar issues, and are interested in similar comments, in 
connection with the appropriate amount of a cap for interoperable, 
certified technology donated under the post-interoperability exception.
    We are interested in comments regarding the appropriate amount and 
methodology of a limiting cap. In addition to an aggregate dollar cap, 
we are considering two alternative approaches: (1) A cap that would be 
set at a percentage of the value of the donated technology to the 
physician (thus requiring the physician to share the costs); or (2) a 
cap set at the lower of a fixed dollar amount or a percentage of the 
value of the technology to the physician. We are soliciting public 
comment about this approach, including comments on how a cap under this 
exception would relate to a cap under the exceptions proposed at Sec.  
411.357(v) and Sec.  411.357(w) and how the value of technology 
provided under the final exceptions would be aggregated. We are 
interested in public comments that address the retail and nonretail 
costs (that is, the costs of purchasing from manufacturers, 
distributors, or other nonretail sources) of obtaining electronic 
health records software and training services necessary to promote the 
widespread adoption of certified electronic health records systems. We 
are also interested in comments that address the degree to which 
physicians may already possess items or services that could be used for 
electronic health records. In addition, we are soliciting comments on 
whether and, if so, how to take into account physicians' access to any 
software that is publicly available either free or at a reduced price.

f. Other Conditions

    Similar to the proposed electronic prescribing and pre-
interoperability exceptions, the proposed post-interoperability 
exception would incorporate additional conditions as discussed in 
section II.A.3 above. These include a restriction at Sec.  
411.357(x)(3) on conditioning business on the receipt of electronic 
health records technology, a documentation requirement at Sec.  
411.357(x)(5), a requirement at Sec.  411.357(x)(6) that the DHS entity 
not have actual knowledge or act in reckless disregard or deliberate 
ignorance of the fact that the physician possesses or has obtained 
duplicative items or services, an all-payors requirement at Sec.  
411.357(x)(7), and a requirement at Sec.  411.357(x)(10) that the 
arrangement 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.

III. Collection of Information Requirements

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

    Under the Paperwork Reduction Act of 1995, 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 evaluate fairly whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 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.
    We are soliciting public comment on each of these issues for the 
exceptions that are being proposed by this document. The electronic 
prescribing exception and the electronic health records exceptions 
would include an information collection requirement; that is, there 
would be a written, signed agreement for the provision to a physician 
of qualifying electronic technology.
    The exception at Sec.  411.357(v) would apply to the donation of 
non-monetary remuneration (consisting of items and services in the form 
of hardware, software, or information technology and training services) 
necessary and used solely to receive and transmit electronic 
prescription information. The exceptions at Sec.  411.357(w) and Sec.  
411.357(x) would apply to non-monetary remuneration consisting of items 
and services (in the form of electronic health records software and 
directly related training services) that is necessary to receive, 
transmit, and maintain electronic health records.
    These exceptions are limited to donations made by hospitals to 
physicians who are members of their medical staffs, by group practices 
to their physician members, and by PDP sponsors and MA organizations to 
physicians in their networks. Each of these arrangements must be in a 
writing that is signed by the parties and that identifies the items or 
services being provided and their value. In addition, the written 
arrangement must include a certification by the physician that the 
items and services to be provided are not technically or functionally 
equivalent to any items or services he or she already possesses or has 
already obtained.
    The burden associated with the written agreement requirement is the 
time and effort necessary for documentation of the agreement between 
the parties, including signatures of the parties, and the signed 
certification by physicians.
    We do not know how many hospitals, PDP sponsors, or MA 
organizations would use the exceptions that apply to qualifying 
electronic prescribing technology and electronic health records 
software and training services. However, as explained in section II.A.2 
of this proposed rule, we expect that few group practices would use 
either exception because existing exceptions would likely apply to 
permit a group practice to provide its physician members with 
qualifying electronic prescribing items and services and electronic 
health records software and training services. Thus, few group 
practices would be affected by this exception and any related paperwork 
burdens.
    In addition, because the donation of qualifying electronic 
prescribing technology and electronic health records software and 
training services is voluntary, we believe that some hospitals, PDP 
sponsors, and MA organizations will not avail themselves of this 
exception and will therefore not experience any paperwork burden.
    Finally, we believe that, for those entities that choose to donate 
qualifying electronic prescribing technology or electronic health 
records software and training services to physicians, the paperwork 
burden will be limited by the terms of each exception. Each exception 
requires the donated items and services to be necessary and not 
duplicative of items and services the physician already possesses or 
has obtained.
    We expect that every hospital, PDP sponsor, and MA organization 
that would choose to furnish qualifying

