[Federal Register Volume 71, Number 152 (Tuesday, August 8, 2006)]
[Rules and Regulations]
[Pages 45140-45171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6667]



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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; 
Final Rule

  Federal Register / Vol. 71 , No. 152 / Tuesday, August 8, 2006 / 
Rules and Regulations  

[[Page 45140]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 411

[CMS-1303-F]
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: Final rule.

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SUMMARY: As required by section 101 of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), this final rule 
creates 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 compensation in the form of 
items or services (not including cash or cash equivalents) 
(``nonmonetary remuneration'') that is necessary and used solely to 
receive and transmit electronic prescription information. In addition, 
using our separate legal authority under section 1877(b)(4) of the Act, 
this rule creates a separate regulatory exception for certain 
arrangements involving the provision of nonmonetary remuneration in the 
form of electronic health records software or information technology 
and training services necessary and used predominantly to create, 
maintain, transmit, or receive electronic health records. These 
exceptions are consistent with the President's goal of achieving 
widespread adoption of interoperable electronic health records to 
improve the quality and efficiency of health care while maintaining the 
levels of security and privacy that consumers expect.

DATES: Effective date: These regulations are effective on October 10, 
2006.

FOR FURTHER INFORMATION CONTACT: Lisa Ohrin, (410) 786-4565, or Linda 
Howard, (410) 786-5255.

SUPPLEMENTARY INFORMATION:

I. Background

    This final rule establishes exceptions to the physician self-
referral law for certain arrangements involving the donation of 
electronic prescribing and electronic health records technology and 
training services. Set forth below is a brief background discussion 
addressing:
     The physician self-referral law and its exceptions;
     A summary of the relevant provisions of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), 
(Pub. L. 108-173);
     The Secretary's authority to implement exceptions under 
section 1877(b)(4) of the Social Security Act (the Act); and
     The November 9, 2005 Open Door Forum on electronic 
prescribing and electronic health records.

A. The Physician Self-Referral Law and Exceptions

    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 or billing the beneficiary or third party payor 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.

B. Section 101 of the MMA

    Section 101 of the MMA added a new section 1860D to the Act 
establishing a prescription drug benefit in the Medicare program. As 
part of the new statutory provision, in section 1860D-4(e)(4) of the 
Act, the Congress directed the Secretary 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. (See 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 that would protect 
certain arrangements involving the provision of compensation in the 
form of nonmonetary 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 information in accordance with electronic 
prescribing standards published by the Secretary under section 1860D-
4(e)(4) of the Act. Specifically, this new exception sets forth 
conditions under which the provision of such remuneration by hospitals, 
group practices, and prescription drug plan (PDP) sponsors and Medicare 
Advantage (MA) organizations (collectively, for purposes of this 
preamble discussion, donors) to prescribing physicians (collectively, 
for purposes of this preamble discussion, physician recipients) would 
be protected. As we noted in the preamble to the October 11, 2005 
proposed rule, depending on the circumstances, provisions in the 
existing physician self-referral regulations may also provide 
protection for the donation of these items and services to physicians.
    In addition to mandating the new exception to the physician self-
referral prohibition, section 1860D-4(e)(6) of the Act directs the 
Secretary to create a corresponding safe harbor under the anti-kickback 
statute (section 1128B(b) of the Act, 42 U.S.C. 1320a-7b(b)). The 
Health and Human Services Office of Inspector General (OIG), the agency 
that enforces the anti-kickback statute, is promulgating that safe 
harbor through a separate rulemaking. We have attempted to ensure as 
much consistency as possible between our final electronic prescribing 
exception and the corresponding final safe harbor, given the 
differences in the respective underlying statutes. One significant 
difference in the statutory schemes is that complying with a safe 
harbor under the anti-kickback statute is voluntary, whereas fitting in 
an exception under section 1877 of the Act is mandatory. In other 
words, arrangements that do not comply with a safe harbor may not 
necessarily violate the anti-kickback statute. Rather, such 
arrangements are subject to the customary case-by-case review under the 
statute. If an arrangement fails to meet all requirements of a 
physician self-referral exception, however, it violates section 1877 of 
the Act. Another difference is that section 1877 of the Act applies 
only to referrals from physicians, while the anti-kickback statute 
applies more broadly.

C. Section 1877(b)(4) Authority

    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 
final rule also sets forth terms and conditions for a separate 
exception to the physician self-referral prohibition for certain 
arrangements involving the donation of electronic health records 
software or information technology and training

[[Page 45141]]

services. Information technology, and electronic health records in 
particular, supports treatment choices for consumers and enables better 
and more efficient care, while maintaining the levels of security and 
privacy that consumers expect. We seek to encourage the adoption of 
such technology through this final rulemaking. We believe that 
electronic health records systems that are secure and interoperable may 
mitigate many of our concerns regarding the potential anticompetitive 
effects of stand-alone electronic health records systems.

D. Open Door Forum

    We held an Open Door Forum early in the comment period for the 
proposed rule, on November 9, 2005, to discuss the benefits and risks 
of donating electronic prescribing and electronic health records 
technology. The OIG also participated in this Open Door Forum. This 
Open Door Forum was in addition to, and not in lieu of, the public 
comment process. During this Open Door Forum, panelists representing 
the health care industry (for example, the American Hospital 
Association and the American College of Physicians), the health 
information technology industry, and members of the public contributed 
to the discussion. Panelists described the types of technology they 
believe are necessary to have a useful, workable, interoperable 
electronic health records system, including software, training, 
connectivity, upgrades, and a help desk function. The following topics 
were also included in the discussion:
     The cost of the technology to the donor versus the value 
to the physician and a cap on the value of the technology;
     Safeguards necessary to protect against program or patient 
abuse, including permissible donors and recipients and donation 
selection criteria;
     Staged implementation;
     Standards for the certification of the technology;
     Physician certification of technical and functional 
equivalence; and
     The limitations of electronic prescribing functionality 
alone as opposed to electronic prescribing functionality integrated 
into electronic health records software.

II. Provisions of the October 11, 2005 Proposed Rule

    On October 11, 2005, we published a proposed rule to issue three 
exceptions under the physician self-referral statute (70 FR 59182). The 
first proposed exception addressed arrangements involving electronic 
prescribing technology as required by section 101 of the MMA. Many 
industry and government stakeholders had expressed concerns that the 
MMA provision was not sufficiently useful or practical, and would not 
adequately advance the goal of achieving improved health care quality 
and efficiency through widespread adoption of interoperable electronic 
health records systems. Accordingly, we proposed two additional 
exceptions to address donations of certain electronic health records 
software and directly related training services, using our authority at 
section 1877(b)(4) of the Act. One proposed exception would have 
protected certain arrangements involving nonmonetary remuneration in 
the form of interoperable electronic health records software certified 
in accordance with criteria adopted by the Secretary (and directly 
related training services). The second proposed exception would have 
protected certain arrangements involving donations of electronic health 
records technology made before the adoption of certification criteria. 
The proposed rule for safe harbors under the anti-kickback statute, 
issued the same day, contained comparable proposals.
    In response to our proposed rule, we received 74 timely filed 
comment letters. The majority of the comments came from hospitals and 
health systems, trade associations, and vendors. We also received 
comments from information technology organizations, health plans, and 
providers.
    The OIG received 71 timely filed comment letters. The majority of 
the comments came from the same types of entities from which CMS 
received its comments. However, the OIG also received comments from 
pharmaceutical manufacturers and pharmacies.
    Overall, the commenters welcomed the establishment of exceptions 
and safe harbors for electronic prescribing and electronic health 
records technology arrangements. However, we received many specific 
comments about various aspects of the proposed rule.
    After considering these public comments, we are finalizing two 
exceptions:
     An exception that protects certain arrangements involving 
electronic prescribing technology (new Sec.  411.357(v)); and
     An exception that protects certain arrangements involving 
interoperable electronic health records software or information 
technology and training services (new Sec.  411.357(w)).
    These final exceptions create separate and independent grounds for 
protection under the physician self-referral law. For the convenience 
of the public, we are providing Chart 1 that lays out schematically the 
overall structure and approach of the final exceptions, details of 
which we are providing in sections III and IV of this preamble. Readers 
are cautioned that the final exceptions contain additional conditions 
and information not summarized in Chart 1.

                                CHART 1.
------------------------------------------------------------------------
                                  MMA-mandated
                                   electronic         Electronic health
                                   prescribing        records exception
                                 exception  Sec.      Sec.   411.357(w)
                                   411.357(v)
------------------------------------------------------------------------
Authority for Exception.....  Section 101 of the    Section 1877(b)(4)
                               MMA.                  of the Social
                                                     Security Act.
Covered Technology..........  Items and services    Software necessary
                               that are necessary    and used
                               and used solely to    predominantly to
                               transmit and          create, maintain,
                               receive electronic    transmit, or
                               prescription          receive electronic
                               information.          health records.
                                                     Software packages
                                                     may include
                                                     functions related
                                                     to patient
                                                     administration, for
                                                     example, scheduling
                                                     functions, billing,
                                                     and clinical
                                                     support.
                              Includes hardware,    Software must
                               software, internet    include electronic
                               connectivity, and     prescribing
                               training and          capability.
                               support services.

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                                                    Information
                                                     technology and
                                                     training services,
                                                     which would
                                                     include, for
                                                     example, internet
                                                     connectivity and
                                                     help desk support
                                                     services.
Standards with Which Donated  Applicable standards  Electronic
 Technology Must Comply.       for electronic        prescribing
                               prescribing under     capability must
                               Part D (currently,    comply with the
                               the first set of      applicable
                               these standards is    standards for
                               codified at Sec.      electronic
                               423.160).             prescribing under
                                                     Part D (currently,
                                                     the first set of
                                                     these standards is
                                                     codified at Sec.
                                                     423.160).
                                                    Electronic health
                                                     records software
                                                     must be
                                                     interoperable.
                                                     Software may be
                                                     deemed
                                                     interoperable under
                                                     certain
                                                     circumstances.
Donors and Recipients.......  As required by        Entities that
                               statute, protected    furnish designated
                               donors and            health services
                               recipients are        (DHS) to any
                               hospitals to          physician.
                               members of their
                               medical staffs;
                               group practices to
                               physician members;
                               PDP sponsors and MA
                               organizations to
                               prescribing
                               physicians.
Selection of Recipients.....  Donors may not take   Donors may use
                               into account          selection criteria
                               directly or           that are not
                               indirectly the        directly related to
                               volume or value of    the volume or value
                               referrals from the    of referrals from
                               recipient or other    the recipient or
                               business generated    other business
                               between the parties.  generated between
                                                     the parties.
Value of Protected            No limit on the       Physician recipients
 Technology.                   value of donations    must pay 15 percent
                               of electronic         of the donor's cost
                               prescribing           for the donated
                               technology.           technology and
                                                     training services.
                                                    The donor may not
                                                     finance the
                                                     physician
                                                     recipient's payment
                                                     or loan funds to
                                                     the physician
                                                     recipient for use
                                                     by the physician
                                                     recipient to pay
                                                     for the items and
                                                     services.
Expiration of the Exception.  None................  Exception sunsets on
                                                     December 31, 2013.
------------------------------------------------------------------------

General Comments and Responses to the Proposed Rule

    Comment: Most commenters supported the promulgation of exceptions 
for electronic prescribing and electronic health records arrangements. 
Commenters observed that both the Congress and the Administration have 
recognized the compelling need for rapid and widespread adoption of 
electronic prescribing and electronic health records technology. 
Several commenters suggested that fraud and abuse concerns should not 
impede the adoption of health information technology. In this regard, 
commenters suggested that the final rule should better balance the goal 
of preventing fraud and abuse with the goal of creating incentives for 
health information technology arrangements that reduce fraud and abuse, 
increase quality and efficiency, and improve patient care. One 
commenter asserted that investments in health information technology 
and the desire to provide an incentive to participate in health 
information technology systems do not raise typical fraud and abuse 
concerns present with other financial arrangements. However, another 
commenter noted that the proposed rule generally struck an appropriate 
balance between the needs of physicians who may require assistance to 
develop health information technology systems and the underlying 
purpose of Federal fraud and abuse laws to promote the professional 
independence of the physicians receiving the support.
    Response: We disagree with the commenter that suggested that 
financial arrangements involving incentives in the form of health 
information technology do not pose the same fraud and abuse concerns as 
other financial arrangements between parties in a potential referral 
relationship. Indeed, our enforcement experience demonstrates that 
improper remuneration for Medicare referrals may take many forms, 
including free computers, facsimile machines, software, and other goods 
and services. However, we recognize that certain arrangements for the 
transfer of health information technology between parties with actual 
or potential referral relationships may further the important national 
policy of promoting widespread adoption of health information 
technology to improve patient safety, quality of care, and efficiency 
in the delivery of health care. We believe the final rule strikes the 
appropriate balance between promoting the adoption of health 
information technology and protecting against program or patient abuse.
    Comment: Several commenters stated that the Congress and the 
Administration need to offer meaningful financial incentives for 
practitioners to accept the increased cost and workflow burdens 
associated with the implementation of health information technology. 
For example, the government could provide modest add-on payments to 
physicians who employ health information technology as part of overall 
quality improvement measures. Some commenters observed that the 
proposed rule would remove a minor impediment to the adoption of health 
information technology, but suggested that we must play a larger role 
in providing capital for the technologies that assist physicians in 
providing quality care and avoiding medical errors.
    Response: These comments address matters outside the scope of this 
rulemaking. However, we note that the Administration supports the 
adoption of health information technology as a normal cost of doing 
business. Specifically, the 2007 Budget states that ``[t]he 
Administration supports the adoption of health information technology 
(IT) as a normal cost of

[[Page 45143]]

doing business to ensure patients receive high quality care.''
    Comment: Some commenters complained that the proposed exceptions 
were too narrow and vague. These commenters urged that the final 
exceptions should be easy to understand, interpret, and enforce so that 
donors and physicians readily can distinguish permissible activities 
from those that violate the statute. Some commenters believe that the 
proposed rule was too complex and might have the unintended effect of 
discouraging participation in health information technology 
arrangements.
    Response: As described in this preamble, we have adopted a number 
of modifications and changes that address the commenters' concerns. 
Although the final exception at Sec.  411.357(v) addresses only 
electronic prescribing arrangements, the final exception at Sec.  
411.357(w) protects a broad scope of arrangements involving electronic 
health records technology. We have made a number of changes that 
clarify and simplify the final rules. We have endeavored to create 
bright line provisions to the extent possible. Moreover, we do not 
believe that the Congress, in enacting section 1860D-4(e)(6) of the 
Act, intended to suggest that a new exception is needed for all 
arrangements involving the provision of electronic prescribing items 
and services, nor do we believe that an exception is needed for all 
electronic health records arrangements. Many arrangements can be 
structured to fit in existing exceptions.
    Comment: Some commenters observed that the description of the 
nonmonetary remuneration that would be included in the exceptions as 
proposed did not reflect the many existing combinations and varieties 
of electronic prescribing, electronic health records, and similar 
technology.
    Response: As discussed in greater detail, we believe that the final 
exceptions are sufficiently broad to accommodate the most essential 
current and evolving electronic prescribing and electronic health 
records technology. We began this rulemaking process by looking to the 
guidance from the Congress in section 101 of the MMA with respect to 
electronic prescribing technology. Using our regulatory authority, we 
have added a separate exception for arrangements involving electronic 
health records software or information technology and training 
services. We believe that we have appropriately balanced the goal of 
promoting widespread adoption of health information technology against 
the significant fraud and abuse concerns that stem from the provision 
of free or reduced cost goods or services to actual or potential 
referral sources.
    Comment: A commenter suggested that the final rule should include 
provisions that allow us to evaluate and ensure that the regulatory 
requirements, once enacted, have not negatively impacted key 
stakeholders or business segments within the health care industry.
    Response: Nothing in this rulemaking prevents us from reviewing the 
impact of the regulations on stakeholders in the health care industry. 
As with all regulatory exceptions, we may, in future rulemaking, 
propose modifications or clarifications to the exception as 
appropriate.
    Comment: We solicited comments on whether and, if so, how to take 
into account physician access to publicly available software at free or 
reduced prices. One commenter urged that the availability of free 
public software should not impact the design of the final exceptions. 
In addition, the commenter stated that we should grant physicians and 
hospitals substantial latitude in selecting interoperable technology 
that best meets their needs.
    Response: After further consideration, we concluded that it was not 
necessary to take the availability of publicly available software into 
account in developing the final exceptions. Hospitals, physicians, and 
other donors will have great flexibility in selecting technology that 
will qualify for protection under the exceptions. Nothing in this rule 
limits the choice of health information technology, although certain 
technology, such as non-interoperable electronic health records 
software (as discussed in section IV), would not qualify for protection 
because it would not meet all of the conditions of the exception.
    Comment: Some commenters suggested that the exceptions under the 
physician self-referral law should mirror the safe harbors under the 
anti-kickback statute in all respects in order to promote the rapid and 
widespread adoption of electronic prescribing and electronic health 
records technology. A few commenters suggested that OIG not adopt anti-
kickback statute safe harbors or that any safe harbors should be 
stricter than any corresponding exceptions to the physician self-
referral law.
    Response: We believe consistency between these exceptions and the 
corresponding safe harbors under the anti-kickback statute is 
preferable. We have attempted to ensure as much consistency between the 
two sets of regulations as possible given the underlying differences in 
the two statutory schemes.
    Comment: A few commenters requested that the Federal physician 
self-referral exception preempt State laws that prohibit physician 
self-referrals relating to health information technology. One commenter 
wanted the physician self-referral exceptions, once finalized, to 
preempt any State laws or regulations that conflict with the provisions 
of the exceptions.
    Response: The MMA specifically dictated that the Part D electronic 
prescribing standards would preempt any State law or regulation that--
(1) Is contrary to the adopted final Part D electronic prescribing 
standards or that restricts the Secretary's ability to carry out Part D 
of title XVIII; and (2) pertains to the electronic transmission of 
medication history and of information on eligibility benefits, and 
prescriptions with respect to covered Part D drugs under Part D. No 
similar authority was provided with respect to the physician self-
referral exception for the donation of electronic prescribing 
technology. Moreover, the legal authority for the electronic health 
records exception in this rule is derived from section 1877(b)(4) of 
the Act, which similarly does not provide authority to preempt State 
physician self[pi]referral laws. Existing Federal physician self-
referral law permits States to regulate physician self-referrals 
concurrently.
    Comment: Some commenters inquired whether the electronic 
information that is transmitted via electronic prescribing or 
electronic health records systems would be considered remuneration for 
purposes of the physician self[pi]referral law.
    Response: Whether a particular item or service constitutes 
remuneration for purposes of the physician self-referral law depends on 
the particular facts and circumstances. Typically, information about a 
particular patient's health status, medical condition, or treatment 
exchanged between or among the patient's health care providers and 
suppliers for the purpose of diagnosing or treating the patient would 
not constitute remuneration to the recipient of the information. In 
this regard, the electronic exchange of patient health care information 
is comparable to the exchange of such information by mail, courier, or 
phone conversation. Thus, when related to the care of individual 
patients, information such as test results, diagnosis codes, 
descriptions of symptoms, medical history, and prescription information 
are part of the delivery of the health care services and would not have 
independent value to the recipient. However, in other

[[Page 45144]]

situations, information may be a commodity with value that could be 
conferred to induce or reward referrals. For example, data related to 
research or marketing purposes, or information otherwise obtained 
through a subscription or for a fee, could constitute remuneration for 
purposes of the physician self-referral law.

