[Federal Register Volume 72, Number 171 (Wednesday, September 5, 2007)]
[Rules and Regulations]
[Pages 51012-51099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4252]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411 and 424



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

  Federal Register / Vol. 72, No. 171 / Wednesday, September 5, 2007 / 
Rules and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411 and 424

[CMS-1810-F]
RIN 0938-AK67


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

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

ACTION: Final rule.

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SUMMARY: This final rule is the third phase (Phase III) of a final 
rulemaking amending our regulations regarding the physician self-
referral prohibition in section 1877 of the Social Security Act (the 
Act). Specifically, this rule finalizes, and responds to public 
comments regarding, the Phase II interim final rule with comment period 
published on March 26, 2004, which set forth the self-referral 
prohibition and applicable definitions, interpreted various statutory 
exceptions to the prohibition, and created additional regulatory 
exceptions for arrangements that do not pose a risk of program or 
patient abuse (69 FR 16054).
    In general, in response to public comments, in this Phase III final 
rule, we have reduced the regulatory burden on the health care industry 
through the interpretation of statutory exceptions and modification of 
the exceptions that were created using the Secretary's discretionary 
authority under section 1877(b)(4) of the Act to promulgate exceptions 
for financial relationships that pose no risk of program or patient 
abuse.

DATES: Effective date: This final rule is effective on December 4, 
2007.

FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer, (410) 786-4620. 
Lisa Ohrin, (410) 786-4565.

SUPPLEMENTARY INFORMATION: To help readers locate information in this 
final rule, we are providing the following Table of Contents.

I. Background
II. General Comments
    A. General
    B. Compliance With the Anti-Kickback Statute
III. Definitions--Sec.  411.351
    A. Employee
    B. Entity
    C. Fair Market Value
    D. ``Incident to'' Services
    E. Physician in the Group Practice
    F. Radiology and Certain Other Imaging Services and Radiation 
Therapy
    G. Referral
    H. Rural Area
IV. Group Practice--Sec.  411.352
V. Prohibition on Certain Referrals by Physicians and Limitations on 
Billing--Sec.  411.353
VI. Financial Relationship, Compensation, and Ownership or 
Investment Interest--Sec.  411.354
    A. Ownership
    B. Compensation
    C. Special Rules on Compensation
VII. General Exceptions to the Referral Prohibition Related to Both 
Ownership/Investment and Compensation--Sec.  411.355
    A. Physician Services
    B. In-office Ancillary Services
    C. Services Furnished by an Organization (or Its Contractors or 
Subcontractors) to Enrollees
    D. Reserved
    E. Academic Medical Centers
    F. Implants Furnished by an Ambulatory Surgical Center
    G. EPO and Other Dialysis-Related Drugs Furnished in or by an 
End-Stage Renal Dialysis Facility
    H. Preventive Screening Tests, Immunizations, and Vaccines
    I. Eyeglasses and Contact Lenses Following Cataract Surgery
    J. Intra-family Rural Referrals
VIII. Exceptions to the Referral Prohibition Related to Ownership or 
Investment Interests--Sec.  411.356
    A. Publicly-traded Securities and Mutual Funds
    B. Hospitals Located in Puerto Rico
    C. Rural Providers
    D. Ownership Interest in a Whole Hospital
IX. Exceptions to the Referral Prohibition Related to Compensation 
Arrangements--Sec.  411.357
    A. Rental of Office Space
    B. Rental of Equipment
    C. Bona Fide Employment Relationships
    D. Personal Service Arrangements
    E. Physician Recruitment
    F. Isolated Transactions
    G. Remuneration Unrelated to Designated Health Services
    H. Group Practice Arrangements with a Hospital
    I. Payments by a Physician
    J. Charitable Donations by a Physician
    K. Nonmonetary Compensation
    L. Fair Market Value Compensation
    M. Medical Staff Incidental Benefits
    N. Risk-sharing Arrangements
    O. Compliance Training
    P. Indirect Compensation Arrangements
    Q. Referral Services
    R. Obstetrical Malpractice Insurance Subsidies
    S. Professional Courtesy
    T. Retention Payments in Underserved Areas
    U. Community-Wide Health Information Systems
X. Reporting Requirements--Sec.  411.361
XI. Miscellaneous (Other)
XII. Provisions of the Final Rule
XIII. Technical Corrections
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered Regulation Text