[[Page 59192]]

electronic prescribing technology or electronic health records software 
and training services to physicians would likely use a model agreement 
that lists or describes the electronic items and services to be 
donated. We expect that State or national organizations representing 
lawyers, physicians, group practices, hospitals, PDP sponsors, and MA 
organizations would create model agreements for their members. However, 
we also expect that attorneys for large providers (for example, 
academic medical centers) would create model agreements. We estimate 
that an entity that creates a model agreement would have to spend 
approximately 3 hours to draft two model agreements (one for each 
exception). We estimate that it would take a donor hospital 20 minutes 
to both tailor each model agreement for each physician and to sign each 
agreement. We estimate that each physician would also spend 20 minutes 
reading and signing each agreement and completing the necessary 
certification. We recognize that a physician and an entity would have 
to understand the differences between the items and services that an 
entity is offering and the items and services that the physician 
already possesses or has obtained.
    As of April 2003, there were 586,411 physicians who provided Part B 
physician services to beneficiaries and (as of December 31, 2003) 6,057 
hospitals that participated in Medicare. As of January 1, 2006, we 
expect that there would be at least two PDP sponsors serving each State 
and at least 270 MA plans. We assume that each physician is on the 
medical staff of two hospitals and would treat patients who are members 
of one PDP and two MA plans.
    We do not believe that physicians would be willing now to 
participate in more than one type of electronic system because of the 
time necessary to learn to use each system efficiently. Because items 
and services must be necessary and used solely for electronic 
prescribing or electronic health records, we estimate that, on average, 
physicians would receive items and services from only one entity. (We 
recognize that two or more entities could each provide necessary items 
and services to a physician under an exception, but we do not expect 
that to occur in the near future.)
    We are unable to estimate how many entities would provide these 
items or services to physicians annually. However, because the Federal 
government has established a goal of having most Americans' health 
information in electronic form by 2014, we estimate that one-ninth of 
all entities would begin the process of developing or using electronic 
prescribing and electronic health records each year.
    Taking all of this into account, we expect that no more than 150 
State or national organizations or lawyers for large hospital systems, 
PDP sponsors, or MA organizations would draft agreements for the 6,057 
hospitals, 100 PDP sponsors, and 270 MA organizations. Because we 
estimate it would take 3 hours to prepare a model agreement, there may 
be at least two model agreements, and that 150 organizations would each 
prepare these agreements, it could take a maximum of 900 hours to 
prepare all model agreements (2 types of model agreements x 150 model 
agreements x 3 hours to prepare = 900 hours).
    To calculate the maximum number of hours that reasonably would be 
required to complete the agreements, we assume that 10 percent of the 
586,411 physicians would sign an agreement for electronic items and 
services. Therefore, we estimate that annually the donating entities 
may spend 19,547 hours in completing and signing the agreements (20 
minutes x [.10 x 586,411 physicians] = 19,547 hours). In addition, we 
estimate that the cumulative burden on physicians would also be 19,547 
hours.
    An additional burden associated with the requirements for both 
exceptions would be that of maintaining documentation, and, if 
necessary, making it available to the Secretary upon request. We 
believe that the information we are requiring entities to maintain is 
information that they would already maintain in the ordinary course of 
business. Thus, any information the Secretary would need would already 
have been collected and maintained by the entities. Moreover, making 
information available to the Secretary should rarely be necessary, as 
the information is not collected routinely by the Secretary. Rather, 
the information would likely be collected only during the conduct of an 
administrative action, investigation, or audit involving a Federal 
governmental agency regarding specific individuals or entities. The 
paperwork burden associated with these types of reviews is exempt from 
the PRA under 5 CFR 1320.4(a).
    If you comment on 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, Regulations Development Group, Attn: 
Jim Wickliffe, CMS-1303-P, Room C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: CMS Desk Officer, Fax (202) 395-6974.

IV. Regulatory Impact Statement

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

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995, Pub. L. 104-4), the Congressional Review Act (5 
U.S.C. 804(2)), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibilities of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, when 
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 final rules with 
economically significant effects (that is, a final rule that would have 
an annual effect on the economy of $100 million or more in any one 
year, or would adversely affect in a material way the economy, a sector 
of the economy, productivity, competition, jobs, the environment, 
public health or safety, or State, local, or tribal governments or 
communities). Because we believe that the economic impact of this 
proposed rule would not exceed $100 million annually, we have not 
prepared an RIA. However, we have analyzed alternatives and assessed 
benefits and costs in order to provide a basis for informed responses 
that will help us make final decisions.
    This proposed rule would create new exceptions to the physician 
self-referral prohibition to allow certain entities to provide 
technology-related items and services to physicians for purposes of 
conducting electronic prescribing and maintaining electronic health 
records. The exceptions would protect donations of qualifying 
electronic prescribing technology and electronic health records 
software and directly related