III. Response to Comments and Final Rule Provisions Regarding 
Electronic Prescribing Exception Required Under Section 101 of the MMA 
(proposed Sec.  411.357(v))

A. Summary of the Proposed Provisions Related to Sec.  411.357(v)

    On October 11, 2005, as mandated in the MMA, we proposed adding a 
new paragraph (v) to the existing regulations at Sec.  411.357 for 
certain electronic prescribing arrangements. We proposed the following:
     That the exception would protect certain arrangements 
involving the provision of nonmonetary remuneration (in the form of 
hardware, software, or information technology and training services) 
necessary and used solely to receive and transmit electronic 
prescription information. We construed this language broadly to include 
internet connectivity services (of all types, including broadband or 
wireless), and upgrades of equipment and software that significantly 
enhance functionality.
     That the donated technology must be part of, or used to 
access, a prescription drug program that meets applicable standards 
under Medicare Part D.
     That the technology must be donated by a hospital to 
members of its medical staff, by a group practice to its members, or by 
a PDP sponsor or MA organization to prescribing physicians, as long as 
all of the exception conditions are satisfied.
     That the physician could not make the receipt of donated 
technology a condition of doing business with a donor.
     That protected arrangements must be fully and completely 
documented.
     That the exception would not protect donations of 
technology that replicate technology the physician already possessed. 
To ensure compliance with this provision, we proposed requiring 
physicians to certify that they did not already possess equivalent 
technology. Moreover, we proposed that donors would not be protected if 
they knew or should have known that the physicians already possessed 
equivalent technology.
     That neither a physician's eligibility for donated 
technology, nor the amount or nature of the technology, could be 
determined in any manner that takes into account the volume or value of 
referrals or other business generated between the parties.
     That the parties could not take any action to impede the 
compatibility or interoperability of the technology.
     That the donor could not restrict the ability of the 
physician to use the technology for any patient, regardless of payor.
     Limiting the value of donated technology that could be 
protected by the exception.
     A separate exception for multifunctional items and 
services used for electronic prescribing (for example, multi-use hand-
held devices) because we recognized the limitations imposed by the 
``used solely'' standard set forth in the MMA.

B. General Comments

    Comment: Many commenters stated that the proposed electronic 
prescribing exception was too narrow to be useful and should be merged 
into an electronic health records exception, noting that physicians 
would likely resist adopting stand-alone electronic prescribing 
systems. One commenter observed that the proposed rule was generally in 
accordance with the congressional intent underlying section 101 of the 
MMA.
    Response: We agree that the proposed exception was consistent with 
congressional intent. As we are not free to ignore a congressional 
mandate, we must promulgate the electronic prescribing exception 
described in section 101 of the MMA. However, we are also promulgating 
a separate exception for electronic health records arrangements that 
incorporate an electronic prescribing component. This new exception 
should address the commenters'' concerns.

C. Specific Comments

1. Protected Compensation in the Form of Items and Services 
(Nonmonetary Remuneration)
    The proposed rule clarified the items and services that would 
qualify for the new exception (for purposes of this preamble, 
``qualifying electronic prescribing technology'') that the Congress 
authorized only for the provision of items and services that are 
``necessary and used solely'' to transmit and receive electronic 
prescription drug information.
a. Covered Technology
    In our proposed exception, we proposed protecting hardware, 
software, or information technology and training services that met the 
various exception conditions. We interpreted the statutory language to 
include the donation of 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.
    Comment: Various commenters suggested that the scope of covered 
technology should be expanded to include: billing, scheduling, and 
other administrative functions; implementation and maintenance of the 
system; upgrades; and licenses, rights of use, or intellectual 
property. Commenters also urged that any exception cover educational 
sessions and consulting assistance related to the electronic 
prescribing technology. Commenters generally agreed that the provision 
of equipment for personal, non-medical purposes should not be 
protected. One commenter suggested that it would not be possible to 
develop a comprehensive list of protected remuneration that would 
sufficiently reflect all possible electronic prescribing items and 
services. The commenter recommended that we periodically review the 
scope of protected items and services, and expand it as needed.
    Response: We agree that it would be difficult to provide a 
comprehensive list of items and services covered by the exception. 
Although a specific list would provide a ``bright line'' rule, in this 
case, it would also impede the ability of the exception to accommodate 
novel or rapidly evolving technologies in the marketplace. For these 
reasons, we are not promulgating a specific list of protected items and 
services.
    Consistent with the MMA mandate, covered items and services under 
Sec.  411.357(v) include ``hardware, software, and information 
technology and training services'' that are necessary and used solely 
for electronic prescribing and that meet the other conditions of the 
exception. We believe that licenses, rights of use, intellectual 
property, upgrades, and educational and support services (including, 
for example, help desk and maintenance services) are items and services 
that potentially can fit in the exception if all conditions of the 
exception are met. Billing, scheduling, administrative, and other 
general office software cannot. Operating software that is necessary 
for the hardware to function can qualify for protection under the 
exception because it is integral to the hardware and distinct from 
other software applications that are not necessary to transmit and 
receive electronic

[[Page 45145]]

prescribing information. Interfaces designed to link the donor's 
existing electronic prescribing system to the physician's existing 
electronic prescribing system can qualify for protection. The exception 
does not protect the provision of technology for personal, nonmedical 
purposes, nor does the exception protect the provision of office staff.
    Comment: We solicited comments on whether the exception should 
protect electronic prescribing technology that is used for the 
transmission of prescription information for items and services that 
are not drugs (for example, durable medical equipment (DME) or 
laboratory tests). Several commenters suggested that the exception 
should support the use of electronic prescribing technology for all the 
functions currently accomplished through written prescriptions, in 
order to encourage provider utilization of electronic prescribing 
technology to increase safety, cost-effectiveness, and efficiency. The 
commenters suggested including the use of electronic prescribing 
technology used for prescribing medical supplies and durable medical 
equipment, physical therapy, dialysis testing, laboratory tests, and 
other nondrug prescriptions. A commenter from the clinical laboratory 
industry supported a broad reach, but only if clinical laboratories 
were included as permissible donors under the exception.
    Response: We agree generally with the first set of commenters. We 
have reviewed further the language in section 101 of the MMA. The 
exception mandated by section 1860D-4(e)(6) of the Act requires that 
the donated technology be capable of receiving and transmitting 
``electronic prescription information'' in accordance with the 
electronic prescribing standards promulgated for purposes of the MMA 
electronic prescription drug programs described in section 1860D-
4(e)(1) through (3) of the Act. We believe that the specific term 
electronic ``prescription information'' as commonly used and as used in 
section 1860D-4(e)(6) of the Act retains a broad meaning, to include 
information about prescriptions for any items that would normally be 
conducted with a written prescription. In contrast, the information to 
be transmitted under an electronic prescription drug program 
established under section 1860D-4(e)(2) of the Act is clearly limited 
to drug information for Part D eligible individuals. Moreover, we do 
not believe that the statutory language is intended to be construed to 
prohibit the use of the donated technology for the transmission and 
receipt of orders or prescriptions for other items and services or to 
require the use of separate systems depending on the payor or the item 
or service to be prescribed or ordered. We believe this approach is 
consistent with the broad applicability of the physician self-referral 
law, the objectives of the electronic prescribing standards, and the 
patient safety, quality, and efficiency goals underlying the mandated 
exception. Accordingly, we are defining ``prescription information'' 
for purposes of the exception to mean information about prescriptions 
for drugs or any other item or service normally accomplished through a 
written prescription. With respect to the clinical laboratory 
commenter, consistent with the MMA language, we are not including 
clinical laboratories as permissible donors under the exception. 
However, we have expanded the new exception for electronic health 
records arrangements to include clinical laboratories.
b. ``Necessary and Used Solely''
    In the proposed rule, we proposed protecting items and services 
that are necessary and used solely to transmit and receive electronic 
prescription information. We stated that the exception would not 
protect arrangements in which donors provide items or services that are 
technically or functionally equivalent to items that the receiving 
physician already possessed or services that the physician had already 
obtained. We proposed requiring the physician to certify that the items 
and services provided were not technically or functionally equivalent 
to those that the physician already possessed or had already obtained. 
We also proposed that arrangements would not be protected if the donor 
knowingly provided technology that duplicated the physician's existing 
technology. We indicated that we would consider ``necessary,'' for 
purposes of the exception, upgrades of equipment or software that 
significantly enhance the functionality of the item or service.
    Because the term ``necessary'' appeared in our proposed rule in the 
discussions of all three proposed exceptions, many commenters chose to 
address comments on the meaning of the term ``necessary'' in the 
context of the proposed exceptions for electronic health records 
arrangements. We intend to interpret the term ``necessary'' uniformly 
for both new exceptions. Thus, there is a detailed discussion of our 
interpretation of the term ``necessary'' in section IV.C of this 
preamble, which addresses the new electronic health records exception. 
We are addressing here only the comments received on the ``necessary 
and used solely'' requirement that are specific to the proposed 
electronic prescribing exception.
    Comment: One commenter observed that the ``necessary and used 
solely'' requirement ensures that items and services will be used to 
encourage electronic prescribing activities. This commenter suggested 
including an additional requirement that the items or services clearly 
be intended to promote the interoperability of health information 
technology and the improvement of quality in a clinical setting.
    Response: We agree that it was the intent of the Congress to 
encourage electronic prescribing activities, in part, through the 
development of an exception for donations of certain items and services 
necessary and used solely for electronic prescribing transactions. 
However, the additional standards suggested by the commenter, while 
reflecting laudable goals, are not sufficiently ``bright line'' for 
purposes of this exception. We have included a requirement at Sec.  
411.357(v)(3) intended to ensure that protected technology meets Part D 
electronic prescribing standards applicable at the time of the 
donation, including any standards relating to interoperability.
    Comment: Some commenters expressed concern that we have taken an 
unnecessarily narrow interpretation of the statutory language 
``necessary and used solely to receive and transmit electronic 
prescription information in accordance with the standards promulgated 
under [section 101 of the MMA].'' One commenter explained its view that 
the phrase ``necessary and used solely'' should be read such that the 
word ``necessary'' modifies the phrase ``in accordance with the 
standards issued under this subsection.'' In other words, in this 
commenter's view, the protected hardware, software, and services must 
be ``necessary'' to perform electronic prescribing transactions 
``solely'' in accordance with CMS-established data interchange 
standards. The commenter explained that this interpretation would be 
consistent with the purpose of the exception and the practical 
realities of computers and electronic transactions.
    Response: We appreciate the comment; however, we do not believe 
that the commenter's proposed interpretation is the best or most 
logical reading of the statutory language. We believe the better and 
less strained reading is that the Congress intended for all donated 
technology to be necessary for the receipt and transmission of

[[Page 45146]]

electronic prescription information and to be used solely for that 
purpose. Limiting the exception to necessary items and services helps 
ensure that the exception does not become a means of conveying valuable 
items and services that do not further the underlying policy goals and 
that might, in reality, constitute disguised payments for referrals. As 
we noted in the preamble to the proposed rule, we believe that the 
Congress included the ``used solely'' requirement to safeguard against 
abusive arrangements in which the donated technology might constitute a 
payment for referrals because it might have additional value 
attributable to uses other than electronic prescribing. For example, a 
computer that a physician can use to conduct office or personal 
business might have value to the physician apart from its electronic 
prescribing purpose. Accordingly, consistent with section 101 of the 
MMA, the final exception requires that the protected items and services 
be necessary and used solely to receive and transmit electronic 
prescribing information.
    We note that software that bundles general office management, 
billing, scheduling, electronic health records, or other functions with 
the electronic prescribing features does not meet the ``used solely'' 
requirement and is not protected by the final electronic prescribing 
exception. In some cases, the provision of such bundled software may be 
eligible for protection under the new exception for electronic health 
records arrangements at Sec.  411.357(w).
    Comment: One commenter suggested that the definition of 
``necessary'' include all components required for a physician to be 
enabled to prescribe electronically whether or not other functionality 
is available or incorporated into the electronic prescribing 
technology.
    Response: We believe that the commenter is referring to technology 
that is beyond the scope of the MMA-mandated exception. We have elected 
not to finalize a multifunctional electronic prescribing exception. The 
final exception for arrangements involving the donation of electronic 
health records technology may address the commenter's concerns.
    Comment: Many commenters requested that we eliminate the proposed 
requirement that physicians provide written certification that the 
donated technology is not technically or functionally equivalent to the 
technology that the physician already possesses. Several commenters 
expressed concern about the potential difficulty of making this 
determination, the potential lack of expertise on the part of some 
physicians, and the potential increased cost that could arise by having 
an outside expert provide a determination of technical or functional 
equivalence.
    Response: For the reasons noted in section IV of this preamble with 
respect to the electronic health records exception, we are not adopting 
the proposed requirement that physicians provide written certification 
that the donated technology is not technically or functionally 
equivalent to technology the physician already possesses. Although we 
have eliminated the certification requirement, we retained the 
requirement for written documentation regarding the specifics of the 
arrangement in the final exception at Sec.  411.357(v)(7).
    We do not believe that items and services are ``necessary'' if the 
physician already possesses equivalent items and services. The 
provision of duplicative items and services poses a heightened risk of 
abuse, since such arrangements would confer independent value on the 
physician (that is, the value of the existing items and services that 
may be put to other uses) unrelated to the need for electronic 
prescribing technology. Thus, if a donor knows that the physician 
already possesses equivalent items or services, or acts in deliberate 
ignorance or reckless disregard of that fact, the exception will not 
protect the donation. Therefore, prudent donors may want to make any 
reasonable inquiries to potential physician recipients and document the 
communications. We do not believe this requirement necessitates the 
hiring of technical experts by either the donor or the physician 
recipient.
    Comment: One commenter supported our interpretation of the term 
``necessary'' as permitting upgrades of equipment or software that 
significantly enhance the functionality of an item or service. Another 
commenter suggested that we should not require that the upgrades 
``significantly'' enhance the functionality of the item or service. 
Rather, the commenter believes that we should allow the marketplace to 
determine whether an upgrade constitutes a beneficial improvement.
    Response: Although we continue to believe that the term 
``necessary'' does not preclude upgrades of equipment or software that 
significantly enhance the functionality of the item or service, we 
agree with the commenter that distinguishing ``significant'' 
enhancements from other beneficial improvements introduces unnecessary 
complexity. Under the final exception, any upgrade that is necessary 
and used solely to transmit and receive electronic prescribing 
information is protected (as long as all other conditions of the 
exception are satisfied).
    Comment: Many commenters noted that it would be impractical to 
require physicians to acquire or use software and hardware solely for 
electronic prescribing. Several commenters noted that, in most cases, 
single-use technology is of limited value to a physician, and could 
result in inefficiencies. Another commenter expressed concern that the 
``used solely'' standard would preclude the use of robust electronic 
clinical support tools, such as tools to identify drug-to-drug 
interactions or to conduct drug-to-lab or prescription data analysis. 
This commenter urged that any exceptions from the physician self-
referral prohibition for health information technology arrangements 
promote access to all information needed by physicians to evaluate 
alternative drug therapies, identify potential drug-to-drug 
interactions, and to improve safety, quality, and efficiency of patient 
care.
    Response: The ``used solely'' condition derives directly from the 
MMA language. We believe that many of the arrangements of interest to 
the commenters are addressed best by the electronic health records 
exception, which is not restricted to technology used solely for 
electronic prescribing. The MMA-mandated electronic prescribing 
exception reasonably is interpreted to encompass electronic tools that 
provide information necessary to formulate, transmit and receive a 
medically appropriate prescription for a patient. These tools would 
include electronic clinical support tools identifying alternative drug 
therapies, drug-to-drug interactions, or a payor's formulary 
information.
    The nature of the ``prescription data analysis'' tools referenced 
by the commenter is not clear. We believe the appropriate inquiry would 
be whether the tool is used to formulate, transmit and receive a 
medically appropriate prescription for a patient. To the extent the 
data analysis tool (or any other electronic item or service) is used to 
transmit and receive data unrelated to formulating a medically 
appropriate prescription for a patient (for example, data collected for 
marketing purposes), the tool would not be necessary for electronic 
prescribing and would not be protected under the exception.
c. Standards
    The MMA required that donated electronic prescribing technology 
must comply with the standards for electronic prescribing under 
Medicare Part D at the