[[Page 59193]]

training services made by a hospital to a physician member of its 
medical staff, a group practice to a physician member, and a PDP 
sponsor or MA organization to a prescribing physician, provided that 
certain conditions are satisfied. The exceptions should facilitate the 
adoption of electronic prescribing and electronic health records 
technology by filling a gap rather than creating the primary means by 
which physicians will adopt these technologies. In other words, we do 
not believe that donor entities will fund all of the health information 
technology used by physicians.
    The proposed rule on electronic prescribing standards, which was 
published on February 4, 2005 (70 FR 6256), takes into consideration 
the expected cost for the hardware, software, training and information 
technology needed by prescribing practitioners, including physicians. 
In the preamble to that rule, we presented a Regulatory Impact Analysis 
covering the expected effects of electronic prescribing and the 
specific standards proposed. Our analysis showed the possibility of 
substantial and economically significant positive health effects on 
consumers and net positive economic effects on affected entities, such 
as physicians, pharmacies, and health plans. Our analysis focused on 
the likelihood that PDP sponsors and MA organizations would find it in 
their interest to pay some or all of the costs of qualifying electronic 
prescribing technology or electronic health records software and 
training services to encourage physician adoption.
    This proposed rule would remove a potential obstacle to the 
provision of qualifying electronic prescribing technology and 
electronic health records software and directly related training 
services (for purposes of this Regulatory Impact Statement, herein 
referred to as ``qualifying health information technology'') by certain 
entities. Although this proposed rule applies to donations of qualified 
health information technology donations by hospitals, group practices, 
PDP sponsors, and MA organizations, we expect that many donor entities 
may not need to use these proposed exceptions, given the existing 
exceptions at Sec.  411.352 and Sec.  411.355(c).
    Of particular importance, managed care services furnished by 
prepaid health plans or their contractors may fall within a previously 
codified exception (see Sec.  411.355(c)). We believe that prepaid 
plans have substantial economic incentives to encourage the adoption of 
health information technology by contracting physicians, incentives 
that are larger than those for most other entities. We are interested 
in public comments on whether this existing exception is sufficiently 
broad to accommodate non-abusive arrangements and to foster the 
adoption of health information technology.
    Regardless of whether donations would be allowed under existing 
exceptions or those that are included in this proposed rule, we 
encourage commenters to provide information on the costs that would 
likely be incurred by entities that would choose to furnish qualifying 
health information technology to physicians, as well as other related 
costs that would likely be incurred by both donors and physicians, such 
as costs incurred for changes in office procedures.
    Our analysis under Executive Order 12866 of the expenditures that 
entities may choose to make under this proposed rule is restricted by 
potential effects of outside factors, such as technological progress 
and other market forces, future certification standards, and companion 
proposed anti-kickback statute safe harbors. Furthermore, both the 
costs and potential savings of electronic prescribing, electronic 
health records, computerized physician order entry, and billing and 
scheduling software vary to the extent to which each element operates 
as a stand-alone system or as part of an integrated system. We welcome 
comments that will help identify both the independent and synergistic 
effects of these variables.
    As discussed in the February 4, 2005 E-Prescribing proposed rule at 
70 FR 6268 through 6273, we expect that donors may experience net 
savings with electronic prescribing in place and patients would 
experience significant positive health effects. We have not repeated 
that analysis in this proposed rule.
    There are numerous studies reporting that electronic health records 
in the ambulatory setting can result in a substantial improvement in 
clinical process. The effects of electronic health records include: (1) 
Reducing unnecessary or duplicative lab and radiology test ordering by 
9 to 14 percent (Bates, D., et al., ``A randomized trial of a computer-
based intervention to reduce utilization of redundant laboratory 
tests,'' Am. J. Med. 106(2), 144-50 (1999)); (Tierney, W., et al., 
``The effect on test ordering of informing physicians of the charges 
for outpatient diagnostic tests,'' N. Engl. J. Med. 322(21): 1499-504 
(1990)); (Tierney, W., et al., ``Computerized display of past test 
results. Effect on outpatient testing,'' Ann. Intern. Med. 107(4): 569-
74 (1987)); (2) lowering ancillary test charges by up to 8 percent 
(Tierney, W., et al., ``Computer predictions of abnormal test results. 
Effects on outpatient testing,'' JAMA 259: 1194-8 (1988)); (3) reducing 
hospital admissions due to adverse drug events (ADEs), costing an 
average of $17,000 each, by 2 to 3 percent (Jha, A., et al., 
``Identifying hospital admissions due to adverse drug events using a 
computer-based monitor,'' Pharmacoepidemiology and Drug Safety 10(2), 
113-19 (2001)); and (4) reducing excess medication usage by 11 percent 
(Wang, S., et al., ``A cost-benefit analysis of electronic medical 
records in primary care,'' Am. J. Med. 114(5): 397-403 (2003)); (Teich, 
J., et al., ``Effects of computerized physician order entry on 
prescribing practices,'' Arch. Intern. Med. 160(18): 2741-7 (2000)). 
There is also evidence that electronic health records can reduce 
administrative inefficiency and paper handling. (Khoury, A., ``Support 
of quality and business goals by an ambulatory automated medical record 
system in Kaiser Permanente of Ohio,'' Eff. Clin.Pract. 1(2): 73-82 
(1998)). Most recently, a large study evaluating the impact of 
electronic health records on resource utilization in two States found 
that physician visits decreased by 9 percent 2 years after 
implementation.
    These studies show a consistent pattern of clinical utilization 
reductions that have been reported to arise from electronic health 
records use in ambulatory settings. Although financial estimates were 
not performed in these studies, these utilization reductions could 
yield savings that accrue to Medicare because of its use of volume-
based payments for ambulatory and inpatient care. Other studies have 
estimated that electronic health records in the ambulatory setting 
would save $78 billion to $112 billion annually, across all payors. 
This estimate includes up to $34 billion in annual savings from 
ambulatory computerized provider order entry (Johnston, D., et al., 
``The Value of Computerized Provider Order Entry in Ambulatory 
Settings,'' Center for IT Leadership, Wellesley, MA (2003)) and up to 
$78 billion annually from interoperability of electronic health records 
(Walker, J., et al., ``The Value of Health Care Information Exchange 
and Interoperability,'' Health Affairs, http://www.healthaffairs.org 
(online exclusive) (2005)).
    At the same time, the costs of electronic health records and other 
health information technology are very substantial. For example, one 
estimate of HIPAA compliance costs alone indicated that hospitals would 
need to spend $14 billion and health plans more than $5 billion. 
(Duncan, M., ``August

[[Page 59194]]

2002 HIPAA Panel Results: Expected Costs/Benefits,'' Gartner (2002)). 
The range of cost estimates for electronic health records alone is 
wide. At one extreme, there are software systems under development that 
may be offered to physician settings free or at the cost of perhaps 
several thousand dollars, while others may cost $20,000 to $30,000. 
Extrapolated to the universe of health plans, hospitals, and 
physicians, total investment costs are likely to reach the billions of 
dollars.
    It is unclear how rapidly adoption is now occurring. A recent study 
indicates ``practices are encountering greater-than-expected barriers 
to adopting an [electronic health records] system, but the adoption 
rate continues to rise.'' (Gans, D., et al., ``Medical Groups' Adoption 
of Electronic Health Records and Information Systems,'' Health Affairs, 
September/October 2005). This study dealt only with group practices, 
and found greater difficulties in smaller groups. We can infer similar 
implementation difficulties for individual physician practices. For 
example, this study found the average initial cost of implementing an 
electronic health records system to be $33,000 per physician, with 
maintenance costs of $1,500 per physician per month, numbers which 
``would translate into about a 10 percent reduction in take-home pay 
each year for most primary care practices'' if amortized over 5 years. 
(See Gans, D.). Another recent study reviews a broader range of 
providers and is equally pessimistic, arguing that the economic 
incentives of most stakeholders do not support health information 
technology investments. According to that article, ``The greater marvel 
is that any physician, at his or her personal expense, would install a 
system that * * * saves money for every health care stakeholder except 
the adopting physician.'' (Kleinke, J.D., ``Dot-Gov: Market Failure and 
the Creation of a National Health Information Technology System,'' 
Health Affairs, September/October 2005). This study is also more 
pessimistic than most about the business case for managed care plans to 
make health information technology investments, arguing that 
investments benefit not only the investing firm but also its 
competitors. Many other studies, discussed below, are more optimistic 
about economic returns to physicians. However, the disparate results 
illustrate the uncertainty that prevents us from making confident 
quantitative estimates of rates of adoption.
    We assume that health information technology costs and benefits 
will be realized eventually. Even without government intervention, 
there is a lively market today, and as consensus standards evolve, that 
market will grow. The question as to the regulatory impact of the 
proposed rule is: Taking into account available policy instruments 
(notably the development of interoperability standards), to what extent 
would the use of these proposed physician self-referral exceptions 
accelerate adoption of electronic prescribing and electronic health 
records?
    We do not have good baseline information. There are numerous 
estimates for the adoption of electronic prescribing by health plans, 
hospitals, physicians, and (for prescribing of drugs only) pharmacies. 
However, these estimates are clouded by uncertainty. For example, some 
studies count facsimile transmission of prescriptions as electronic 
prescribing. The majority of physician offices now use computers, and 
have high-speed Internet access, but less than one in five uses 
electronic health records. (Goldsmith, J., et al., ``Federal Health 
Information Policy: A Case of Arrested Development,'' Health Affairs, 
July/August 2003 (citing 17 percent adoption)). The Gans study found 
that about 12 percent of medical group practices have a fully 
implemented electronic health records system, and another 13 percent 
are in the process of implementation. For smaller group practices these 
percentages fall to 10 and 10, respectively. (See Gans, D., supra).
    As discussed below, we estimate that 2 percent of physicians and 2 
percent of all hospitals, group practices, MA organizations and PDP 
sponsors would be affected by these proposed exceptions each year. That 
is, only one in five of the potential donors of qualifying health 
information technology will utilize these exceptions. As explained in 
the February 4, 2005 E-Prescribing proposed rule (70 FR 6256), we 
believe that between 5 and 18 percent of prescribers, including 
physicians, are currently participating in some electronic prescribing. 
In addition, we explained that we believe that the proportion of 
prescribers using electronic prescribing would increase by about 10 
percent annually over the next 5 years (70 FR 6256). We believe it is 
likely that about one in five of those prescribers would receive 
assistance under these proposed exceptions and another one in five 
would receive assistance under the exceptions already in place that 
apply to managed care plans and group practices.
    These estimates depend primarily on the decisions of MA 
organizations and PDP sponsors as to whether to provide assistance to 
physicians for electronic prescribing and electronic health records and 
the decisions of group practices to implement these systems. We welcome 
information about the intentions of MA organizations and PDP sponsors 
to make donations of qualifying health information technology to 
physicians and the willingness of group practices to implement these 
systems.
    Even if we were able to determine more precisely the number of 
physicians who are currently engaged in, and the number of physicians 
who will engage in, electronic prescribing, we cannot estimate with 
certainty the number of those physicians who would receive donated 
items and services. Some entities may be unwilling or unable to donate 
items or services, and some physicians already have the requisite items 
and services. In addition, we cannot estimate with certainty the cost 
of the qualifying health information technology that a physician would 
need from a donor. Part of this uncertainty is due to varying needs for 
the technology. For example, we expect that for face-to-face encounters 
with patients in hospital inpatient and outpatient departments, 
physicians would primarily use a hand-held device, for example, a 
personal digital assistant (PDA). Alternatively, physicians might find 
it easier to use one of the hospital's computers that increasingly are 
becoming located near patient rooms and throughout outpatient 
departments.
    Although we do not know the cost of the electronic prescribing 
technology or of the electronic health records software that ultimately 
may be donated under these proposed exceptions, we describe below 
several studies of the costs and benefits of equipping doctors with 
such technology and software. The speed of adoption will depend on the 
extent to which prescribers realize net benefits (discussed extensively 
in our proposed rule on E-Prescribing) and on the extent to which our 
proposed exceptions (when made final) incrementally affect the costs 
and savings of the technology.
    One study of data on the costs associated with an internally 
developed electronic medical record system for several internal 
medicine clinics at an integrated delivery system indicated that 
software development and maintenance would cost about $1,600 per 
provider per year. (See Wang, supra.) Use of commercially available 
software may cost twice as much. Financial benefits of electronic 
health records include not having to ``pull'' patient charts whenever a 
patient is to be seen and reduced transcription costs. In addition, 
electronic clinical decision