[[Page 45147]]

time the items and services are donated. In the November 7, 2005 
Federal Register (70 FR 67568), we finalized the first set of these 
standards (the ``foundation standards''). We proposed in Sec.  
411.357(v)(2) a requirement that the items and services be provided as 
part of, or be used to access, an electronic prescription drug program 
that complies with the applicable standards under Medicare Part D at 
the time the items and services are donated.
    We received no comments on this issue. The final exception requires 
that the donated technology must comply with the applicable standards 
under Medicare Part D at the time the items and services are donated.
2. Permissible Donors and Physician Recipients
    We proposed protecting the same categories of donors and physician 
recipients listed in section 101 of the MMA.
    Comment: We received numerous comments requesting that we expand 
the list of permissible donors and physician recipients.
    Response: Because most commenters commented on this issue jointly 
with the proposed electronic health records exception, we included a 
detailed discussion of these comments in our discussion of the 
electronic health records exception in section IV.D. of this preamble.
    We are finalizing the exception consistent with the MMA-mandated 
donors and physician recipients set forth by the Congress. We are not 
persuaded that additional donors or physicians are necessary to achieve 
the purpose of this exception for electronic prescribing. The 
enumerated categories of donors and physicians reflect individuals and 
entities centrally involved in the ordering, processing, filling, or 
reimbursing of prescriptions. Accordingly, protected donors and 
physicians under Sec.  411.357(v) are hospitals to members of their 
medical staffs, group practices to their physician members, and PDP 
sponsors and MA organizations to prescribing physicians. For the 
convenience of the reader, we note the following:
     Group practice is defined as specified in Sec.  411.352;
     Members of a group practice is defined as all persons 
covered by the definition of ``member of a group practice'' at Sec.  
411.351;
     PDP sponsor or MA organization is defined as specified in 
Sec.  423.4 and Sec.  422.2, respectively.
3. Selection of Physician Recipients
    We proposed additional conditions in proposed Sec. Sec.  
411.357(v)(5) and (v)(6) related to how donors select recipients of the 
electronic prescribing technology. These proposed conditions were 
designed to minimize the risk that donors would select recipients for 
the improper purpose of inducing or rewarding the generation of 
Medicare business. Proposed Sec.  411.357(v)(5) would require that the 
recipients (including their groups, employees, or staff) refrain from 
making the donation of qualifying electronic prescribing technology a 
condition of doing business with the donor. Proposed Sec.  
411.357(v)(6) would preclude protection if the eligibility of a 
physician to receive items and services from a donor, or the amount or 
nature of the items or services received, is determined in any manner 
that takes into account the volume or value of the physician's 
referrals or other business generated between the parties. We observed 
that this requirement would not preclude selecting a recipient based 
upon the total number of prescriptions written by the recipient, but 
would preclude selecting the recipient based upon the number or value 
of prescriptions written by the recipient that are dispensed or paid by 
the donor (as well as on any other criteria based on any other business 
generated between the parties). (see October 11, 2005 proposed rule, 
(70 FR at 59187)).
    Comment: Commenters requested that we confirm that donors can 
select physician recipients of electronic prescribing technology based 
upon the total number of prescriptions written by the physician, but 
cannot select them based upon the number or value of prescriptions 
written by the physician recipient that are dispensed or paid by the 
donor (or on any other criteria based on any other business generated 
between the parties). A commenter supported excluding from the 
protection of the exception donations that take into account directly 
the volume or value of referrals or other business generated between 
the parties. This commenter expressed concern that donors would employ 
such selection criteria to disadvantage small practices and practices 
in rural or underserved areas. To counter this potential disadvantage, 
the commenter suggested that the final rule include incentives to 
promote donations to small practices, especially in rural and 
underserved areas. Other commenters suggested that donors, such as PDP 
sponsors and MA organizations should be permitted to consider the 
volume and value of prescriptions written by the physician recipient, 
particularly for a donor's patient or plan population.
    Response: To safeguard against the use of donated technology to 
disguise referral payments, we are adopting our proposal that neither 
the eligibility of a physician to receive items and services, nor the 
amount or nature of the items or services received, may be determined 
in a manner that takes into account, directly or indirectly, the volume 
or value of the physician's referrals or other business generated 
between the parties. Notwithstanding, in the instant case, we believe 
that prohibiting the selection of recipients based on total number of 
prescriptions written by the recipient would be inconsistent with the 
MMA mandate and congressional intent to promote the use of electronic 
prescribing. Accordingly, we confirm our interpretation, for purposes 
of the exception at Sec.  411.357(v), that donors may select physician 
recipients of electronic prescribing technology based upon the total 
number of prescriptions written by the physician, but cannot select 
them based upon the number or value of prescriptions written by the 
physician that are dispensed or paid by the donor (or on any other 
criteria based on any other business generated between the parties). 
They also may not select physician recipients based on the overall 
value of prescriptions written by the physician or on the volume or 
value of prescriptions written by the physician that are reimbursable 
by the Medicare program.
    We are not persuaded that PDP sponsors or MA organizations should 
be permitted to offer technology selectively based on the volume or 
value of business generated for the plan by the recipient, especially 
in the context of Part D, which includes some reimbursement based on 
the plan's costs, rather than capitated payments.
    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), 
because such arrangements take into account business generated for the 
donor. We understand the commenter's concern about donors excluding 
rural and underserved area physicians from their health information 
technology arrangements. Some donors may favor large or urban practices 
over small or rural ones. However, we can discern no ``incentives'' 
that could be included appropriately in an exception to address

[[Page 45148]]

this concern, nor has the commenter proposed any with respect to 
assisting rural or solo practitioners. We note that our decision not to 
limit the value of technology that can qualify under the exception may 
assist rural and solo practices insofar as donors may want to provide 
them with greater resources in recognition of their greater need for 
assistance in adopting electronic prescribing technology.
    Comment: Some commenters supported our proposal to exclude from the 
protection of the exception donations that are a condition of doing 
business with the donor.
    Response: We are retaining the proposed requirement that recipients 
(or any affiliated group, employee, or staff member) cannot make the 
receipt of items or services a condition of doing business with the 
donor. We have clarified that the condition applies with respect to all 
individuals and entities affiliated with the recipient.
4. Value of Technology: Cap
    In our proposed rule, we solicited public comments on various means 
by which we might limit the value of protected technology under the 
electronic prescribing exception. We indicated that we were considering 
a limit on the value of protected technology as a further safeguard 
against program or patient abuse. We received a large number of 
comments on this topic, the majority of which opposed any limit on the 
value of donated technology. Because these commenters typically 
commented jointly on this issue for all three proposed exceptions (and 
each commenter typically had the same concerns under all three proposed 
exceptions), an extensive description of these comments is found in 
section IV of this preamble. Having considered the comments, we are 
persuaded not to limit the value of the donated technology under the 
new exception for electronic prescribing arrangements at Sec.  
411.357(v). We believe the final conditions of the exception, including 
the ``necessary and used solely'' requirement and the conditions 
related to how donors select physician recipients, should be sufficient 
to guard against program and patient abuse. Although we are not 
limiting the value of donated technology, it is not our expectation 
that donors will necessarily want, or be in a position, to donate 
unlimited amounts of electronic prescribing technology.
5. Additional Conditions on the Provision of Qualifying Electronic 
Prescribing Technology
a. All Payors Requirement
    In proposed Sec.  411.357(v)(4), we stated that we would require 
that, where possible, physicians must be able to use the protected 
technology for all patients without regard to payor status.
    Comment: Commenters universally supported the requirement that, 
where possible, physicians must be able to use the donated technology 
for all patients regardless of payor source.
    Response: We agree, and we have included this requirement in the 
final exception.
b. Documentation
    We proposed at Sec.  411.357(v)(7) a requirement that the 
arrangement for the donation of electronic prescribing technology be in 
writing, be signed by the parties, identify with specificity the items 
or services being provided and their values, and include a 
certification that the donated items and services are not technically 
or functionally equivalent to items and services the physician 
recipient already has. We stated that, to permit effective oversight of 
protected arrangements, the writing must cover all qualifying 
electronic prescribing technology provided by the donor to the 
physician. For example, if a donor provides a piece of hardware under 
one arrangement and 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).
    Comment: Some commenters supported the requirement that any 
transfers of technology and services be memorialized in a written 
agreement. One commenter objected to including a written agreement 
requirement in the exception, arguing that the requirement would cause 
an unnecessary delay and increase paperwork. Another commenter 
suggested that the exception permit the arrangement between the donor 
and physician recipient to be captured through a combination of 
agreements between the recipient, donor, and service provider, rather 
than one agreement. Commenters also urged us to remove the technical 
and functional equivalence certification requirement from the 
exception.
    Response: We have adopted a documentation requirement in the 
exception at Sec.  411.357(v)(7) with several modifications. With 
respect to the condition requiring that the documentation cover all of 
the electronic prescribing items and services provided by the donor to 
the physician recipient, we have added language to the final exception 
clarifying that the written documentation requirement can be satisfied 
by incorporating by reference other agreements between the parties or 
by the use of cross references to a master list of agreements between 
the parties that is maintained and updated centrally, is available for 
review by the Secretary upon request, and preserves the historical 
record of agreements. We have eliminated the certification of technical 
and functional non-equivalence. In addition, given our decision not to 
limit the value of protected donations, we have eliminated the 
requirement that the agreement specify the value of the donated 
technology. However, in the interests of transparency and 
accountability, we are requiring that the parties document the donor's 
cost for the technology. We have retained the remaining documentation 
requirements, as proposed, at Sec.  411.357(v)(7).
c. Commercial and Other Messaging
    Comment: A commenter requested clear and specific rules prohibiting 
inappropriate commercial messaging through electronic prescribing 
technology, including electronic detailing messages from a manufacturer 
promoting a particular brand or brand-name drug. This commenter 
suggested that such messaging may inappropriately influence clinical 
decision-making. The commenter gave the following as examples of 
inappropriate messaging: (1) Messages disguised as ``clinical alerts'' 
based upon biased research not published in the public domain; and (2) 
alerts purporting to save a patient money when, in reality, the out-of-
pocket expense for the drug to the patient is higher. Another commenter 
suggested that we should prohibit commercial messaging and require that 
donated technologies present information in a neutral and transparent 
manner so as not to influence clinical decision making improperly. 
Similarly, another commenter noted that pop-up messaging could 
influence inappropriately prescribing patterns. The commenter provided 
the example of making the procedure for prescribing certain formulary 
drugs very easy and straightforward, while attempts to prescribe other 
formulary drugs trigger multiple pop-up notices or require a series of 
additional steps.
    Response: We do not believe it would be feasible or appropriate to 
regulate the content of commercial messaging or

[[Page 45149]]

formulary compliance activities through these exceptions to the 
physician self-referral law. The regulation of speech is outside the 
scope of this rulemaking. Nor, in any event, would a condition in these 
exceptions related to the accuracy or objectivity of the content of 
messages or formulary activities be sufficiently ``bright line'' to be 
practical or readily enforceable. Nothing in this rulemaking should be 
construed to authorize or approve any commercial messaging, formulary 
compliance activity (or any other conduct) that is prohibited by any 
Federal, State, or local law or regulation. Moreover, technology used 
for marketing purposes would not meet the ``necessary and used solely'' 
standard required by the MMA for the electronic prescribing exception 
because marketing information is not the type of clinical support that 
is integral to prescribing accurate and appropriate items and services 
for patients.
d. Other Conditions
    Comment: Many commenters supported the prohibition against donors 
or their agents taking any actions to disable or limit interoperability 
or otherwise impose barriers to compatibility.
    Response: We agree, and we are retaining this requirement in the 
final exception.
    Comment: Commenters generally agreed that the provision of 
equipment for personal, nonmedical purposes should not be protected.
    Response: The exception does not protect the provision of 
technology for personal, nonmedical purposes.
6. Multifunctional Technology
    We proposed using our regulatory authority under section 1877(b)(4) 
of the Act to create an additional exception to protect the provision 
by DHS entities to physician recipients of some limited hardware 
(including necessary operating system software) and connectivity 
services that are used for more than one function, as long as a 
substantial use of the item or service would be to receive or transmit 
electronic prescription information.
    Comment: Most commenters supported a single exception that would 
extend protection to technology beyond what is ``necessary and used 
solely'' for electronic prescribing. Many commenters expressed the hope 
that multifunctional technology ultimately would be captured in an 
electronic health records technology exception.
    Response: We have decided not to create a separate exception for 
multifunctional technology. Instead, we are creating a new exception 
for the protection of certain arrangements involving electronic health 
records software, information technology and training services 
(including connectivity services) that will serve more directly to 
further the overall goal of widespread adoption of interoperable 
electronic health records technology without some of the program or 
patient abuse risks inherent in gifts of multifunctional hardware. Our 
review of the totality of the public comments supports this approach, 
as more fully described in the next section.

D. Summary of the Final Provisions Related to Sec.  411.357(v)

    This final rule at Sec.  411.357(v) contains one exception for 
items and services that are necessary and used solely to receive and 
transmit electronic prescription information. The exception mirrors the 
MMA language and protects donations of hardware, software, internet 
connectivity, and training and support services, provided that the 
technology meets the applicable standards under Medicare Part D at the 
time the items and services are donated. (See November 7, 2005 final 
rule (70 FR 67568) for the current, or ``foundation,'' standards.) 
Further, donations may not take into account, directly or indirectly, 
the volume or value of referrals from the physician or other business 
generated between the parties. We have not placed a monetary limit on 
the value of donations of electronic prescribing technology. We have 
retained most of the key provisions from the proposed rule; however, 
the final rule does not include a requirement for physician 
certification of technical and functional non-equivalence. We emphasize 
that: (1) The final rule protects technology necessary and used solely 
to receive and transmit any prescription information, whether related 
to drugs or to other items or services normally ordered by 
prescription; and (2) donations may be in an unlimited amount.
    We are not finalizing a separate exception for multifunctional 
electronic prescribing technology.

IV. Response to Comments and Final Rule Provisions Regarding Electronic 
Health Records Exception (Proposed Sec.  411.357(w))

A. Summary of the Proposed Provisions Related to Sec.  411.357(w)

    Prior to publication of the proposed rule, many in the hospital 
industry, among others, raised the issue of the need for protection 
under an exception for arrangements involving technology other than 
electronic prescribing. To encourage the adoption of electronic health 
records technology consistent with the ultimate goal of achieving fully 
interoperable electronic health records for all patients, we proposed 
using our legal authority at section 1877(b)(4) of the Act to issue two 
exceptions related to electronic health records software and training 
services that are necessary and used to receive, transmit, and maintain 
electronic health records of the donor's or physician's patients. We 
did not propose protecting hardware in either exception, because we 
believe electronic health records software and training services are 
the components of electronic health records systems most likely to be 
needed by physicians, and because donations of valuable, 
multifunctional hardware (such as computers and servers) would 
inherently pose a higher risk of constituting a disguised payment for 
referrals. The first proposed exception would have applied to donations 
made before the Secretary adopts product certification criteria, 
including criteria for interoperability, functionality, and privacy and 
security of electronic health records technology. (In the proposed rule 
(70 FR 59197), we referred to this proposed exception as the ``pre-
interoperability'' exception.) We proposed the following:
     That the electronic health records software must be 
necessary and used solely for the transmission, receipt, and 
maintenance of patients' electronic health records and prescription 
drug information.
     Defining ``necessary'' consistent with the definition of 
the term in the proposed exception for electronic prescribing 
arrangements.
     That the software would have to include an electronic 
prescribing component that meets the applicable standards under 
Medicare Part D at the time the software is donated.
     That the pre-interoperability exception would not protect 
the provision of other types of technology (for example, billing, 
scheduling, or general office management software) or any software or 
staff used by the physician to conduct business or engage in activities 
unrelated to the physician's medical practice. We also proposed that 
the exception would not protect the provision of staff to the physician 
or the physician's office.
     Defining the term ``electronic health records'' and we 
solicited comments on an appropriate definition.
     Including documentation provisions comparable to those 
proposed for the electronic prescribing exception.
     Prohibiting protection for any arrangement in which the 
donor (or any

[[Page 45150]]

person on the donor's behalf) disabled the interoperability of any 
component of the software or otherwise imposed barriers to 
compatibility.
     Limiting the aggregate value of protected technology that 
a donor could provide to a physician under the pre-interoperability 
exception or in combination with the other proposed exceptions. We 
noted that we were considering the same alternatives for setting a 
value limit that were proposed for the electronic prescribing 
exception. These could include: An aggregate dollar cap; a limitation 
that would require cost sharing by the physician; or another 
methodology, for example, a reduction in the amount of any cap over 
time.
     Including the same categories of donors and physician 
recipients that we proposed for the electronic prescribing exception.
     Including other requirements drawn from the proposed 
electronic prescribing exception, for example, the restriction on 
arrangements tied to the volume or value of referrals or other business 
generated between the donor and recipient (proposed Sec.  
411.357(x)(4)); a prohibition on conditioning business on the receipt 
of technology (proposed Sec.  411.357(x)(3)); and an all payors 
condition (proposed Sec.  411.357(x)(7)).
     Sunsetting the pre-interoperability exception once product 
certification criteria were finalized.
    Recognizing that some enhanced flexibility in the conditions 
applicable under an exception for electronic health records 
arrangements might be appropriate once standards and product 
certification criteria were developed for electronic health records 
(including standards for interoperability) and adopted by the 
Secretary, we proposed a second exception that we referred to as the 
``post-interoperability'' exception. We noted that adoption of uniform 
interoperability standards, as well as product certification criteria 
to ensure that products meet those standards, would help prevent 
technology from being used by unscrupulous parties to lock in streams 
of referrals or other business. In summary, we proposed the following 
for the post-interoperability exception:
     That protected technology must be certified in accordance 
with product certification criteria adopted by the Secretary, and must 
include an electronic prescribing component that complies with 
applicable electronic prescribing standards established by the 
Secretary for the Part D program, to the extent that those standards 
are not incorporated into the product certification criteria.
     That the same conditions proposed for the pre-
interoperability exception would apply, with the following exceptions: 
(1) We proposed including some additional software applications as long 
as electronic health records and electronic prescribing remain core 
functions; (2) we proposed including additional categories of donors 
and physician recipients; (3) we proposed including specific selection 
criteria to identify acceptable methods for selecting physician 
recipients; and (4) we proposed a potentially larger limit on the value 
of protected technology.
    We also proposed and solicited public comment on the scope and 
conditions for the electronic health records exceptions.
    As noted previously in this preamble and in the proposed rule, our 
decision to propose these exceptions did not reflect a view that all 
electronic health records arrangements would require protection under 
an exception to the physician self-referral law. Moreover, in many 
cases, such arrangements may qualify for such protection under existing 
exceptions or may not implicate the physician self-referral law.

B. General Comments

    Comment: Most commenters expressed concern with the pre- and post-
interoperability bifurcated approach to the exceptions, asserting that 
a bifurcated approach was not necessary, too confusing, and/or contrary 
to the goal of achieving widespread adoption of health information 
technology. These commenters urged us to abandon the bifurcated 
approach and to publish one final exception for remuneration in the 
form of electronic health records technology. Commenters urged us and 
the OIG to adopt similar approaches to a post-interoperability 
exception under the physician self-referral law and a post-
interoperability safe harbor under the anti-kickback statute.
    Response: We have finalized one exception for arrangements 
involving the donation of electronic health records software or 
information technology and training services at Sec.  411.357(w).
    Comment: Some commenters suggested that we incorporate the general 
concept of interoperability into the pre-interoperability exception, 
even if we do not require product certification. Many commenters stated 
that encouraging electronic health records arrangements before 
interoperability standards are available would be undesirable public 
policy. Some commenters believe that a product certification process 
that would include interoperability standards is already underway and 
within the timeframe for this rulemaking. Others expressed that we 
should either not wait until certification standards are adopted before 
finalizing the post-interoperability exception, or not finalize either 
of the exceptions until the certification standards are adopted. One 
commenter expressed that, since timetables for the rulemaking and for 
the certification standards are not known, we should consider 
promulgating the regulation from the pre-interoperability perspective 
and address the post-interoperability era in the future.
    Response: We agree with the commenters that a bifurcated approach 
is not necessary. We are not promulgating separate exceptions for pre- 
and post-interoperability as we had proposed in the October 11, 2005 
proposed rule. The industry has made considerable progress in 
developing certification criteria for electronic health records 
products within a very short time. In fact, one certification 
organization has already completed an initial set of certification 
criteria for ambulatory electronic health records. In some cases, there 
may be products for which no certification criteria are available. To 
address this situation, and to ensure interoperability to the extent 
possible, the final exception requires that donated software be 
interoperable at the time of the donation (regardless of whether the 
product is actually certified), and bars a donor or any entity on its 
behalf from taking any actions to disable or limit interoperability. 
This latter condition also protects against donors that improperly may 
attempt to create closed or limited electronic health records systems 
by offering technology that functionally or practically locks in 
business for the donor.
    Comment: Many commenters supported the proposed prohibition against 
donors or their agents taking any actions to disable or limit 
interoperability or otherwise impose barriers to compatibility of the 
donated technology with other technology, including technology owned or 
operated by competing providers and suppliers.
    Response: We have included this requirement in the final exception. 
We believe this condition helps ensure that remunerative arrangements 
involving health information technology will further the policy goal of 
fully interoperable health information systems and will not be misused 
to steer Medicare referrals to the donor.
    Comment: Some commenters suggested that early adopters of 
electronic health records technology

[[Page 45151]]

should be offered incentives or rewards because, otherwise, physicians 
might delay investing their own funds in electronic health records 
systems while waiting for a donor to offer them free technology. The 
commenters continued that this delay would have a detrimental effect on 
the adoption of electronic health records technology.
    Response: It is unclear what types of incentives or rewards the 
commenters are requesting. We note that the exception does not provide 
incentives or rewards, nor would it be appropriate for an exception to 
do so; rather, the exception protects the donation of certain 
electronic health records technology when all conditions of the 
exception are satisfied. The exception would not protect any cash 
reimbursement paid to physician recipients for costs they incurred in 
adopting technology.
    Comment: One commenter requested that we and the OIG coordinate 
with the Internal Revenue Service (``IRS'') to provide guidance through 
an IRS revenue ruling publication to alleviate concerns related to tax 
exemption.
    Response: The commenter should contact the IRS directly with its 
concerns.