[[Page 59195]]

support has been shown to reduce ADEs and redundant radiology and 
clinical laboratory tests, and up-to-date information about alternative 
drugs reduces the use of expensive medications. Finally, when a medical 
record has complete and accurate information about services provided, 
billing errors are reduced, including failure to bill for a furnished 
service. The 5-year cost-benefit analysis of the internally developed 
electronic medical records system discussed above indicated savings per 
practitioner. (See Wang, supra.)
    In another article, Dr. Kenneth Adler reported on his 86-physician, 
multi-specialty group practice's adoption of an electronic health 
records system beginning in 2003. (Adler, K., ``Why It's Time to 
Purchase an Electronic Health Record System,'' American Academy of 
Family Practitioners, November/December 2004.) This group practice 
found that its electronic health records system improved communication, 
access to data, and documentation, which led to better clinical and 
service quality. This electronic health records system also saved the 
group practice money, and Dr. Adler expects that other group practices 
that adopt electronic health records systems will save money in 
addition to the other benefits listed above.
    In a third study, the Central Utah Multi-Specialty Clinic, a 59-
physician, nine-location group practice installed an electronic medical 
records system in April 2002. (Barlow, S., et al., ``The Economic 
Effect of Implementing an EMR in an Outpatient Clinical Setting,'' J. 
of Healthcare Information Management, 18(1): 46-51 (2004).) During its 
first year of operation, the group practice experienced direct 
reductions in spending and increases in revenue of more than $952,000 
compared with the prior year, and anticipates savings of more than $8.2 
million over the first 5 years of implementation. Once again, the 
savings are expected to result from reduced transcription costs, a 
reduced number of paper charts and related maintenance (including 
storage), and more appropriate coding because of appropriate 
documentation. (This study did not include information about the start-
up costs of the electronic medical record system or the annual 
continuing costs. Therefore, caution should be used in drawing 
conclusions on any cost savings based on the results of this study.)
    Finally, we note that the Center for Information Technology 
Leadership (CITL), in its 2003 report, ``The Value of Computerized 
Provider Order Entry in Ambulatory Settings'' \2\ found that the 
average first year total cost of a basic electronic prescribing 
software system was approximately $3,000 per physician. This estimate 
was based on a survey of commercially available software.
---------------------------------------------------------------------------

    \2\ Center for Information Technology (CITL, a research 
organization chartered in 2002) http://www.citl.org, Wellesley, MA 
(781-416-9200) 2003 report: ``The Value of Computerized Provider 
Order Entry in Ambulatory Care.''
---------------------------------------------------------------------------