C. Specific Comments

1. Protected Compensation in the Form of Items or Services (Nonmonetary 
Remuneration)
a. Covered Technology
    We proposed protecting the donation of electronic health records 
software and directly related training services that are necessary to 
receive, transmit, and maintain electronic health records of the 
entity's or physician's patients, provided that the software includes 
an electronic prescribing component. Importantly, we stated our 
intention to protect donations of systems that improve patient care 
rather than of systems comprised solely or primarily of technology that 
is incidental to the core functions of electronic prescribing and 
electronic health records.
    Comment: Some commenters asked whether our proposal to protect 
certain technology necessary and used to ``receive, transmit, and 
maintain'' electronic health records would include technology used to 
develop, implement, operate, facilitate, produce, and supplement 
electronic health records.
    Response: We intended that the final rule would encompass the types 
of uses described by the commenters. To make this intent clear, we have 
clarified the final rule to provide that the protected technology must 
be necessary and used predominantly to ``create, maintain, transmit, or 
receive'' electronic health records.
    Comment: Most commenters believe that the proposed scope of 
protected remuneration was too narrow. A few commenters suggested that 
we limit the scope of the protected technology.
    Commenters variously suggested that the exception should also 
protect remuneration in the form of hardware, operating software, 
connectivity items, support services, secure messaging, storage 
devices, clinical decision support technology, services related to 
training and ongoing maintenance, rights, licenses, and intellectual 
property, as well as interfaces and translation software to allow 
physician offices to exchange data with hospital systems, all of which 
the commenters considered necessary for a fully-functioning electronic 
health records system.
    Some commenters encouraged us to exclude from protection hardware 
and broadband wireless internet connectivity and to tailor the 
protection of this exception narrowly to cover software, training, and 
information technology support services. One commenter opined that 
ongoing support, such as help desk support, could pose a risk of abuse, 
because the physician would become dependent on the donor for the help 
desk support, and might feel obligated to refer to the donor to ensure 
continuation of that support. This commenter suggested that we protect 
initial, start-up support services, but not long-term, ongoing system 
support. A few commenters suggested that the scope of support services, 
training, and other items and services should be a defined contribution 
not to exceed 365 person-days.
    Response: We have carefully considered the comments in light of our 
intention to promote the adoption of electronic health records without 
risk of program or patient abuse. The final rule protects electronic 
health records software or information technology and training services 
necessary and used predominantly to create, maintain, transmit, or 
receive electronic health records.
    To ensure that the exception is only available for software, 
information technology and training services that are closely related 
to electronic health records, the exception provides that electronic 
health records functions must predominate. The core functionality of 
the technology must be the creation, maintenance, transmission, or 
receipt of individual patients' electronic health records. In addition, 
the donated software must have electronic prescribing capability, 
either through an electronic prescribing component or the ability to 
interface with the physician's existing electronic prescribing system, 
that meets the applicable standards under Medicare Part D at the time 
the items and services are provided. Although electronic health records 
purposes must predominate, protected software packages may also include 
other software and functionality directly related to the care and 
treatment of individual patients (for example, patient administration, 
scheduling functions, billing, clinical support software, etc.). This 
condition recognizes that it is common for electronic health records 
software to be integrated with other features.
    We interpret ``software, information technology and training 
services necessary and used predominantly'' to include, by way of 
example, the following:
     Interface and translation software;
     Rights, licenses, and intellectual property related to 
electronic health records software;
     Connectivity services, including broadband and wireless 
internet services;
     Clinical support and information services related to 
patient care (but not separate research or marketing support services);
     Maintenance services;
     Secure messaging (for example, permitting physicians to 
communicate with patients through electronic messaging); and
     Training and support services (such as access to help desk 
services).
    We interpret the scope of covered electronic health records 
technology to exclude--
     Hardware (and operating software that makes the hardware 
function);
     Storage devices;
     Software with core functionality other than electronic 
health records (for example, human resources or payroll software); and
     Items or services used by a physician primarily to conduct 
personal business or business unrelated to the physician's practice.
    Further, training and support services do not include the provision 
of staff to physicians or their offices. For example, the exception 
would not protect the provision of staff to transfer paper records to 
the electronic format. We believe that most physicians already possess 
the hardware necessary to operate electronic health records systems. 
Moreover, hardware represents a much lower cost to the physician when 
compared to electronic health records software. Requiring investment by 
a physician recipient in the hardware

[[Page 45152]]

portion of the electronic health records system safeguards further 
against program abuse.
    Finally, consistent with our discussion in the proposed rule and 
our goal of widespread adoption of electronic health records, we are 
not protecting systems comprised solely or primarily of technology that 
is incidental to electronic prescribing and electronic health records. 
As previously discussed, we intend that this exception protect 
electronic health records technology arrangements in which the 
electronic health records component predominates.
    Although we share the concerns of those commenters that ongoing 
remuneration, such as maintenance and help desk support, creates long-
term remunerative ties between donors and recipients, we believe that 
requiring donated electronic health records to be interoperable 
protects against the ``tying'' of referral sources (physicians) to 
donor entities seeking referrals. Further, the cost sharing requirement 
and sunset provision in the final electronic health records exception 
should also address this concern.
    Comment: With respect to internet connectivity services, some 
commenters suggested that donations for connectivity should be limited 
to any necessary devices for connectivity and technical support for 
selecting and installing the appropriate connectivity services, but 
should not include connectivity fees, which should be an ongoing 
expense of the physician. Other commenters suggested that covered 
technology should include ``T1'' lines or other enhanced broadband 
connectivity (including connectivity needed to transfer medical images 
and EKGs (especially in rural areas)), routers to speed download times, 
secure connections and messaging, and ongoing maintenance and support 
and interfaces.
    Response: The final exception protects the donation of all forms of 
connectivity services. We believe the choice of appropriate 
connectivity services is an individual determination best made by the 
donors and physician recipients given their specific circumstances. We 
note that the cost sharing requirement of Sec.  411.357(w)(4) will 
apply to these services, including connectivity fees. The exception 
does not protect routers or modems necessary to access or enhance 
connectivity because hardware is not protected remuneration under the 
exception. As noted in the preceding response, concerns about ongoing 
donations of connectivity services are also addressed by the sunset 
provision.
    Comment: Several commenters urged us to protect arrangements 
involving the donation of billing software and other software for 
administrative functions, such as registration and patient scheduling, 
because much of the ``return on investment'' (that is, value) for 
physicians who incorporate an electronic health records system into 
their practices is the integration of clinical and administrative 
systems. Commenters noted that the scope of the exception should 
account for the fact that the products on the market increasingly 
integrate administrative functions with the clinical electronic health 
records functions. One commenter suggested that the exception should at 
least prohibit the donation of technology that is unrelated to the 
actual electronic health records software, such as technology related 
to office administration. The commenter requested that the exception 
protect integrated bundles of applications that include an electronic 
health records component, provided the physician pays for the 
technology that is unrelated to the electronic health records software. 
Another commenter suggested that the exception should not protect 
clearly separable administrative software (for example, billing, 
coding, and practice management software), but protect those elements 
of an electronic health records system that incidentally facilitate 
administrative functions, such as software that links to diagnosis 
codes for billing purposes. The commenter suggested that these 
functions that dually support patient care and practice administration 
are valuable to the physician and a driving force behind adoption of 
electronic health records systems.
    Response: As previously noted, the final exception protects the 
donation of electronic health records software packages that include 
core functionality of electronic prescribing and the creation and 
maintenance of individual patients' electronic health records. 
Protected software packages may also include other software and 
functionality directly related to the care and treatment of individual 
patients (for example, patient administration, scheduling functions, 
billing, clinical support software, etc.).
    Comment: A commenter asked for further clarification on whether the 
exception would cover the donation of an electronic health records 
system operating within an ``Application Service Provider'' model.
    Response: Subject to the cost sharing requirement and other 
conditions of the final exception, we would consider the donation of an 
electronic health records system operating within an ``Application 
Service Provider'' model (a business model that provides computer-based 
services over a network) as covered technology.
    Comment: A few commenters requested that the final rule require 
donors to provide data migration services to a physician if the 
physician chooses to abandon the donated electronic health records 
system and purchase his or her own electronic health records system.
    Response: We believe it is not appropriate to require donors to 
provide data migration or any other specific service to physicians who 
choose to switch electronic health records systems. Donors may provide 
services if they wish, as long as the arrangement otherwise complies 
with the exception. We note that, to the extent the data migration 
services involve the provision of staff to the physician's office in 
order to transfer the data, the services would not be protected.
    Comment: A commenter recommended that the exception specifically 
protect the provision of patient portal software that enables patients 
to maintain on-line personal medical records, including scheduling 
functions.
    Response: Nothing in this final exception precludes protection for 
patient portal software if it meets all conditions of the exception.
    Comment: Some commenters urged us to remove the proposed 
requirement that an electronic health records system include an 
electronic prescribing component because such a requirement may stifle 
investment in electronic health records technology in situations where 
electronic prescribing is not considered a significant need. These 
commenters suggested that patients would benefit most if we permit 
donors to first adopt electronic health records technology and then add 
electronic prescribing. Other commenters supported making an electronic 
prescribing component a mandatory part of the donated electronic health 
records system.
    Response: Nothing in this exception prevents donors from adopting 
any particular form of technology. However, to qualify for the 
protection of this exception for arrangements in which the donor 
provides electronic health records technology to potential referral 
sources, we are requiring that the donated electronic health records 
system include electronic prescribing capacity, either in an electronic 
prescribing component or the ability to interface with the physician's 
existing electronic prescribing system that meets the

[[Page 45153]]

applicable standards under Medicare Part D at the time the items and 
services are donated. We are including this requirement, in part, 
because of the critical importance of electronic prescribing in 
producing the overall benefits of health information technology, as 
evidenced by section 101 of the MMA. It is our understanding that most 
electronic health records systems routinely include an electronic 
prescribing component.
    Comment: One commenter urged that the availability of public 
software, such as VISTA, is not relevant to the requirements of an 
exception. The commenter explained that hospitals and physicians must 
be allowed flexibility to determine which software best meets their 
needs, as long as it also meets the final interoperability standards.
    Response: We agree that hospitals and physicians should have 
flexibility to determine which software best meets their needs. We are 
not adopting any express requirements related to public software. 
Nothing in this final rule limits physician choice with respect to 
health information technology. Protection is only available under this 
exception for technology that meets the conditions of the exception, 
including interoperability. We expect that physicians would 
appropriately evaluate any offer of health information technology to 
ensure that it best meets their needs before accepting the donation.
b. Definition of Electronic Health Records
    Comment: We requested comments on how to define ``electronic health 
record.'' One commenter suggested that we should define electronic 
health record as electronically originated and/or maintained clinical 
health information, that may incorporate data derived from multiple 
sources and that replaces the paper record as the primary source of 
patient information. Another commenter suggested that we protect any 
interoperable component or module of an electronic health record. 
Another commenter suggested that ``electronic health record'' be 
defined for purposes of this exception to accomplish two objectives: 
(1) To promote a connected system of electronic health care information 
available to all doctors and patients whenever and wherever possible; 
and (2) to promote the collection of quality and outcome measures to 
facilitate pay-for-performance payment methodologies. This commenter 
referred to the Medicare Payment Advisory Commission (``MedPAC'') 
description of electronic health record clinical information technology 
and suggested that we define ``electronic health record'' to include 
applications that permit the following functions:
     Tracking patients' care over time;
     Allowing physicians to order medications, laboratory work, 
and other tests electronically and access test results;
     Providing alerts and reminders for physicians; and
     Producing and transmitting prescriptions electronically.

(See MedPAC ``Report to the Congress: Medicare Payment Policy'' at 206 
(2005) (available at http://www.medpac.gov/publications/congressional_reports/Mar05_EntireReport.pdf.) A commenter requested that we define 
``electronic health record'' broadly enough to include applications 
that capture clinical trial data. Another commenter did not think it 
was in the best interest of the industry for us to propose such a 
definition at this time.
    Response: For the purpose of this regulation, we are adopting a 
broad definition of ``electronic health record'' to read as follows: 
``A repository of consumer health status information in computer 
processable form used for clinical diagnosis and treatment for a broad 
array of clinical conditions.'' We are adopting a broad definition 
consistent with our goal of encouraging widespread adoption of 
electronic health records technology.
    Comment: A commenter stated that the term ``electronic health 
record,'' as used in the proposed rule, is inconsistent with the same 
terminology when used within the information technology industry, and 
is therefore confusing. The commenter suggested that we may have meant 
to use the term ``electronic medical record.'' According to the 
commenter, an ``electronic health record'' is commonly used to describe 
the broad concept of the total health care data that exists regarding 
an individual within an electronic universe (including, for example, 
the patient's personal health record, medication history stored by an 
insurance plan, electronic imaging results stored at a hospital, etc.). 
An ``electronic medical record'' typically refers to patient-centric, 
electronically maintained information about an individual's health 
status and care that focuses on tasks and events related to patient 
care, is optimized for use by a physician, and relates to care within a 
single clinical delivery system.
    Response: We recognize that there are several ways in which 
information technology terms are used, including the terminology 
``electronic health record'' and ``electronic medical record.'' For 
purposes of this exception, we have opted to use the term ``electronic 
health record,'' and we have included a definition of ``electronic 
health record'' in this final rule.
    Comment: We solicited comments on whether we should require that, 
in order to qualify for protection under this exception, electronic 
health records software include a computerized physician order entry 
(``CPOE'') component. Many commenters stated that, without either 
agreed upon standards or product criteria, a CPOE component should not 
be required. These commenters noted that CPOE and electronic 
prescribing functionalities can be quite similar and may be redundant. 
These commenters were concerned that mandating implementation of CPOE 
technology along with electronic health records software could deter 
development of either system. Another commenter noted that most of the 
off-the-shelf generic CPOE programs have proven ineffective to date. 
Some commenters supported permitting CPOE as part of the electronic 
health records software, as long as it is not a particular type of 
CPOE.
    Response: We are not persuaded to require that electronic health 
records technology include a CPOE component in order to qualify for 
protection under this exception. We note that nothing in this exception 
mandates the implementation of any particular technology or functions.
    Comment: Most commenters opposed our proposal to require that 
electronic health records software be compatible with Public Health 
Information Network (``PHIN'') preparedness standards or BioSense 
standards in order to qualify for the protection of this exception. 
These commenters pointed out that there is currently no industry 
consensus on preparedness standards, nor are there product 
certification criteria established for these programs. These commenters 
were concerned that clinicians and patients may be alarmed by the idea 
of clinician systems being linked to government systems for 
biosurveillance purposes.
    Response: We are not including this requirement in the final 
exception.
c. ``Necessary and Used Solely'' and Technical and Functional 
Equivalence
1. Interpretation of ``Necessary''
    We proposed interpreting ``necessary'' in the electronic health 
records exception consistent with our interpretation of the term in 
section

[[Page 45154]]

II.A.1 of the proposed rule in the exception for electronic 
prescribing.
    Comment: Some commenters asked whether our proposal to protect 
certain technology necessary and used to ``receive, transmit, and 
maintain'' electronic health records would include technology used to 
develop, implement, operate, facilitate, produce, and supplement 
electronic health records.
    Response: We intend that the final rule will encompass the types of 
uses described by the commenters. To make this intent clear, we have 
clarified the final rule to provide that the protected technology must 
be necessary and used predominantly to ``create, maintain, transmit, or 
receive'' electronic health records.
    Comment: One commenter requested that we clarify that the term 
``necessary'' would not preclude the provision of outpatient-focused 
(also referred to as ``ambulatory-focused'') electronic health records 
software to physicians who may already have access through the internet 
or otherwise to an inpatient-focused electronic health records systems.
    Response: The final rule does not preclude the provision of 
outpatient or ambulatory electronic health records software to 
physicians who already have access to inpatient-focused systems.
2. Technical and Functional Equivalence
    We proposed requiring the physician recipient of donated electronic 
health records technology to certify that the items and services to be 
provided are not technically or functionally equivalent to items or 
services the physician already possesses or has obtained. The proposed 
exception would have required that the certification be updated before 
the provision of any necessary upgrades or items and services not 
reflected in the original certification. We expressed our concern that 
the certification process would be ineffective as a safeguard against 
program or patient abuse if it were a mere formality or if physicians 
simply executed a form certification provided by a donor. Therefore, we 
proposed that the donor must not have actual knowledge of, and 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 
and that the exception would protect the physician only if the 
certification were truthful.
    Comment: Several commenters requested further clarification 
regarding the meaning of ``technically or functionally equivalent'' and 
the meaning of ``significantly enhance the functionality'' as we used 
those terms in the proposed rule. Other commenters expressed concerns 
about the requirement, asserting that it would deter physicians who are 
not technology experts from adopting health information technology, and 
might result in physicians hiring costly technology consultants to 
evaluate their existing systems. A commenter expressed concern that the 
exception not hinder the goals of widespread adoption of electronic 
health records by, for example, excluding from protection technology 
that would standardize the technology used by all physician recipients 
or updated, user-friendly technology that would replace outdated, 
outmoded, or unusable technology. For these reasons, several commenters 
stated that technical and functional equivalence was not an appropriate 
or workable standard for assessing whether donated items and services 
are necessary and that, accordingly, the requirement should not be 
adopted. Other commenters suggested modifications to the proposed rule. 
One commenter suggested that hospitals should incorporate inquiries 
regarding the technological items and services physicians possess into 
the surveys physicians must complete to acquire and maintain physician 
privileges. Another suggested that any costs associated with the 
certification process should be included as part of the services 
offered by the donor. A few commenters suggested that we should provide 
financial assistance in evaluating the existing technology, while 
another commenter proposed that we publish guidelines for technological 
equivalence upon which all donors and physicians could rely. Some 
commenters urged that the certification requirement incorporate a 
``good faith'' standard for compliance, while other commenters 
expressed concern that donors would not be in a position to evaluate 
the technology already possessed by potential physician recipients and, 
therefore, that protection under this exception for donors should not 
hinge on the physician's certification. Another commenter requested 
that we provide ``templates'' for the written certification to ensure a 
simple and transparent certification process. One commenter expressed 
concern that a requirement for ongoing certification to account for 
upgrades or new software, hardware, or services would create an 
unnecessary burden. Another commenter proposed that there should be one 
certification required once interoperability standards for all health 
information technology components are finalized.
    Response: Having considered the public comments, we have concluded 
that our proposal to require physicians to certify in writing that they 
do not possess equivalent technology might become unnecessarily 
burdensome. We are not requiring a written certification. The final 
exception requires that protected donations be limited to electronic 
health records software or information technology and training services 
that are necessary and used predominantly to create, maintain, 
transmit, or receive electronic health records. We do not believe 
software and services are ``necessary'' if the physician recipient 
already possesses the equivalent software or services. The provision of 
equivalent items and services poses a risk of abuse, since such 
arrangements potentially confer independent value on the recipient 
(that is, the value of the existing items and services that might be 
put to other uses) unrelated to the need for electronic health records 
technology. Thus, if a donor knows that the physician already possesses 
the equivalent items or services, or acts in deliberate ignorance or 
reckless disregard of that fact, the donor will not be protected by the 
exception. Thus, prudent donors may want to make reasonable inquiries 
to potential physician recipients and document the communications. We 
do not believe this requirement necessitates the hiring of technical 
experts by either the donor or physician recipient.
    The final exception would not preclude upgrades of items or 
services that enhance the functionality of the physician's existing 
technology, including upgrades that make software more user-friendly or 
current, nor would it preclude items and services that result in 
standardization of systems among donors and physicians, provided that 
the standardization enhances the functionality of the electronic health 
records system (and any donated software is interoperable).
    Comment: Many commenters requested further clarification of our 
concern about the risk of physicians intentionally divesting themselves 
of technically or functionally equivalent technology that they already 
possess or have obtained in order to shift costs to the donor. (See 
October 11, 2005 proposed rule, (70 FR 59188).) These commenters 
expressed the opinion that physicians would not intentionally divest 
themselves of health information technology given the low adoption rate 
of health information technology and the time and resource commitment