    We believe that donations allowed by this proposed rule would 
create no net costs to the economy. This rule would permit cost-
shifting, allowing hospitals, PDP sponsors, and MA organizations to 
bear financial burdens that otherwise would have been borne by 
physicians and their patients. We anticipate that electronic 
prescribing and electronic health records technology ultimately should 
save donor entities and physicians the costs and other burdens 
associated with incorrect drug prescribing or dispensing, and result in 
reductions in the costs of medical transcribing and other paperwork. 
Similarly, obtaining accurate health records on a timely basis should 
benefit patients, physicians, hospitals, MA organizations, and PDP 
sponsors. The February 4, 2005 proposed rule on E-Prescribing standards 
(70 FR 6256) cites an estimate from the CITL that nationwide adoption 
of electronic prescribing would eliminate nearly 2.1 million ADEs per 
year. In turn, this reduction of ADEs would prevent nearly 1.3 million 
provider visits, more than 190,000 hospitalizations, and more than 
136,000 life-threatening ADEs (70 FR 6268). We hope to see a 
significant reduction in ADEs each year as nationwide adoption occurs.
    We estimate that 10 percent of the 586,411 physicians who provide 
services to Medicare beneficiaries would adopt electronic prescribing 
technology and electronic health records software and software training 
each year. We believe it is likely that health plans or hospitals would 
donate software or other items or services to no more than 20 percent 
of these physicians (or to fewer than 12,000 physicians) under our 
proposed exceptions and perhaps another 20 percent of these physicians 
(again fewer than 12,000 physicians) would receive donations under the 
existing exceptions that apply to managed care services and to group 
practices. We estimate that, at most, each physician would receive a 
total of $3,000 worth of donated items and services under the proposed 
exceptions. Therefore, assuming that 2 percent of physicians (one-fifth 
of all adopting physicians) would receive $3,000 worth of donated items 
and services in each of the two categories (electronic prescribing and 
electronic health records), annual donations approximate $36 million.
    We expect that many physicians already own hand-held devices and 
will have begun to computerize their own medical practices. We also 
expect that hospitals, MA organizations, and PDP sponsors would see 
immediate financial and patient care benefits from the expanded use of 
electronic prescribing and electronic health records. We are 
particularly interested in comments concerning our estimated costs to 
hospitals for donating these items and services and the expected 
savings from reductions in medical transcription, redundant diagnostic 
testing, ADEs, and readmissions to hospitals. We anticipate that these 
savings will be greater than the costs incurred by entities using these 
exceptions, but we cannot quantify the savings at this time.
    We note that an unexpected benefit recently occurred. The Atlantic 
Information Service reported in AIS E-Health on September 15, 2005 that 
patients from the Veterans Administration (VA) Hospital in New Orleans 
had been evacuated to other VA hospitals throughout the United States 
because of the effects of Hurricane Katrina. (See (www.aishealth.com/EHealthBusiness/091505.html)). Because the VA system makes extensive 
use of electronic prescribing and electronic health records, complete 
patient medical information was quickly made available to VA clinicians 
throughout the country.
    The estimates above are highly sensitive to assumptions. The 
permitted value of donated items and services under the proposed 
exceptions might be half as much or twice as much as discussed above. 
The rate of adoption might be higher or lower than estimated. The 
proportion of physicians receiving remuneration could be lower or 
higher than estimated, depending on the willingness of hospitals, group 
practices, MA organizations, and PDP sponsors to subsidize investment 
in health information technology. We welcome comments on these 
variables and independent estimates as to the likely rates of adoption 
and subsidization.
    At this time, there are mixed signals about the potential of 
electronic prescribing and electronic health records to reduce costs. 
For example, many estimates are based in part on the reduction of 
medical errors. However, one study has also shown that medical errors, 
and potentially costs, can increase if software is poorly designed

[[Page 59196]]

or implemented (Koppel, et al., 2005). Therefore, achieving reliable 
cost savings requires a more substantial transformation of care 
delivery that goes beyond simple use of any one kind of health 
information technology.
    This rule likely would have an effect on the actual rate of 
adoption of electronic prescribing and electronic health records 
technology. Potential donors may be unlikely to provide assistance 
unless they believe it would accelerate the adoption of the technology. 
To the extent adoption is advanced, the costs and benefits of these 
technologies will be realized sooner. However, we are unable to provide 
any quantitative estimate of the likely effect of these proposed 
exceptions, taken alone, in the larger panorama of all health 
information technology investment decisions, market evolution, 
standards adoption, and use of existing physician self-referral 
exceptions. We welcome comment on whether information exists that would 
allow such estimates, and what they might be.
    Finally, we believe it unlikely that annual effects would exceed 
$100 million in the 5-year timeframe that we generally use in our 
economic impact projections. If our estimate of the independent and 
direct effects of these new exceptions is accurate, and if the 
resulting acceleration in adoption is relatively small, this proposed 
rule would not be a major rule. However, we have completed all the 
elements of a Regulatory Impact Analysis because the uncertainty is so 
great.
    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess the anticipated costs and benefits of Federal 
mandates before issuing any rule that may result in the mandated 
expenditure by State, local, or tribal governments, in the aggregate, 
or by the private sector, of $100 million in 1995 dollars (a threshold 
adjusted annually for inflation and now approximately $120 million). 
This proposed rule would impose no mandates. Any actions taken under 
this rule would be voluntary. Furthermore, such actions are likely to 
result in cost savings, not net expenditures, and any expenditures 
would be undertaken by government-owned hospitals in their business 
capacity, without any necessary impact on State, local, or tribal 
governments, or their expenditure budgets, as such.
    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. For the reasons given above, this proposed rule, if 
finalized, would not have a substantial effect on State or local 
governments.