[[Page 45155]]

necessary to implement and maintain a health information technology 
system.
    Response: Although we believe that there is a real potential for a 
physician to divest intentionally himself or herself of health 
information technology to shift the costs to a donor, we are not 
including any specific conditions to address such divestiture. Rather, 
we believe that the totality of the conditions in the final exception, 
including, for example, the cost sharing requirement and the sunset 
provision, should adequately address our concerns. We believe that 
physicians, acting as prudent buyers, are less likely to divest 
themselves of technology for which they would have to contribute to the 
replacement cost.
d. Interoperability/Standards
    The implementation of electronic health information technology is a 
national priority that has the potential to improve our health care 
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.
    As discussed in the proposed rule, 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 also 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 clinical decision-making inappropriately. We 
proposed two types of conditions that would make compatibility and 
interoperability of donated technology key features of protected 
arrangements. These features would encourage the adoption of open, 
interconnected, interoperable systems, and thereby reduce the risk of 
fraud and abuse. First, we proposed that once interoperability and 
other product criteria have been recognized, electronic health records 
technology should be certified in accordance with standards adopted by 
the Secretary. Second, we proposed that a donor (or entity acting on 
behalf of the donor) not limit or restrict the use of the technology 
with other electronic prescription or health records systems, or 
otherwise impose barriers to compatibility.
    Comment: Many commenters advocated a requirement that all donations 
meet the Certification Commission for Healthcare Information Technology 
(CCHIT) approved certification levels of functionality, 
interoperability, and security. One commenter suggested that we measure 
interoperability based on accepted, consensus-driven standards that are 
already in place, such as the Electronic Health Record-Lab 
Interoperability and Connectivity Standards or other interoperability 
standards adopted by the Federal government as part of the Consolidated 
Health Informatics initiative (see http://www.hhs.gov/healthit/chi.html). Some commenters expressed concern that clinicians who adopt 
health information technology before the existence of final 
certification standards would be unfairly penalized. These commenters 
were also concerned about the chilling effect on some early adoption 
arrangements where certification standards are not yet available. These 
commenters requested that we consider ``grandfathering'' clinicians 
whose existing health information technology systems are not compliant 
with the certification standards by permitting them a one-time 
opportunity to upgrade their systems to be compliant with CCHIT 
certification criteria. As an alternative to requiring CCHIT 
certification, a few commenters recommended that we condition the 
ongoing use of the exception on the donated software being capable of 
exchanging health care information in compliance with applicable 
standards once adopted by the Secretary and on no action being taken 
that would pose a barrier to the information exchange.
    Response: Having considered the options, and consistent with 
Department policy, we have concluded that software will qualify for the 
protection of the exception if it is interoperable as defined in this 
final rule. Software will be deemed to be interoperable if it is 
certified by a certifying body recognized by the Secretary. Nothing in 
the final rule precludes donors from providing physicians with upgrades 
to software that meet the definition of ``interoperable'' or would make 
the software comply with then-existing certification standards.
    Comment: We indicated in the October 11, 2005 proposed rule (70 FR 
59186) that we were considering defining the term ``interoperable'' for 
purposes of the exception to mean ``the ability of different operating 
and software systems, applications, and networks to communicate and 
exchange data in an accurate, secure, effective, useful, and consistent 
manner.'' One commenter agreed with this proposed definition. Another 
commenter suggested that we adopt the definition developed by the 
National Alliance for Health Information Technology (NAHIT): ``the 
ability of different information technology systems and software 
applications to communicate, to exchange data accurately, effectively, 
and consistently, and to use the information that has been exchanged.'' 
One commenter suggested that the definition of interoperability be 
flexible enough to adapt to evolving industry standards. A few 
commenters suggested defining interoperability as ``the uniform and 
efficient movement of electronic healthcare data from one system to 
another, such that clinical or operational purpose and meaning of the 
data is preserved and unaltered.'' One commenter opposed any definition 
of interoperability that would require a donor to support electronic 
transmissions from technology supplied by other vendors or to host 
applications accessible by software supplied by other vendors.
    Response: Having reviewed the public comments and upon further 
consideration, we are defining ``interoperable'' to mean that, at the 
time of the donation, the software is ``able to (1) communicate and 
exchange data accurately, effectively, securely, and consistently with 
different information technology systems, software applications, and 
networks, in various settings, and (2) exchange data such that the 
clinical or operational purpose and meaning of the data are preserved 
and unaltered.''
    Interoperability must apply in various settings, meaning that the 
software must be interoperable with respect to systems, applications, 
and networks that are both internal and external to the donor's or 
physician recipient's systems, applications, and networks. In other 
words, software will not be considered interoperable if it is capable 
of communicating or exchanging data only within a limited health care 
system or community.
    We believe this definition reflects our intent to protect only 
those

[[Page 45156]]

arrangements that will foster 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 undue risk that donors might use arrangements to lock in 
referrals from physician recipients.
    We are mindful that the ability of software to be interoperable is 
evolving as technology develops. In assessing whether software is 
interoperable, we believe the appropriate inquiry is whether the 
software is as interoperable as feasible given the prevailing state of 
technology at the time the items or services are provided to the 
physician recipient. Parties should have a reasonable basis for 
determining that software is interoperable. We believe it would be 
appropriate--and, indeed, advisable--for parties to consult any 
standards and criteria related to interoperability recognized by the 
Department. Compliance with these standards and criteria will provide 
greater certainty to donors and recipients that products meet the 
interoperability requirement, and may be relevant in an enforcement 
action. We note further that parties wishing to avoid any uncertainty 
can avail themselves of the ``deeming'' provision, which provides that 
software that is certified by a body recognized by the Secretary will 
be deemed to be interoperable for purposes of the exception. In order 
to ensure interoperability, products must have an up-to-date 
certification at the time of donation, and we are requiring that, to 
meet the deeming provision, the software must have been certified 
within 12 months prior to the date of the donation.
    We are including the condition that the donor (or any person on the 
donor's behalf) must not take any actions to limit or restrict the 
ability of the items or services to be interoperable with other 
electronic prescription information items or services or electronic 
health information systems. We believe this condition clearly reflects 
our intent that donors should not limit or restrict the use, 
compatibility, or interoperability of donated technology. We note that 
compliance with the condition in Sec.  411.357(w)(3) is a separate 
requirement from compliance with Sec.  411.357(w)(2), which requires 
that products must be interoperable and will be deemed interoperable if 
a certifying body recognized by the Secretary has certified the 
software within no more than 12 months prior to the date it is provided 
to the physician. For example, if a donor takes actions that would 
cause a certified product to fall out of compliance with the 
interoperability standards that apply to the certified product, we 
would consider that to be an action to limit or restrict the use or 
compatibility of the items or services for purposes of Sec.  
411.357(w)(3). We are not persuaded to protect arrangements where use, 
compatibility, or interoperability is limited to the products of 
specific vendors. To the contrary, we believe that inherent in the 
concept of interoperability is the ability of technology to communicate 
with products of other vendors.
    Comment: Many commenters supported the proposed prohibition against 
donors or their agents taking any actions to disable or limit 
interoperability or otherwise impose barriers to compatibility of the 
donated technology with other technology, including technology owned or 
operated by competing providers and suppliers.
    Response: We have revised Sec.  411.357(w)(3) to clarify this 
requirement in the final exception. We believe this condition will help 
ensure that donations of health information technology will further the 
policy goal of fully interoperable health information systems and will 
not be misused to steer business to the donor.
2. Permissible Donors and Physician Recipients
a. Donors
    We proposed to limit the scope of protected donors under the 
electronic health records exception to hospitals, group practices, PDP 
sponsors, and MA organizations, consistent with the MMA-mandated donors 
for the electronic prescribing exception. We indicated that we selected 
these donors because they have a direct and primary patient care 
relationship and a central role in the health care delivery 
infrastructure that would justify protection under the exception for 
the provision of electronic health records technology that would not be 
appropriate for other types of providers and suppliers, including 
providers and suppliers of ancillary services.
    Comment: Most commenters stated that the proposed scope of 
potential donors was too limited. Commenters variously suggested that 
the protected donors include some or all of the following categories:
     Nursing facilities;
     Assisted living and residential care facilities;
     Intermediate care facilities for persons with mental 
retardation;
     Mental health facilities;
     Organizations providing population health management 
services (such as disease and care management programs and services);
     All components of an integrated delivery system (``IDS'') 
(including network providers or other entities that operate, support, 
or manage network providers);
     Clinical laboratories;
     Pharmaceutical manufacturers;
     Durable medical equipment suppliers;
     Radiation oncology centers;
     Community health centers;
     Physician-hospital organizations;
     Health plans;
     Regional Health Information Organizations (``RHIOs'');
     Dialysis facilities; and
     Other entities that, in the commenters' views, enhance the 
overall health of a community.
    One commenter representing dialysis facilities suggested that the 
exception should protect donations of nonmonetary remuneration by all 
providers that maintain medical staffs pursuant to medical staff bylaws 
when the donations are made to members of the medical staff. Another 
commenter suggested that a clinical data exchange (or community-wide 
health information system) should be included as a protected donor, 
because individual stakeholders in health information technology 
projects are unlikely to develop, purchase, or donate items necessary 
to implement and maintain a true community-wide clinical data exchange. 
A few commenters stated that health plans and pharmacy benefits 
managers (PBMs) should be protected donors because, according to the 
commenters, these entities develop health information technology and 
are engaged with physicians on a direct level to increase the 
utilization of electronic prescribing and electronic health records 
technology. These commenters urged that the risk to the Medicare 
program and its beneficiaries is reduced because health plans and PBMs 
have business incentives to limit utilization of prescriptions. A few 
commenters suggested that we should permit any entity that has an 
interest in donating health information technology to do so.
    Response: Recognizing that extending the protection of the 
exception to a wider group of donors may further facilitate the 
dissemination of the technology and after carefully considering the 
recommendations of the commenters, we have expanded the list of 
protected donors. In an effort to create a bright line rule, protected 
donors include all entities (as that term is defined at Sec.  411.351) 
that furnish DHS. DHS entities may donate covered

[[Page 45157]]

technology to any physician. To the extent that a PDP sponsor or MA 
organization is an entity that furnishes DHS, donations of electronic 
health records software or information technology and services by the 
PDP sponsor or MA organization would be permissible, provided that all 
conditions of the exception are met. (When PDP sponsors and MA 
organizations do not satisfy that definition, the physician self-
referral prohibition may not be implicated.) Moreover, PDP sponsors and 
MA organizations potentially may avail themselves of other existing 
exceptions.
    In identifying the final list of protected donors, we considered 
the important goal of encouraging the rapid adoption of interoperable 
electronic health records by physicians and other providers. We believe 
that, although some types of DHS entities may have a more direct and 
central role in the provision of care to patients than other DHS 
entities, the goal of widespread adoption of interoperable electronic 
health records is sufficiently important to permit all types of DHS 
entities to donate covered technology. Expanding the list of 
permissible donors beyond those identified in the proposed rule will 
expedite adoption of electronic health records. We also believe that 
our concerns about the potential for increased utilization or 
anticompetitive behavior that could arise from permitting an expanded 
list of donors to donate electronic health records technology are 
addressed through the additional conditions and limitations included in 
the final rule. Specifically, we believe that the requirements that 
donated software be interoperable and that physicians contribute 15 
percent to the cost of the donated technology, and the limited duration 
of the exception (it sunsets on December 31, 2013), if met, provide 
adequate protection against program and patient abuse. We caution that 
compliance with each condition of the exception is mandatory in order 
for an arrangement to enjoy the protection of the exception. We are not 
expanding the list of protected donors to include every type of health 
care entity requested by the commenters as the physician self-referral 
law does not apply to many of the suggested entities (for example, 
pharmaceutical manufacturers and RHIOs). In addition, as discussed in 
this preamble, protection under this exception may not be needed for 
all arrangements involving the provision of electronic health records 
items and services.
    Comment: A commenter requested that Federally qualified health 
clinics (FQHCs), as defined in the Medicaid statute and Medicare 
regulations, should be included as permissible donors.
    Response: As entities furnishing DHS, FQHCs are protected donors 
under the final rule.
    Comment: A commenter requested that we expand the list of 
permissible donors to include research and manufacturing entities and 
suggested that blind trusts could be established utilizing funds from 
several pharmaceutical companies to reduce the risk of program or 
patient abuse. Another commenter requested that we include entities in 
the research-based biopharmaceutical industry as permissible donors, 
noting that the widespread adoption of health information technology 
could reduce the need for proprietary systems used solely for purposes 
of clinical trial programs. One commenter requested that health 
information technology vendors be included as protected donors.
    Response: We are not including research and manufacturing entities, 
entities in the research-based biopharmaceutical industry, or health 
information technology vendors as protected donors for purposes of this 
final exception because they are not subject to the prohibitions of the 
physician self-referral law as they are not entities furnishing DHS. 
With respect to the establishment of blind trusts, such arrangements 
would be outside the scope of this rulemaking.
    Comment: One commenter strongly urged us to expand the list of 
protected donors to give physicians the opportunity to choose between 
different software offerings. Other commenters suggested that the 
exception should require an open, transparent Request for Proposal 
(``RFP'') process whereby the donating entity would be required to 
offer technology from a minimum of three vendors for the physician to 
select. These commenters expressed the view that a multivendor, open 
RFP process would ensure competitive market pricing and would allow 
physicians to participate in the selection process to ensure that 
services meet the needs of their clinical practices, while also 
protecting against the physician being locked in by the donating 
entity. Another commenter requested that the final rule clearly state 
that physicians should be free to choose their own electronic health 
records systems or should be offered a choice by entities providing 
subsidies or assistance for purchasing these systems.
    Response: Physicians remain free to choose any electronic health 
information technology that suits their needs. However, we are not 
requiring donors to facilitate that choice for purposes of the 
exception, although donors must offer interoperable products and must 
not impede the interoperability of any technology they decide to offer. 
We decline to require the type of RFP process requested by the 
commenter, as it would be unnecessarily complex, burdensome and 
impractical, and would increase significantly the transaction costs for 
donating electronic health records technology. In addition, nothing in 
this exception requires donors to donate any particular level, scope, 
or combination of items and services.
    Comment: Commenters from the laboratory industry strongly urged us 
to include laboratories as protected donors. They argued that reducing 
duplicative laboratory testing is a potential benefit to the 
implementation of interoperable electronic health records. These 
commenters stated that clinical laboratories should be included in the 
exception to achieve a level playing field and the goal of widespread 
adoption of technology.
    Response: Because clinical laboratories are entities furnishing 
DHS, we are including them as permissible donors under the final 
exception.
    Comment: A commenter suggested that the exception should protect 
nonmonetary remuneration offered by partnerships or consortia of 
otherwise permissible donors, so that parties could work together and 
share the cost of expanding needed health information technology in the 
community.
    Response: We discern nothing in the final exception that 
necessarily would preclude a partnership or consortium of otherwise 
permissible donors from entering into a protected arrangement, provided 
the conditions of the exception are satisfied.
b. Physician Recipients
    Comment: Most commenters expressed the view that the categories of 
protected physician recipients were too limited and urged us to be more 
expansive. Commenters suggested that some or all of the following 
should be included as permissible recipients:
     Nonmedical staff physicians;
     Physicians who are network providers;
     Physicians who have contracted with an IDS;
     Physicians and other licensed health care professionals 
whose patients regularly receive inpatient and/or outpatient care at 
the donor hospital or health system;
     Hospitalists;
     Intensivists;

[[Page 45158]]

     Physician assistants;
     Nurse practitioners;
     Audiologists; and
     Independent contractors of group practices.
    Commenters noted that many nonphysician providers would benefit 
greatly from protection under this exception, given the fact that 
nonphysician providers generally have limited resources available to 
fund office technology.
    Response: We agree with the commenters who suggested expanding the 
list of protected physician recipients of donated technology to further 
the goal of, and achieve the benefits of, widespread adoption of 
electronic health information technology. The final rule permits 
donation of protected remuneration by an entity that furnishes DHS to 
any physician. Because the physician self-referral law only applies to 
donations to physicians, it is unnecessary for us to expand the 
exception to protect donations to nonphysicians.
    Comment: Many commenters suggested that the categories of 
permissible recipients be expanded to include the following providers 
and suppliers and their staffs:
     Nursing facilities;
     Assisted living and residential care facilities;
     Intermediate care facilities for persons with mental 
retardation;
     Mental health facilities;
     Clinical laboratories;
     Durable medical equipment providers;
     Pharmacies, including long term care pharmacies;
     Community health centers;
     Network providers or other entities that operate, support 
or manage network providers;
     Physician-hospital organizations;
     Health plans;
     RHIOs; and
     Other entities designed to enhance the overall health of 
the community.
    Commenters also requested that FQHCs, as defined in the Medicaid 
statute and Medicare regulations, should be included as permissible 
recipients.
    Response: We decline to adopt the commenters' suggestion for 
permitting donations to these types of entities and their staffs. We 
note that the physician self-referral law applies only when a physician 
is a party to the financial (either compensation or ownership) 
arrangement. Donations to the types of entities suggested by the 
commenters for inclusion as permissible recipients under the final 
exception would not implicate the physician self-referral law if made 
by other nonphysician entities.
    Comment: Many commenters requested that we permit donors to donate 
technology to all members of a group practice, or to the group practice 
as a whole, even if all members do not routinely provide services to 
the donor. Some commenters suggested that we should permit group 
practices to donate to other group practices. One commenter asked for 
clarification as to whether the proposed exception would apply only to 
the specific physician recipient of the donated technology or whether, 
for example, all members of a group practice could use the technology 
that was donated to the physician.
    Response: The final rule contains no limitation on the physician's 
membership on a donor hospital's medical staff. The final exception 
does not protect donations from one group practice to another group 
practice; however, group practices, because they are entities that 
furnish DHS, may donate covered technology to any physician.
    Comment: Some commenters stated that a hospital donor may not want 
to donate the full value of an electronic health records system to 
physicians outside of its medical staff. These commenters suggest 
permitting outside physicians to have access to the information in the 
hospital's electronic health records system by allowing the outside 
physicians to use or sublicense the hospital's electronic health 
records system at the cost to the hospital. These commenters also 
suggested allowing outside physicians to take advantage of the pricing 
obtained by the hospitals for electronic health records technology and 
related services.
    Response: We have expanded the final exception to include all 
physicians as recipients when the donor is an entity that furnishes 
DHS. Nothing in the exception requires hospitals or other donors to 
offer physicians a full electronic health records system. We interpret 
the commenters' suggestion that community physicians be permitted to 
access electronic data at the hospital's cost to be a comment seeking 
clarification that any aggregate dollar limit on donated technology be 
calculated based on the donor's costs rather than retail value to the 
recipient. In this regard, the final exception incorporates a cost 
sharing requirement based on the donor's costs. It does not incorporate 
an aggregate dollar limit.
3. Selection of Physician Recipients
    In light of the enhanced protection against program or patient 
abuse offered by interoperable electronic health records systems, this 
final rule permits donors to use selective criteria for choosing 
physician recipients, provided that neither the eligibility of a 
physician, nor the amount or nature of the items or services donated, 
is determined in a manner that directly takes into account the volume 
or value of referrals or other business generated between the parties. 
We have enumerated several selection criteria which, if met, are deemed 
not to be directly related to the volume or value of referrals or other 
business generated between the parties (for example, a determination 
based on the total number of hours that the physician practices 
medicine or a determination based on the size of the physician's 
medical practice). Selection criteria that are based on the total 
number of prescriptions written by a physician are not prohibited. 
However, the final rule prohibits criteria based upon the number or 
value of prescriptions written by the physician that are dispensed or 
paid by the donor, as well as any criteria directly based on any other 
business generated between the parties. The final exception does not 
protect arrangements for which selection criteria are designed to 
induce a physician to change loyalties from other providers or plans to 
the donor.
    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 electronic health records, while 
discouraging especially problematic direct correlations with Medicare 
referrals. This approach is a deliberate departure from other 
exceptions under the physician self-referral law based on the unique 
public policy considerations surrounding electronic health records and 
the Department's goal of encouraging widespread adoption of 
interoperable electronic health records. We caution, however, that 
outside of the context of electronic health records as specifically 
addressed in this final 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 free or deeply discounted goods 
or services and the volume or value of referrals or other business 
generated between the parties are prohibited.
    Comment: Several commenters commended us for our efforts to prevent 
program or patient abuse by prohibiting efforts to increase referrals 
or other changes in practice patterns. Some commenters noted that we 
should not allow donors to choose physicians selectively based upon the 
volume of their prescribing, size of practice, or

[[Page 45159]]

whether they would be likely to adopt the technology, and stated that 
donors should give technology to all physicians.
    One commenter suggested eliminating the criteria permitting donors 
to select physicians based on any reasonable and verifiable manner that 
is not directly related to the volume or value of referrals or other 
business generated between the parties. The commenter stated that this 
criteria is too open-ended and subjective and could become a major 
loophole. Other commenters supported the use of such criteria and 
expressed the view that the use of selection criteria to select 
physician recipients will improve quality of care and ensure successful 
adoption of health information technology by physicians. These 
commenters offered suggestions on the standards for selection criteria. 
Some commenters suggested that we consider broad criteria for the 
selection of physicians, and that donors should be permitted to make 
this decision based upon their own financial model.
    A commenter recommended that selection criteria related to the 
volume or value of referrals should be permitted, as long as the 
criteria are linked to achieving greater improvement in quality of 
patient care or greater success in adoption of health information 
technology. The commenter provided the following examples:
     Participation in hospital quality improvement activities;
     Participation in medical staff meetings and activities;
     Specialty;
     Department (if health information technology is rolled out 
by department);
     Readiness to use health information technology;
     Consistent use of hospital-based information technology 
systems;
     Acting as a ``physician champion'' of hospital-based 
information technology systems;
     Willingness to serve as a trainer for other physicians;
     Size of medical practice; or
     Willingness to contribute some resources to the health 
information technology project.
    Another commenter requested that any list of criteria included in 
the rule be inclusive, rather than exclusive, and that we provide 
further guidance on how to interpret the criteria.
    Response: Some of the commenters' suggestions are too subjective, 
impractical, or not sufficiently bright-line to be ``deeming'' 
provisions for purposes of this rulemaking. Accordingly, those 
suggestions are not appropriate here. Although we believe it is 
important to provide some guidance with respect to selection criteria, 
we do not believe it is possible to enumerate a comprehensive list. 
Therefore, we are providing several bright-line criteria in the final 
rule, along with a general provision that permits other reasonable and 
verifiable selection criteria that do not relate directly to the volume 
or value of referrals. We are finalizing the criteria enumerated in the 
proposed rule, in addition to a criterion related to the provision of 
uncompensated care, specifically--
     The determination is based on the total number of 
prescriptions written by the physician (but not the volume or value of 
prescriptions dispensed by the donor);
     The determination is based on the size of the physician's 
medical practice (for example, total patients, total patient 
encounters, or total relative value units);
     The determination is based on the total number of hours 
that the physician practices medicine;
     The determination is based on the physician'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);
     The determination is based on whether the physician is a 
member of the donor's medical staff, if the donor has a formal medical 
staff;
     The determination is based on the level of uncompensated 
care provided by the physician; or
     The determination is made in any reasonable and verifiable 
manner that does not directly take into account the volume or value of 
referrals or other business generated between the parties.
    Comment: Some commenters inquired whether the exception would 
permit a donor to offer a staggered rollout of electronic health 
records technology so that the technology could be provided on a 
selective basis, either by specialty, hospital department, or 
otherwise. These commenters suggested that the exception should not 
enumerate specific examples of instances when a staggered offering is 
deemed ``not directly related to'' referrals or other business, but 
rather should allow donors to offer health information technology as 
appropriate for each hospital's individual financial situation.
    Response: The final rule prohibits the selection of recipients 
using any method that takes into account directly the volume or value 
of referrals from the recipient or other business generated between the 
parties. The final rule provides some examples of acceptable criteria 
and permits any other determination that is reasonable and verifiable. 
Given the potential variation in arrangements, it is not entirely clear 
to us how the commenters would implement their ``staggered rollout.'' 
Such arrangements should be evaluated for compliance with the exception 
on a case-by-case basis. We note that nothing in the exception requires 
that technology be provided to all potential recipients 
contemporaneously.
    Comment: One commenter recommended that we reaffirm that physicians 
who receive donated technology remain free to choose what health 
information may or may not be shared with the hospital or entity 
providing the technology, consistent with current law and the wishes of 
patients and physicians.
    Response: Nothing in this final rule regulates the sharing of 
health information. In addition, nothing in this final rule permits 
donors to influence the medical decision making of physicians or 
requires physicians to act in a manner that would violate any legal or 
ethical obligation to patients.
    Comment: A commenter requested that we prohibit donors from 
selecting physicians in a manner that punishes or rewards past 
prescribing practices or influences their future prescribing practices. 
Another commenter recommended that we expressly permit any incidental 
increase to the volume of referrals resulting from increased quality 
and patient care.
    Response: Any selection criteria directly related to past, present, 
or future volume of prescriptions dispensed or paid by the donor or 
billed to the Medicare program, or directly related to any other 
business generated between the parties, are strictly prohibited. Any 
selection criteria that punish or reward past prescribing practices or 
seeks to influence future prescribing practices would give rise to an 
inference that the selection criteria are tied directly to the volume 
or value of referrals. We are not adopting the commenter's suggestion 
that we expressly permit increases in the volume of referrals 
attributable to increased quality in patient care. Whether an increase 
in the volume of referrals between a donor and physician recipient is 
attributable to increased quality in patient care, rather than an 
impermissible incentive, requires an evaluation of the particular facts 
and circumstances.
    Comment: A commenter requested that PDP sponsors and MA 
organizations be permitted to determine eligibility, or the amount or 
nature of the items and services, in a manner that takes into account 
the volume and value of prescriptions written by the

[[Page 45160]]

physician that are paid by the PDP sponsor or MA organization. This 
commenter believes that PDP sponsors and MA organizations have the 
financial incentive to control drug utilization costs to compete 
effectively in the Medicare Part D marketplace.
    Response: We are not persuaded by this commenter. Neither 
eligibility, nor the amount or nature of the items or services, may be 
determined by taking into account the volume or value of prescriptions 
written by the physician and paid by the PDP sponsor or MA 
organization. Nothing in the exception precludes PDP sponsors and MA 
organizations from offering protected items and services to physicians 
with whom they have network agreements.
    Comment: One commenter requested that we protect donations when 
provided to a physician who provides a certain level of uncompensated 
care or a combination of uncompensated care and services to a certain 
number of Medicaid patients.
    Response: The provision of uncompensated care would be an 
acceptable selection criterion and we have included it in the list of 
selection criteria deemed not to be directly related to the volume or 
value of referrals or other business generated between the donor and 
physician recipient. For example, a hospital can elect to provide 
technology only to rural and solo practitioners who provide high levels 
of uncompensated care when selecting among eligible physicians. The 
total number of Medicaid patients served by the practice could also be 
acceptable as long as there is no direct correlation with the number of 
Medicaid patients referred to the donor (or the value of the services 
provided). We do not believe it would be appropriate for us to 
establish a threshold level of uncompensated care necessary to qualify 
for protection under this exception. Donors should have flexibility to 
respond to the particular needs of their communities by selecting 
recipients based on levels of uncompensated care that reflect those 
needs.
4. Value of Technology: Cap
    We proposed, as a further safeguard against program or patient 
abuse, to limit the aggregate value of the qualifying electronic 
prescribing technology that a donor could provide to a physician. We 
solicited public comment on the applicable amount and methodology for 
limiting the aggregate value of donated technology.
    We also indicated that we were considering setting an initial cap, 
for both the electronic prescribing and electronic health records 
exceptions, which could be lowered after a certain period of time 
sufficient to promote the initial adoption of the technology. This 
approach would have the effect of encouraging investments in the 
desired technology while also ensuring that (as often occurs with 
technology), as costs decrease and technology becomes more widely 
adopted, the exception cannot be abused to disguise payments for 
referrals.
    Comment: We solicited public comments that address the retail and 
nonretail costs (that is, the costs of purchasing from manufacturers, 
distributors, or other nonretail sources). Only a few commenters 
provided concrete information on the cost of health information 
technology, while most commenters simply noted that the cost was high, 
financial incentives were imperative, and adoption was not equally 
affordable by all sectors of the health care industry.
    Response: We appreciate commenters providing this information, and 
we have considered this information in finalizing the exception. Again, 
we note that the Administration supports the adoption of health 
information technology as a normal cost of doing business to ensure 
patients receive high quality care.
    Comment: Most commenters shared the opinion that there should not 
be a cap on the value of donated technology, stating that there is not 
a consistent or appropriate way to determine fair market value or 
establish a monetary cap that would accommodate all situations and 
account for the rapid advancement in technology. Some commenters 
believe that the attempt to ascertain the value of donations for the 
purpose of fraud protection could become a barrier to adoption of 
electronic health records, unnecessarily discourage potential donors 
from providing technology, or result in a reduction on the ``return on 
investment'' for electronic prescribing and electronic health records 
technology. Other commenters expressed concern that a low cap might 
discourage the implementation of electronic health records technology, 
while a high cap may serve to pressure hospitals to provide the maximum 
allowable amount. However, a few commenters shared our concern that 
allowing donors to provide items or services without limiting the value 
of such support could provide a potential for program or patient abuse.
    One commenter asserted that the value of donations will be self-
limiting, because donors are unlikely to spend more than is necessary, 
thereby eliminating the need for a cap. Another commenter argued that a 
cap is not necessary as long as the donation is made without limiting 
or restricting the use of the electronic prescribing or electronic 
health records technology to services provided by the donating entity, 
and as long as the donation does not take into account the volume or 
value of referrals or other business generated between the parties.
    Response: We agree with the commenters that determining the value 
of donated technology poses certain difficulties and we are not 
including a cap on the amount of protected donations in the final 
exception. While gifts of valuable items and services to existing or 
potential referral sources typically pose a high risk of program or 
patient abuse, we believe that the combination of conditions in the 
final exception should adequately safeguard against abusive electronic 
health records arrangements.
    Comment: Most commenters, while opposing the imposition of a cap, 
offered other suggestions for limiting the value of protected 
nonmonetary remuneration. Several commenters suggested a limit on the 
value of protected nonmonetary remuneration in the form of a percentage 
contribution from the physician, that is, cost sharing by the 
recipient. These commenters suggested requiring either a set percentage 
contribution by the physician or a scaled percentage contribution by 
the physician that would be lowered once a predetermined threshold 
amount was reached. Some commenters also suggested that we consider a 
cost sharing method that would be based on set amounts that would be 
donated, with the physician recipient paying any remaining costs. The 
amounts could be revised over time to account for the fluctuating 
expense of technology and other changes that may arise. One commenter 
noted that studies have shown that individuals value services more when 
they share a portion of the cost. This commenter suggested that we 
should require, at a minimum, that physicians contribute towards the 
purchase of wireless Internet access.
    Response: We agree that cost sharing is an appropriate method to 
address some of the risks inherent in unlimited donations of 
technology. Accordingly, the exception establishes a contribution 
percentage that the physician must incur. Specifically, the final rule 
offers protection under this exception only if the physician pays 15 
percent of the donor's cost of the technology. With respect to 
calculation of the costs, particularly for internally-developed 
(``homegrown'') software (that is, software that is not purchased from 
an

[[Page 45161]]

outside vendor) and internally-developed add-on modules and components 
(that is, software purchased from an outside vendor and internally 
customized to ensure operational functionality), parties should use a 
reasonable and verifiable method for allocating costs and are strongly 
encouraged to maintain contemporaneous and accurate documentation. 
Methods of cost allocation will be scrutinized to ensure that they do 
not inappropriately shift costs in a manner that provides an excess 
benefit to the physician recipient or results in the physician 
effectively paying less than 15 percent of the donor's true cost of the 
technology.
    We believe the 15 percent cost sharing requirement is high enough 
to encourage prudent and robust electronic health records arrangements 
without imposing a prohibitive financial burden on physicians. 
Requiring financial participation by a physician should result in 
selection of technology appropriate for the physician's practice and 
increase the likelihood that the physician will actually use the 
technology. Moreover, this approach requires physicians to contribute 
towards the benefits they may experience from the adoption of 
interoperable electronic health records (for example, a decrease in 
practice expenses). We note that, depending on the circumstances, a 
differential in the amount of cost sharing imposed by a donor on 
different recipients could give rise to an inference that an 
arrangement is directly related to the volume or value of referrals or 
other business generated between the parties, thus, rendering the 
arrangement ineligible for the protection of the exception. In this 
regard, the basis for the differential should be closely scrutinized.
    We also note that all donated software and health information 
technology and training services are subject to the cost sharing 
requirements. It is our understanding that many updates and upgrades 
are included in the initial purchase price of the technology and would 
not trigger additional cost sharing responsibility on the part of the 
physician at the time of the update or upgrade. Any updates, upgrades, 
or modifications to the donated electronic health records system that 
were not covered under the initial purchase agreement for the donated 
technology are subject to separate cost sharing obligations by the 
physician (to the extent that the donor incurs additional costs). To 
ensure that physician recipients incur the requisite 15 percent of the 
costs, a donor (and any party related to the donor) is prohibited from 
providing financing or making loans to the physician to fund the 
physician's payment for the technology.
    Comment: One commenter stated that we should study the issue of a 
cap since health information technology capabilities and costs are 
rapidly evolving.
    Response: As noted in the earlier responses, we are not 
implementing in the final rule a cap on the value of donations of 
electronic health records technology.
    Comment: A few commenters suggested that the final rule should 
allow donors to reimburse physicians for previously implemented 
electronic health records systems in an amount equal to the lesser of 
the fair market value of the donated technology or the cap on the value 
of donations, should a cap be adopted. These commenters also requested 
that the donor give assurance to physicians that any technology 
previously purchased that is equivalent to donated technology and meets 
the applicable interoperability standards would be integrated into the 
donor's system.
    Response: We are not adopting these suggestions. The commenters' 
suggestions go beyond the scope of the exception and appear to be a 
request for the exception to provide retroactive protection for 
previously purchased technology. The exception protects donations of 
technology that meet all of the conditions of the exception. The 
exception does not protect reimbursement for previously incurred 
expenses, as this would pose a substantial risk of program and patient 
abuse.
5. Additional Conditions
    The proposed rule also listed additional conditions including a 
restriction on conditioning business on the receipt of electronic 
health records technology, a requirement that the donor 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, and a requirement that the 
arrangement not violate the anti-kickback statute or any Federal or 
State law or regulation governing billing or claims submission.
    Comment: One commenter suggested omitting any requirement that the 
written agreement documenting the arrangement specify the covered items 
and services and their values. Another commenter requested 
clarification as to whether all parties to a three-tier technology 
arrangement (that is, the donor-distributor of the technology, the 
vendor of the technology, and the physician recipient of the 
technology) would be required to sign the written agreement required by 
the exception.
    Response: In light of the cost sharing condition of the final 
exception, we are requiring documentation of the cost to the donor of 
the donated technology, and the physician's contribution to that cost. 
Moreover, we are requiring that the cost sharing contribution be made 
and documented before the items and services can qualify for protection 
under the exception. The documentation must be specific as to the items 
and services donated, the actual cost to the donor, and the amount and 
confirmation of the physician's cost sharing obligation. The 
documentation must cover all of the electronic health records items and 
services to be provided by the donor (or any party related to the 
donor) to the physician. With respect to this requirement, we have 
added language to the final exception clarifying that the written 
documentation requirement can be satisfied by incorporating by 
reference the agreements between the parties or by the use of cross 
references to a master list of agreements between the parties that is 
maintained and updated centrally and is available for review by the 
Secretary upon request and preserves the historical record of 
agreements. Nothing in the exception requires that agreements between 
donors and physicians also be signed by third party vendors; however, 
such documentation may be a prudent business practice.
    Comment: A few commenters suggested that we not sunset the pre-
interoperability exception once the post-interoperability exception is 
finalized, as we had proposed.
    Response: We are not finalizing a separate pre-interoperability 
exception.
    Comment: One commenter suggested that the entire electronic health 
records exception sunset no later than five years from the date of 
publication of the final rulemaking, with the possibility for the 
sunset to be delayed upon an administrative finding by the Secretary 
that there is a still a need for the exception. The commenter observed 
that, in the future, electronic health records technology will be a 
standard and necessary part of a medical practice, and there will no 
longer be a need for third parties to donate it to physicians to spur 
adoption of the technology. Moreover, the commenter observed that 
incompatibility across a network of providers will cease to be an issue 
once interoperability of technology becomes the norm. For these 
reasons, the commenter concluded that the rationale for establishing an 
exception to the