B. Impact on Small Businesses

    The RFA requires agencies to analyze options for regulatory relief 
for small entities when a proposed rule may create a significant impact 
on a substantial number of small entities. For purposes of the RFA, 
small entities include small businesses, nonprofit organizations, and 
small governmental jurisdictions. Most hospitals and physicians are 
considered small entities, either by nonprofit status or by having 
revenues of less than $6 million a year. Almost all physicians in 
private practice (or all the practices of which they are members) are 
small entities because their annual revenues do not meet the Small 
Business Administration's $8.5 million threshold for small physician 
practices. Individuals and States are not included in the definition of 
a small entity, and this proposed rule would not have a financial 
impact on small governmental entities.
    We have determined that this proposed rule would not have a 
significant impact on small entities because it does not increase 
regulatory burden or otherwise meet the RFA standard of ``significant 
impact.'' While the aggregate impacts would be substantial, it is 
unlikely that near term effects on individual practitioners would be 
substantial as a proportion of revenues (for example, a $3,000 
remuneration compared to typical practice revenues in the hundreds of 
thousands of dollars). We expect our proposed new exceptions ultimately 
to be highly beneficial to physicians, hospitals, and pharmacies (most 
in each category are small entities), as well as to affected entities 
and persons who are not ``small entities'' as defined in the RFA--PDP 
sponsors, MA organizations, and our beneficiaries. We welcome comment 
on these conclusions.
    Nothing in this proposed rule meets any of the other thresholds 
requiring in-depth analysis. Although it affects a substantial number 
of small rural hospitals, there is no significant economic effect on 
small rural hospitals (more than 3 to 5 percent of total costs/
revenues), it imposes no unfunded mandates or costs on either private 
or public entities, and it neither preempts State law nor otherwise has 
Federalism implications.

C. Conclusion

    We have concluded that this proposed rule would not have a 
significant economic effect. Although the proposed exceptions may shift 
costs from physicians and patients to permissible donor entities and 
may lead to faster adoption of health information technology with 
substantial benefits, it is unclear whether, and we believe unlikely 
that, these effects would reach the threshold of $100 million annually 
in the near term, even though the long-term cumulative costs and 
benefits are likely to be many times this threshold. This rule would 
remove a potential obstacle to certain entities providing qualifying 
electronic prescribing technology and electronic health records 
software and directly related training services to physicians. The rule 
would permit cost shifting, allowing hospitals, MA organizations and 
PDP sponsors to bear financial burdens that otherwise would have been 
borne by physicians and their patients. We believe that this rule will 
provide substantial positive health effects on consumers and net 
positive economic effects on affected entities, including physicians, 
hospitals, and MA organizations.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because we have determined that this rule would not have a 
significant economic impact on a substantial number of small entities 
or a significant impact on the operations of a substantial number of 
small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 411

    Kidney diseases, Medicare, Physician referral, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services would amend 42 CFR chapter IV as set forth below:

PART 411--[AMENDED]

    1. The authority for part 411 is amended to read as follows:

    Authority: Secs. 1102, 1871, and 1877(b)(4) and (5) of the 
Social Security Act (42 U.S.C. 1302, and 1395hh, and 1395nn(b)(4) 
and (5)).

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

    2. Section 411.357 is amended by adding paragraphs (v), (w), and 
(x) to read as follows:

[[Page 59197]]