[[Page 45162]]

physician self-referral law will decrease over time.
    Response: We agree with this commenter that the need for an 
exception for donations of electronic health records technology should 
diminish substantially over time as the use of such technology becomes 
a standard and expected part of medical practice. Over time, physicians 
and others who receive donated technology from third parties may begin 
to realize the economic benefits from increased efficiencies and 
quality of care, at which point they should be expected to shoulder the 
costs associated with producing any benefits. As we indicated earlier 
in this rulemaking, we are promulgating a physician self-referral 
exception for the donation of valuable technology to promote its use in 
the interests of quality of care, patient safety, and health care 
efficiency, notwithstanding the risk of fraud and abuse normally 
associated with gifts of valuable goods and services to referral 
sources. Our goal is to promote the beneficial uses of technology 
without undue risk of program or patient abuse. As the technology 
becomes widely used and an accepted part of medical practice, the 
balance of competing goals underlying the exception changes.
    A sunset provision would also address some of our concerns about 
gifts of unlimited amounts of valuable technology. As noted previously 
in this final rule, we have concluded that we cannot develop an 
appropriate cap on the amount of protected technology. A sunset 
provision, in effect, would cap the amount of protected technology that 
could be donated by third parties in a different way, thereby 
safeguarding against program and patient abuse in the long term.
    We solicited comments on our overall approach to crafting a set of 
conditions for the exception and how we might ensure that the 
conditions, taken as a whole, provide sufficient protection against 
program and patient abuse. Given the difficulties inherent in limiting 
the value of donated technology and our relaxing of the ordinary 
principle that remuneration cannot be linked in any manner to the 
volume or value of referrals, we believe that the sunset provision 
suggested by the commenter will provide appropriate additional 
protection.
    For all of these reasons, we are adopting the suggestion of the 
commenter, with modifications. We are sunsetting the exception on 
December 31, 2013. This date is consistent with the President's goal of 
adoption of electronic health records technology by 2014. (See 
President George W. Bush's Health Information Technology Plan announced 
April 26, 2004; http://www.whitehouse.gov/infocus/technology/economic_policy200404/chap3.html.) Under Sec.  411.357(w)(13), all 
donations of items and services must occur, and all conditions of the 
exception must have been satisfied, on or before December 31, 2013. 
Nothing in the exception would preclude the Secretary from extending 
the time period pursuant to notice and comment rulemaking; we do not 
believe it would be appropriate to have a condition in a regulation 
that is contingent on an administrative determination.
    We note that we are not similarly sunsetting the electronic 
prescribing exception at Sec.  411.357(v), as that exception is 
mandated by statute, and we do not have authority to limit its 
duration.
    Comment: Many commenters supported the prohibition against donors 
or their agents taking any actions to disable or limit interoperability 
or otherwise impose barriers to compatibility.
    Response: We agree and we are retaining this requirement in the 
final exception.

D. Summary of the Final Provisions Related to Sec.  411.357(w)

    Consistent with the majority of public comments, we have finalized 
one exception for arrangements involving electronic health records that 
effectively combines the pre- and post-interoperability proposals. 
Separate exceptions are no longer necessary, in part, because criteria 
for product certification are available. Therefore, we have finalized 
one exception for arrangements involving electronic health records 
software or information technology and training services necessary and 
used predominantly to create, maintain, transmit, or receive electronic 
health records.
    The final conditions for the exception, in combination, should 
promote the important national policy goal of open, interconnected, 
interoperable electronic health records systems that improve the 
quality of patient care and efficiency in the delivery of health care 
to patients, without protecting arrangements that pose a risk of 
program or patient abuse.
    In summary, the final exception includes the following conditions:
     The exception protects arrangements involving nonmonetary 
remuneration in the form of software or information technology and 
training services necessary and used predominantly to create, maintain, 
transmit, or receive electronic health records (provided all conditions 
of the exception are satisfied). We have not included hardware. We have 
clarified that the exception covers ``information technology 
services,'' including, for example, connectivity and maintenance 
services. We interpret ``training services'' to include help desk and 
other similar support. We have eliminated the language that required 
the training services to be ``directly related'' because that language 
was superfluous in light of the language requiring the training 
services to be ``necessary and used predominantly'' for electronic 
health records purposes.
     We have not adopted the proposal that the protected 
technology be used solely for electronic health records purposes. 
Instead, we have included a condition making clear that electronic 
health records purposes must predominate. Thus, depending on the 
circumstances, software that relates to patient administration, 
scheduling functions, billing, clinical support, etc., can be donated. 
We have also expressly prohibited the provision of any technology used 
primarily to conduct personal business or business unrelated to the 
physician's medical practice, as well as the provision of staff to the 
physician or the physician's office.
    To qualify for protection, at the time of donation, the software 
must be interoperable as defined at Sec.  411.351. Software will be 
deemed to be interoperable if a certifying body recognized by the 
Secretary has certified the software no more than 12 months prior to 
the date it is provided to the physician. Software must contain 
electronic prescribing capability (either in an electronic prescribing 
component or the ability to interface with the physician's existing 
electronic prescribing system) which complies with the applicable 
standards under Medicare Part D (the first set of which were 
promulgated at Sec.  423.160 (see the E-Prescribing and the 
Prescription Drug Program final rule (70 FR 67568, November 7, 2005)) 
at the time the items and services are donated. Moreover, the donor (or 
any agent of the donor) must not take any steps to disable the 
interoperability of any technology or otherwise impose barriers to the 
compatibility of the donated technology with other technology.
     The final exception protects broader categories of donors 
and physician recipients than we proposed. All entities that furnish 
DHS may make protected donations to any physician.
     This final rule clarifies that donors may select 
physicians for receipt of electronic health records technology using 
means that do not directly take into account the volume or value of

[[Page 45163]]

referrals from the physician or other business generated between the 
parties. The final rule sets forth specific criteria that will be 
deemed to meet this condition.
     The final rule does not limit the aggregate value of 
technology that may qualify for protection under this exception. It 
does contain a requirement that the physician pay 15 percent of the 
donor's costs. The donor (or any party related to the donor) may not 
fund any portion of this contribution.
     The final exception adopts the proposed documentation 
requirements and includes a requirement that the donor's costs be 
documented in the written agreement between the parties, and permits 
documentation through incorporation of other agreements between the 
parties. The final exception does not require that physicians certify 
that they do not already possess equivalent technology. However, the 
final exception does preclude protection if the donor knows that the 
physician already has equivalent technology or acts in deliberate 
ignorance or reckless disregard of that fact.
     The final exception adopts the proposed conditions related 
to use of the technology for any patient without regard to payor status 
and not conditioning business on donations.
     The final exception sunsets on December 31, 2013.

V. Collection of Information Requirements

    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 OMB should approve an information 
collection, section 3506(c)(2)(A) of the Paperwork Reduction Act of 
1995 (PRA) requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.

Section 411.357 Exceptions to the referral prohibition related to 
compensation arrangements

    We solicited public comments on the information collection 
requirements listed under Sec.  411.357(v) and Sec.  411.357(w). 
Section 411.357(v) sets forth the exception for certain arrangements 
involving the donation of electronic prescribing items and services. 
Section 411.357(w) sets forth an exception for certain arrangements 
involving the donation of interoperable electronic health records 
software or information technology and training services. Specifically, 
Sec.  411.357(v) addresses the donation of nonmonetary 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. Section 
411.357(w) addresses the donation of nonmonetary remuneration 
(consisting of items or services in the form of software or information 
technology and training services) necessary and used predominantly to 
create, maintain, transmit, or receive electronic health records. For 
the purposes of this explanation of burden, the items and services 
discussed in Sec.  411.357(v) and Sec.  411.357(w) will be collectively 
referred to as ``electronic health information technology.''
    Both Sec.  411.357(v) and Sec.  411.357(w) contain conditions for 
their respective exceptions. The conditions for both sections require 
that arrangements for the items and services provided must be set forth 
in a written agreement that is signed by the involved parties, 
specifies the items or services being provided and the cost of those 
items or services (and, in the case of the electronic health records 
exception, the amount of the physician's contribution), and covers all 
of the electronic health information technology to be provided by the 
donor.
    The aforementioned requirements associated with these exceptions 
are limited to donations made to physicians by entities furnishing DHS 
(for purposes of this Section V and Section VI, ``DHS Entities''). We 
do not know how many DHS Entities will use the exceptions that apply to 
electronic health information technology. However, we expect that few 
group practices will use either exception for donations to their 
members because existing exceptions will likely apply to permit a group 
practice to provide its physician members with electronic health 
information technology. In addition, because the donation of electronic 
health information technology is voluntary, we believe that some DHS 
Entities will not avail themselves of this exception and will therefore 
not experience any paperwork burden.
    We expect that every DHS Entity that chooses to provide electronic 
health information technology to physicians will likely use a model 
agreement that lists or describes the items and services to be donated. 
We expect that State or national organizations representing attorneys, 
physicians, group practices, and DHS Entities will create model 
agreements for their constituents. We also expect that attorneys for 
large DHS Entities (for example, academic medical centers or other 
entities that include hospitals and possibly skilled nursing facilities 
or home health agencies) will create one model agreement for use by all 
of their clients that are donors. In addition, we expect a DHS Entity 
that donates electronic health information technology to create a 
single model agreement for use for memorializing donations of 
electronic prescribing and electronic health records technology, 
because we believe that virtually no donor entity will need or want an 
agreement that is limited just to the provision of electronic 
prescribing technology.
    The burden associated with these requirements is the time and 
effort needed to gather the necessary information for the agreement, to 
draft the agreement, and to review and sign the written document. For 
donor entities (or their attorneys), we estimate that it will take 1.5 
hours to create a model agreement and another 15 minutes to tailor the 
model agreement for each physician and sign the personalized agreement. 
Further, we estimate that, on average, each physician will spend 15 
minutes reading and signing an agreement, including time spent 
listening to an explanation from the group practice manager or other 
physician representative. We recognize that a physician (and a donating 
entity) will have to understand the differences between the items and 
services that the donor is offering and the items and services that the 
physician already possesses or has obtained.
    We expect that no more than 150 State or national organizations or 
attorneys for large hospital systems (or other DHS Entities) will draft 
agreements for the hospitals and other DHS Entities. Because we 
estimate it will take 1.5 hours to prepare a model agreement, and 150 
different organizations will prepare these agreements, it could take a 
maximum of 225 hours to prepare all model agreements.

[[Page 45164]]

    As of April 2006, 609,562 physicians provided Part B physician 
services to Medicare beneficiaries. To calculate the maximum number of 
hours required to complete the agreements, we assume that 60,956 
physicians (10 percent of the total number of physicians providing Part 
B physician services to Medicare beneficiaries) will begin the process 
of developing or using electronic prescribing and/or electronic health 
records each year. We believe that one-fifth (or 20 percent) of those 
physicians will accept donations of and sign agreements for electronic 
health information technology each year. We assume that each of these 
12,191 physicians (60,956 x 0.20) will accept two donations of 
electronic health information technology, and each donation will 
require that an agreement be signed by the donor DHS Entity and the 
physician. Each agreement will require 15 minutes (0.25 hours) of the 
physician's time. Therefore, the physicians might spend 6,096 hours 
annually in interacting with two donors (2 agreements (that is, 1 per 
donation) x 0.25 hours for each agreement x 12,191 physicians).
    As noted, we expect that a donor entity will spend 15 minutes 
tailoring and signing each agreement into which it enters. We estimated 
that 12,191 physicians will enter into 2 agreements each. Therefore, 
each year, 24,382 agreements will be signed. Each agreement will 
require 15 minutes (0.25 hours) of the donor entity's time, or 6,096 
hours per year (24,382 x 0.25 hours).
    We assume that donating entities will not interact with each 
individual physician, but instead will spend time with individuals or 
entities that represent physician recipients of donated technology. On 
average, these representatives represent approximately 25 physicians 
each. We estimate that a donor entity will spend approximately 2 hours 
with each physician representative. We estimate that the average yearly 
burden for donor entities for the interactions with physician 
representatives may be 975 hours ([12,191 physicians/25 physicians per 
representative] x 2 hours per interaction). This is in addition to the 
time spent tailoring and signing physician-specific agreements 
discussed above.
    Assuming that the average cost for the donors and physician 
recipients involved in this process is $75 per hour, the annual 
paperwork burden for the first year should cost $1,004,400 ($75 x [225 
hours preparing master agreements + 6,096 physician hours + 6,096 donor 
hours + (975 donor hours spent with group practice or physician 
representatives x 2 agreements per physician)]) with each additional 
future year costing $987,525 ($75 x [6,096 physician hours + 6,096 
donor hours + (975 donor hours spent with group practice or physician 
representatives x 2 agreements per physician)]).
    An additional requirement for both exceptions will be that of 
maintaining the written agreements required to comply with Sec.  
411.357(v) and Sec.  411.357(w), and, if necessary, making them 
available to the Secretary upon request. We are requiring entities to 
maintain information that they already maintain as part of their usual 
and customary business practices. In addition, the information would 
only be collected during the conduct of an administrative action, 
investigation, or audit involving a Federal governmental agency 
regarding specific individuals or entities.
    We believe that the recordkeeping requirements in this section are 
exempt from the PRA under both 5 CFR 1320.3(a)(2) and 5 CFR 
1320.4(a)(2).
    These requirements are not effective until they are approved by 
OMB.

VI. Regulatory Impact Analysis

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 will have 
an annual effect on the economy of $100 million or more in any one 
year, or will 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 final 
rule will 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 have 
helped us make final decisions.
    This final rule creates two new exceptions to the physician self-
referral prohibition. The first exception permits certain entities to 
provide to physicians hardware, software, or information technology and 
training services necessary and used solely to receive and transmit 
electronic prescription information, provided that certain conditions 
are satisfied. The second exception permits DHS Entities to provide to 
physicians software and information technology and training services 
necessary and used predominantly to create, maintain, transmit, or 
receive electronic health records, provided that certain conditions are 
satisfied. (Electronic prescribing technology and electronic health 
records technology are collectively referred to as ``electronic health 
information technology'' for purposes of this Section VI.)
    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 contribute toward all of the health information 
technology used by physicians.
    Recently, Modern Healthcare presented findings from its annual 
survey (conducted in December 2005 through early January 2006) of 601 
health care executives regarding whether respondents (about 80 percent 
of which were hospitals or health care systems that include hospitals) 
would be willing to contribute to physician office health information 
technology if the physician self-referral provisions and the anti-
kickback statute did not prohibit such donations. The findings showed 
that 70.2 percent of respondents would be willing to allocate money to 
help a referring physician buy and use clinical information technology 
(up from 59 percent last year). Table 1 shows the breakdown percentages 
of respondents that would be willing to subsidize varying amounts of 
the startup costs for computerizing physicians' practices.

[[Page 45165]]



                                 Table 1
------------------------------------------------------------------------
                                          Percentage of startup costs
    Percentage of  all respondents      respondents would be willing to
                                                   subsidize
------------------------------------------------------------------------
29.80................................  no amount
32.36................................  20 percent or less
8.77.................................  21-40 percent
15.16................................  41-60 percent
4.28.................................  61-80 percent
9.69.................................  81-100 percent
------------------------------------------------------------------------

    This survey indicates that, as of the beginning of calendar year 
2006, over 60 percent of the CEOs surveyed did not see their 
institutions providing more than 20 percent of the costs necessary to 
initiate the computerization of physician offices for the purpose of 
clinical information technology. (Conn, Joseph, ``Subsidies: Ready to 
give, but * * *,'' Modern Healthcare, S5, February 13, 2006). 
Interestingly, this same survey showed that 65.1 percent of the 
executives indicated that moving toward an electronic health record was 
one of their top 10 information technology priorities, whereas only 
51.6 percent chose ``improve patient-care capabilities.'' (Conn, 
Joseph, ``EHRs: Still in hot pursuit,'' Modern Healthcare, S1, February 
13, 2006). However, 42.1 percent of the surveyed executives indicated 
that they expected their organizations to spend approximately 1.6 
percent to 3.0 percent of their total operating budget on information 
systems. Nearly 21 percent of the executives predicted that their 
organizations would spend less than 1.6 percent, and 37.3 percent 
predicted that their organizations would spend more than 3.0 percent of 
their total operating budget on information systems. (Conn, Joseph, 
``Budgets: Opening the wallet,'' Modern Healthcare, S2, February 13, 
2006).
    We believe that health care entities are waiting for the completion 
of a sizeable number of national standards before committing 
substantially for electronic health records items and services, first 
for themselves, and then for physicians and other entities in their 
communities.
    The final rule establishing the first set of standards for 
electronic prescribing in the Part D program, which was published on 
November 7, 2005 (70 FR 67568), discusses 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. 
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 DHS 
Entities will find it in their interest to pay some or all of the costs 
of qualifying health information technology to encourage physician 
adoption of such technology.
    This final rule removes a potential obstacle to the provision of 
qualifying health information technology by certain entities. This 
final rule applies to donations of qualifying health information 
technology by DHS Entities, and we expect that many donor entities may 
not need to use these exceptions, given the existing provisions at 
Sec.  411.352 for group practices and the exception at Sec.  411.355(c) 
for managed care services. (See 66 FR 856 and 69 FR 16054.) 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 (incentives that are larger than those 
for most other entities) to encourage the adoption of health 
information technology by contracting physicians.
    Regardless of whether donations are allowed under existing 
exceptions or those that are included in this final rule, we encouraged 
commenters to provide information on the costs that likely will be 
incurred by entities that choose to provide qualifying health 
information technology to physicians, as well as other related costs 
that likely will 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 final rule is restricted by the 
potential effects of outside factors, such as technological progress 
and other market forces, future certification standards, and companion 
final anti-kickback statute safe harbors. Furthermore, both the costs 
and potential savings of electronic prescribing, electronic health 
records, and administrative software such as billing and scheduling 
vary to the extent to which each element operates as a stand-alone 
system or as part of an integrated system. We solicited comments to 
help identify both the independent and synergistic effects of these 
variables.
    As discussed in the November 7, 2005 E-Prescribing final rule (70 
FR 67584 through 67588), donors may experience net savings with 
electronic prescribing in place, and patients will experience 
significant positive health effects. We have not repeated that analysis 
in this final 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--
     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,'' American Journal Medicine 106(2), 144-50 (1999)); 
(Tierney, W., et al., ``The effect on test ordering of informing 
physicians of the charges for outpatient diagnostic tests,'' New 
England Journal of Medicine 322(21): 1499-504 (1990)); (Tierney, W., et 
al., ``Computerized display of past test results. Effect on outpatient 
testing,'' Annals Internal Medicine 107(4): 569-74 (1987));
     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));
     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
     Reducing excess medication usage by 11 percent (Wang, S., 
et al., ``A cost-benefit analysis of electronic medical records in 
primary care,'' American Journal of Medicine 114(5): 397-403 (2003)); 
(Teich, J., et al., ``Effects of computerized physician order entry on 
prescribing practices,'' Archives of Internal Medicine 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,'' Effective Clinical Practice 
1(2): 73-82 (1998)).
    These studies show a consistent pattern of reductions in clinical 
utilization reported to arise from electronic health records use in 
ambulatory settings. Although financial estimates were not performed in 
these studies, these reductions in utilization could yield savings that 
accrue to the Medicare program because of its high volume of payments 
for ambulatory and inpatient care. Other studies have