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

* * * * *
    (v) Electronic prescribing items and services. Non-monetary 
remuneration (consisting of items and services in the form of hardware, 
software, or information technology and training services) necessary 
and used solely to receive and transmit electronic prescription 
information, if all of the following conditions are met:
    (1) The items and services are provided by a--
    (i) Hospital to physicians who are members of its medical staff;
    (ii) Group practice (as defined at Sec.  411.352) to physicians who 
are members of the group practice (as defined at Sec.  411.351); or
    (iii) PDP sponsor or MA organization to prescribing physicians.
    (2) The items and services are donated as part of, or are used to 
access, an electronic prescription drug program that meets the 
applicable standards under Medicare Part D at the time the items and 
services are furnished.
    (3) The entity (or any person on the entity's behalf) must not take 
any actions to limit or restrict unnecessarily the use or compatibility 
of the items or services with other electronic prescription information 
items or services or electronic health information systems.
    (4) For items or services that are of the type that can be used for 
any patient without regard to payor status, the donor may not restrict, 
or take any action to limit, the physician's right or ability to use 
the items or services for any patient.
    (5) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services a 
condition of doing business with the donor.
    (6) Neither the eligibility of a physician for the items or 
services, nor the amount or nature of the items and services, is 
determined in a manner that takes into account the volume or value of 
referrals or other business generated between the parties.
    (7) The arrangement is set forth in a written agreement that--
    (i) Is signed by the parties;
    (ii) Specifies the items or services being provided and the value 
of those items and services;
    (iii) Covers all of the electronic prescribing items or services to 
be furnished by the entity; and
    (iv) Contains a certification by the physician that the items and 
services are not technically or functionally equivalent to items and 
services he or she already possesses or has obtained.
    (8) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the fact that the 
physician possessed or had obtained items and services that were 
technically or functionally equivalent to those donated by the entity.
    (w) Electronic health records items and services that are not 
certified. Non-monetary remuneration (consisting of items and services 
in the form of software or directly related training services) 
necessary and used solely to receive, transmit, and maintain electronic 
health records, if all of the following conditions are met:
    (1) The items and services are provided by a--
    (i) Hospital to physicians who are members of its medical staff;
    (ii) Group practice (as defined at Sec.  411.352) to physicians who 
are members of the group practice (as defined at Sec.  411.351); or
    (iii) PDP sponsor or MA organization to prescribing physicians.
    (2) The entity (or any person on the entity's behalf) must not take 
any actions to limit or restrict unnecessarily the use or compatibility 
of the items or services with other electronic health records items or 
services or electronic health information systems.
    (3) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services, 
nor the amount or nature of the items or services, a condition of doing 
business with the donor.
    (4) Neither the eligibility of a physician, nor the amount or 
nature of the items and services, is determined in a manner that takes 
into account the volume or value of referrals or other business 
generated between the parties.
    (5) The arrangement is set forth in a written agreement that--
    (i) Is signed by the parties;
    (ii) Specifies the items or services being provided and the value 
of those items and services;
    (iii) Covers all of the electronic health records items and 
services to be furnished by the entity to the physician; and
    (iv) Contains a certification by the physician that the items and 
services are not technically or functionally equivalent to items and 
services he or she already possesses or has obtained.
    (6) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the fact that the 
physician possessed or had obtained items and services that were 
technically or functionally equivalent to those donated by the donor.
    (7) For items or services that are of the type that can be used for 
any patient without regard to payor status, the donor may not restrict 
or take any action to limit the physician's right or ability to use the 
items or services for any patient.
    (8) The items and services do not include any billing, scheduling, 
or other similar general office management or administration software 
or services, nor do the services include staffing of physician offices.
    (9) The electronic health records technology contains electronic 
prescribing capability that complies with the electronic prescription 
drug program standards under Medicare Part D at the time the items and 
services are furnished.
    (10) 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.
    (11) The donation was made before the effective date of paragraph 
(x) of this section.
    (x) Certified electronic health records items and services. Non-
monetary remuneration (consisting of items and services in the form of 
software or directly related training services) necessary to receive, 
transmit, and maintain electronic health records, if all of the 
following conditions are met:
    (1) The items and services are provided by a--
    (i) Hospital to physicians who are members of its medical staff;
    (ii) Group practice (as defined at Sec.  411.352) to physicians who 
are members of the group practice (as defined at Sec.  411.351); or
    (iii) PDP sponsor or MA organization to prescribing physicians.
    (2) The technology is certified in accordance with criteria adopted 
by the Secretary that are in effect at the time of the donation.
    (3) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services, 
nor the amount or nature of the items or services, a condition of doing 
business with the donor.
    (4) Neither the eligibility of a physician for the items or 
services, nor the amount or nature of the items and services, is 
determined in a manner that is directly related to the volume or value 
of referrals or other business generated between the parties. For the 
purposes of this paragraph, the determination is deemed not to be 
directly related to the

[[Page 59198]]

volume or value of referrals or other business generated between the 
parties if any one of the following conditions is met:
    (i) The determination is based on the total number of prescriptions 
written by the recipient;
    (ii) The determination is based on the size of the recipient's 
medical practice (for example, total patients, total patient 
encounters, or relative value units);
    (iii) The determination is based on the total number of hours that 
the recipient practices medicine;
    (iv) The determination is based on the recipient's overall use of 
automated technology in his or her medical practice (without specific 
reference to the use of technology in connection with referrals made to 
the donor);
    (v) The determination is based on whether the physician is a member 
of the hospital's medical staff, if the donor is a hospital; or
    (vi) The determination is made in any reasonable and verifiable 
manner that is not directly related to the volume or value of referrals 
or other business generated between the parties.
    (5) The arrangement is set forth in a written agreement that--
    (i) Is signed by the parties;
    (ii) Specifies the items or services being provided and the value 
of those items and services;
    (iii) Covers all of the electronic health records items and 
services to be furnished by the entity to the physician; and
    (iv) Contains a certification by the physician that the items and 
services are not technically or functionally equivalent to items and 
services he or she already possesses or has obtained.
    (6) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the fact that the 
physician possessed or had obtained items and services that were 
technically or functionally equivalent to those donated by the donor.
    (7) For items or services that are of the type that can be used for 
any patient without regard to payor status, the donor may not restrict 
or take any action to limit the physician's right or ability to use the 
items or services for any patient.
    (8) The items and services do not include staffing of physician 
offices and are not used solely to conduct personal business or 
business unrelated to the physician's medical practice.
    (9) The electronic health records technology contains electronic 
prescribing capability that complies with the electronic prescription 
drug program standards under Medicare Part D at the time the items and 
services are furnished.
    (10) 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.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: March 18, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: August 12, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-20322 Filed 10-5-05; 10:49 am]
BILLING CODE 4120-01-P