[[Page 45166]]

estimated that electronic health records in the ambulatory setting will 
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 substantial.
    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.).
    HealthLeadersMedia interviewed individuals from 5 medical practices 
to try to determine reasons (other than money) for the fact that, as of 
2005, only 14 percent of physician groups used database-driven 
electronic health records systems. One sole practitioner put $70,000 
into hardware and software to duplicate the system she had used when in 
a group practice. Although this physician reduced much of the external 
paper flood, she has not saved money. She replaced transcription costs 
with scanning expenses. This physician is pleased that she can document 
more detail electronically than by hand, resulting in more appropriate 
reimbursement. A small rural clinic hired a vendor after a year's 
search, but then endured multiple delays and missed deadlines. After 
firing its vendor, it hired another vendor with a similar lack of 
results. Finally, it hired a vendor that the rural health clinic had 
interviewed two years earlier after discovering that this vendor had 
significantly upgraded its clinical documentation system, and the rural 
health clinic is now satisfied. On the other hand, a physician practice 
with over 500 physicians reported that, because it spent a lot of time 
in design, workflow analysis, and early development before employing 
any system, it is very satisfied with its physician-friendly system. 
Another physician practice, with five physician members, successfully 
adopted information technology with its third contractor resulting in 
financial and clinical benefits, including running the practice much 
more efficiently which resulted in treating more patients. Finally, a 
group practice with 13 internists borrowed $600,000 for hardware and 
software for an electronic health records system. Annual transcription 
costs have decreased from $150,000 to $30,000 and records are easily 
shared. (Baldwin, Gary, ``Paper Charts No More,'' http://www.healthleadersmedia.com (May 2006)).
    Another recent study reviewed a broader range of providers and 
argued 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 in this 
section, 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. 
Even so, a recent survey by the Center for Studying Health System 
Change indicated that between 2000-2001 and 2004-2005, the proportion 
of physicians in their own practices reporting access to information 
technology for treatment guidelines increased from 52.9 percent to 64.8 
percent, and the number of electronically prescribing physicians 
increased from 11.4 percent to 21.9 percent. In addition, the percent 
of physicians in practices who reported that they had used information 
technology to exchange clinical data increased from 40.6 percent to 
50.1 percent during this time period. (Reed, Marie C. and Grossman, Joy 
M., ``Growing Availability of Clinical Information Technology in 
Physician Practices,'' Data Bulletin No. 31, Center for Studying Health 
System Change, http://www.hschange.com (June 2006).
    The major barriers to physician adoption of clinical information 
technology include start-up and maintenance costs, and the significant 
effort and costs of changing workflow to use information technology 
effectively. (Bates, David W., ``Physicians and Ambulatory Electronic 
Records,'' Health Affairs, (September/October 2005). However, in an 
interview, Joy Grossman of the Center for Studying Health System 
Change, cited above, indicated her belief that one reason for the delay 
in physician adoption of information technology is that physicians want 
to make sure that the type of technology and software they purchase 
will not become obsolete and also will be compatible with tools used by 
hospitals, other physicians, and health plans. (Agovino, Theresa, 
``Doctor Access to Information Technology Up,'' the Associated Press, 
reported by the Houston Chronicle at http://www.chron.com (June 6, 
2006)).
    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 this 
final rule is: taking into account available policy instruments 
(notably the development of interoperability standards), to what extent 
does the use of these physician self-referral exceptions accelerate 
adoption of electronic prescribing and electronic health records 
technology?
    We do not have good baseline information. There are numerous 
estimates for the adoption rate of electronic prescribing by health 
plans, hospitals, physicians, and (for prescribing of drugs only) 
pharmacies.

[[Page 45167]]

However, these estimates are clouded by uncertainty. For example, some 
studies count facsimile transmission of prescriptions as electronic 
prescribing while others do not. 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, both 
of these percentages fall to 10 percent. (See Gans, D., supra.)
    As discussed in this section, we estimate that 2 percent of 
physicians and an unknown number of DHS Entities will be affected by 
these exceptions each year. Put another way, only one in five 
physicians adopting electronic health information technology will 
utilize these exceptions annually.
    As explained in the November 7, 2005 E-Prescribing final rule (70 
FR 67585), 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. We believe it is 
likely that about one in five of those prescribers will receive 
assistance under these exceptions. (Another one in five will 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 DHS Entities 
as to whether to provide assistance to physicians for electronic health 
information technology and the decisions of physicians and group 
practices to implement these systems. We solicited information about 
the intentions of DHS Entities to make donations of qualifying health 
information technology to physicians and the willingness of physicians 
and 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 will 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 electronic health information technology that a physician will need 
from a donor.
    Although we do not know the cost of the electronic health 
information technology, we describe below several studies of the costs 
and benefits of equipping doctors with such technology. The speed of 
adoption depends on the extent to which physicians realize net benefits 
(discussed extensively in the proposed rule) and on the extent to which 
our exceptions incrementally affect the costs and savings of the 
technology.
    One study of data on the costs associated with an internally-
developed electronic health records system for several internal 
medicine clinics in 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 support has been shown to reduce ADEs and 
redundant radiology and clinical laboratory tests; the maintenance of 
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 health 
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 Records 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. The 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, 9-location group practice, installed an electronic health 
records system in April 2002. (Barlow, S., et al., ``The Economic 
Effect of Implementing an EMR in an Outpatient Clinical Setting,'' 
Journal 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 improved 
documentation. (This study did not include information about the start-
up or annual costs of the electronic health records system. 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'' \1\ 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.
---------------------------------------------------------------------------

    \1\ 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.''
---------------------------------------------------------------------------

    The following are our responses to comments to the Regulatory 
Impact Analysis in the proposed rule:
    Comment: One commenter asserted that the estimate that we used in 
the proposed rule for the cost of information technology items and 
services is too low. Another commenter estimated that electronic health 
records systems cost between $700 and $800 per physician per month 
during the first 5 years of implementation. A third commenter estimated 
that the implementation cost for each physician will range from $15,000 
to $35,000. Another commenter asserted that donors will probably donate 
approximately $5,000 per physician and that no donor will provide items 
and services worth over $35,000 per physician. One commenter agreed 
that donations will result in a reduction of the utilization of 
unneeded

[[Page 45168]]

health care services. Finally, a commenter agreed that there should not 
be a significant impact on small businesses.
    Response: We recognize that the cost of implementing information 
technology in the physician office setting currently appears to be 
substantial, with benefits that will be recognized, but not 
immediately. Recently, Robert Miller and colleagues at the University 
of California, San Francisco, presented findings from case studies of 
14 sole practitioners and small group practices in twelve States. They 
found that start-up costs average $44,000 per physician and annual 
maintenance costs average $8,400 per physician per year. However, they 
also found that the physicians recoup their investment costs in 2.5 
years, with over half of the financial benefits coming from improved 
billing services. In addition, physician practice revenues increased by 
$17,000 per year and efficiency savings and gains from greater 
physician productivity averaged $15,800 per physician per year. 
(Miller, Robert H., et al., ``The Value of Electronic Health Records in 
Solo or Small Group Practices, Health Affairs, September/October 2005.)
    We presented information above in this section from a recent Modern 
Healthcare survey that indicated a breakdown of the funding that 501 
health care executives anticipated that their institutions will spend 
to help physician practices with information technology. (Conn, Joseph, 
``Subsidies: Ready to give, but * * *,'' Modern Healthcare, S5, 
February 13, 2006). The figures in that article are not considerably 
different from the commenter's estimates.
    Comment: One commenter believes that donors will be concerned about 
the direct impact to their patient populations and the common good.
    Response: We hope that donors will recognize that physicians need 
systems that will work for their patients and practices. We believe 
that the studies we have cited indicate the importance of physicians 
being able to use the systems they are purchasing and implementing. If 
a system does not work for a physician, he or she will abandon the 
system.
    We believe that donations protected under this exception will 
create no net costs to the economy. This rule will permit cost-
shifting, allowing DHS Entities 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 in a timely manner should benefit patients, physicians, and DHS 
Entities. The November 7, 2005 E-Prescribing final rule (70 FR 67586) 
cites an estimate from the CITL that nationwide adoption of electronic 
prescribing will eliminate nearly 2.1 million ADEs per year. In turn, 
this reduction of ADEs will prevent nearly 1.3 million provider visits, 
more than 190,000 hospitalizations, and more than 136,000 life-
threatening ADEs. We hope to see a significant reduction in ADEs each 
year as nationwide adoption of electronic health information technology 
occurs.
    We estimate that 10 percent of the 609,562 physicians who provide 
Part B services to Medicare beneficiaries (60,956 physicians) will 
adopt electronic prescribing and electronic health records technology 
each year. We believe it is likely that DHS Entities will donate 
software or other items or services to no more than one-fifth (or 20 
percent) of these physicians (or to fewer than 12,191 physicians) under 
these exceptions, and perhaps another one-fifth (or 20 percent) of 
these physicians (again fewer than 12,191 physicians) will receive 
donations under the existing exceptions that apply to managed care 
services and to group practices. We estimate that, at most, each 
physician will receive a total of $3,000 worth of donated items and 
services per donation under the exceptions. Therefore, assuming that 2 
percent of physicians (\1/5\ of the 10 percent of physicians adopting 
the technology per year) will receive $3,000 worth of donated 
electronic health information technology, annual donations approximate 
$36 million.
    We expect that many physicians already own handheld devices and 
will have begun to computerize their own medical practices. We also 
expect that DHS Entities will see immediate benefits from the expanded 
use of electronic prescribing and electronic health records technology. 
We anticipate that these savings will be greater than the costs 
incurred by donor entities using these exceptions, but we cannot 
quantify the savings at this time.
    We note that a significant benefit of electronic health records was 
recognized in 2005. 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 http://www1.va.gov/opa/pressrel/pressrelease.cfm?id=1152 1152). 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 Ochsner Clinic in New Orleans had also computerized its 
patient records prior to Hurricane Katrina and, thus, was able to 
recover its practice after the hurricane.
    The estimates above are highly sensitive to assumptions. The cost 
to the donor for the donated items and services might be significantly 
higher or lower than discussed above. The rate of adoption may be 
higher or lower than estimated. The proportion of physicians receiving 
remuneration could be higher or lower than estimated, depending on the 
willingness of DHS Entities to subsidize investment in health 
information technology.
    We also note that, 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 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 will 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 will 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 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.
    Finally, we believe it unlikely that annual effects will 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 final rule 
is not a major rule. However, we have completed all the elements of a 
RIA because the uncertainty is so great.

[[Page 45169]]

    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 final rule imposes no mandates. Any actions taken under this rule 
are voluntary. Furthermore, such actions are likely to result in net 
cost savings, not net expenditures. Any expenditure undertaken by 
government-owned hospitals in their business capacity will not 
necessarily have an 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 issues a 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 final rule will not have a substantial effect on State or 
local governments, nor does it preempt State law or have Federalism 
implications.

B. Impact on Small Businesses

    The RFA requires agencies to analyze options for regulatory relief 
for small entities when a final 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 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 final rule will not have a financial impact on small 
governmental entities.
    We have determined that this final rule will 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 may be substantial, it is unlikely that near term 
effects on individual practitioners will be substantial as a proportion 
of revenues (for example, neither a $3,000 donation nor a $450 cost 
sharing contribution (15 percent of $3,000) is significant compared to 
typical practice revenues in the hundreds of thousands of dollars). We 
expect our new exceptions ultimately to be highly beneficial to 
physicians and DHS Entities (most in both categories 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.
    Nothing in this final 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 final rule will not have a significant 
economic effect. Although the final 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 will 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 will remove a 
potential obstacle to certain entities providing electronic prescribing 
and electronic health records technology and services to physicians. 
The rule will permit cost shifting, allowing DHS Entities 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 and DHS Entities.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because we have determined, and we certify, that this rule 
will not have a significant economic impact on a substantial number of 
small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.
    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.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV part 411 as set forth below:

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

0
1. The authority citation for part 411 is revised to read as follows:

    Authority: Secs. 1102, 1860D-4(e)(6), 1871, and 1877(b)(4) and 
(5) of the Social Security Act (42 U.S.C. 1302, 1395w-104(e)(6), 
1395hh, and 1395nn(b)(4) and (5)).

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

0
2. Section 411.351 is amended by adding the definitions of ``electronic 
health record'' and ``interoperable'' in alphabetical order to read as 
follows:


Sec.  411.351  Definitions.

* * * * *
    Electronic health record means a repository of consumer health 
status information in computer processable form used for clinical 
diagnosis and treatment for a broad array of clinical conditions.
* * * * *
    Interoperable means able to communicate and exchange data 
accurately, effectively, securely, and consistently with different 
information technology systems, software applications, and networks, in 
various settings; and exchange data such that the clinical or 
operational purpose and meaning of the data are preserved and 
unaltered.
* * * * *
0
3. Section 411.357 is amended by adding paragraphs (v) and (w) to read 
as follows:


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

* * * * *
    (v) Electronic prescribing items and services. Nonmonetary 
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 a physician who is a member of its medical staff;

[[Page 45170]]

    (ii) Group practice (as defined at Sec.  411.352) to a physician 
who is a member of the group (as defined at Sec.  411.351); or
    (iii) PDP sponsor or MA organization to a prescribing physician.
    (2) The items and services are provided 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 provided.
    (3) The donor (or any person on the donor's behalf) does not take 
any action to limit or restrict the use or compatibility of the items 
or services with other electronic prescribing or electronic health 
records 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 does 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, or 
the amount or nature of the 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 or 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 and services being provided and the 
donor's cost of the items and services; and
    (iii) Covers all of the electronic prescribing items and services 
to be provided by the donor. This requirement will be met if all 
separate agreements between the donor and the physician (and the donor 
and any family members of the physician) incorporate each other by 
reference or if they cross-reference a master list of agreements that 
is maintained and updated centrally and is available for review by the 
Secretary upon request. The master list should be maintained in a 
manner that preserves the historical record of agreements.
    (8) The donor does not have actual knowledge of, and does not act 
in reckless disregard or deliberate ignorance of, the fact that the 
physician possesses or has obtained items or services equivalent to 
those provided by the donor.
    (w) Electronic health records items and services. Nonmonetary 
remuneration (consisting of items and services in the form of software 
or information technology and training services) necessary and used 
predominantly to create, maintain, transmit, or receive electronic 
health records, if all of the following conditions are met:
    (1) The items and services are provided by an entity (as defined at 
Sec.  411.351) to a physician.
    (2) The software is interoperable (as defined at Sec.  411.351) at 
the time it is provided to the physician. For purposes of this 
paragraph, software is deemed to be interoperable if a certifying body 
recognized by the Secretary has certified the software no more than 12 
months prior to the date it is provided to the physician.
    (3) The donor (or any person on the donor's behalf) does not take 
any action to limit or restrict the use, compatibility or 
interoperability of the items or services with other electronic 
prescribing or electronic health records systems.
    (4) Before receipt of the items and services, the physician pays 15 
percent of the donor's cost for the items and services. The donor (or 
any party related to the donor) does not finance the physician's 
payment or loan funds to be used by the physician to pay for the items 
and services.
    (5) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services, or 
the amount or nature of the 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 or services, is 
determined in a manner that directly takes into account the volume or 
value of referrals or other business generated between the parties. For 
purposes of this paragraph, the determination is deemed not to directly 
take into account the 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 physician (but not the volume or value of prescriptions 
dispensed or paid by the donor or billed to the program);
    (ii) The determination is based on the size of the physician's 
medical practice (for example, total patients, total patient 
encounters, or total relative value units);
    (iii) The determination is based on the total number of hours that 
the physician practices medicine;
    (iv) The determination is based on the physician'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 donor's medical staff, if the donor has a formal medical staff;
    (vi) The determination is based on the level of uncompensated care 
provided by the physician; or
    (vii) The determination is made in any reasonable and verifiable 
manner that does not directly take 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 and services being provided, the donor's 
cost of the items and services, and the amount of the physician's 
contribution; and
    (iii) Covers all of the electronic health records items and 
services to be provided by the donor. This requirement will be met if 
all separate agreements between the donor and the physician (and the 
donor and any family members of the physician) incorporate each other 
by reference or if they cross-reference a master list of agreements 
that is maintained and updated centrally and is available for review by 
the Secretary upon request. The master list should be maintained in a 
manner that preserves the historical record of agreements.
    (8) The donor does not have actual knowledge of, and does not act 
in reckless disregard or deliberate ignorance of, the fact that the 
physician possesses or has obtained items or services equivalent to 
those provided by the donor.
    (9) For items or services that are of the type that can be used for 
any patient without regard to payor status, the donor does not 
restrict, or take any action to limit, the physician's right or ability 
to use the items or services for any patient.
    (10) The items and services do not include staffing of physician 
offices and are not used primarily to conduct personal business or 
business unrelated to the physician's medical practice.
    (11) The electronic health records software contains electronic 
prescribing capability, either through an electronic prescribing 
component or the ability to interface with the physician's existing 
electronic prescribing system that meets the applicable standards under 
Medicare Part D at the time the items and services are provided.

[[Page 45171]]

    (12) 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.
    (13) The transfer of the items or services occurs and all 
conditions in this paragraph (w) are satisfied on or before December 
31, 2013.

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

    Dated: June 28, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: July 14, 2006.
Michael O. Leavitt,
Secretary.
[FR Doc. 06-6667 Filed 8-1-06; 8:45 am]
BILLING CODE 4120-01-P