I. Background

    Section 1877 of the Social Security Act (the Act), also known as 
the physician self-referral law: (1) Prohibits a physician from making 
referrals for certain ``designated health services'' (DHS) payable by 
Medicare to an entity with which he or she (or an immediate family 
member) has a financial relationship (ownership or compensation), 
unless an exception applies; and (2) prohibits the entity from filing 
claims with Medicare (or billing another individual, entity, or third 
party payer) for those referred services. The statute establishes a 
number of specific exceptions and grants the Secretary the authority to 
create regulatory exceptions for financial relationships that pose no 
risk of program or patient abuse. The current version of section 1877 
of the Act, which applies to referrals for 11 DHS, has been in effect 
and subject to enforcement since January 1, 1995.
    This is Phase III of a final rulemaking under section 1877 of the 
Act. Proposed regulations were published in the Federal Register on 
January 9, 1998 (63 FR 1659). Phase I of the final rulemaking was 
published in the Federal Register on January 4, 2001 (66 FR 856) 
(``Phase I'') as a final rule with comment period, and Phase II of the 
final rulemaking was published in the Federal Register on March 26, 
2004 (69 FR 16054) (``Phase II'') as an interim final rule with comment 
period. Due to a printing error, a portion of the Phase II preamble was 
omitted from the March 26, 2004 Federal Register publication. That 
portion of the preamble, which addressed reporting requirements and 
sanctions, was published on April 6, 2004 (69 FR 17933).
    Except for two provisions, the regulations published in Phase I 
became effective on January 4, 2002. We delayed the effective date of 
Sec.  424.22(d), relating to home health services until April 6, 2001 
(66 FR 8771.) We also delayed the effective date of the final sentence 
of Sec.  411.354(d)(1) relating to the definition of ``set in advance'' 
until the publication of Phase II; ultimately, it never became 
effective. The regulations in Phase II became effective on July 26, 
2004.

Phase I Covered--

     Sections 1877(a) and 1877(b) of the Act (the general 
prohibition against physician self-referral and the exceptions 
applicable to both ownership and compensation arrangements);

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     The statutory definitions at section 1877(h) of the Act;
     Certain additional regulatory definitions; and
     A number of new regulatory exceptions promulgated using 
the Secretary's authority under section 1877(b)(4) of the Act.

Phase II Covered--

     All provisions of section 1877 of the Act;
     Additional regulatory definitions;
     Additional new regulatory exceptions issued pursuant to 
the Secretary's authority under section 1877(b)(4) of the Act; and
     Responses to the public comments on the January 1998 
proposed rule and the Phase I regulations.
    This Phase III final rule responds to comments on Phase II and, 
thus, addresses the entire regulatory scheme. In developing Phase III 
of this rulemaking, we have carefully considered the history and 
structure of section 1877 of the Act, as well as the comments to the 
Phase II interim final rule. As with Phase I and Phase II, we believe 
that Phase III of this rulemaking addresses many of the industry's 
primary concerns, is consistent with the statute's goals and 
directives, and protects beneficiaries of Federal health care programs. 
In particular, we have attempted to preserve the core statutory 
prohibition, while providing sufficient flexibility to minimize the 
impact of the rule on many common business arrangements. We have 
endeavored to simplify the rules and provide additional guidance in 
response to comments, as well as to reduce any undue burden on the 
regulated community by modifying exceptions created using the 
Secretary's authority under section 1877(b)(4) of the Act to promulgate 
additional exceptions regarding financial relationships that pose no 
risk of program or patient abuse. As we did in Phase II, in evaluating 
our regulatory options, we have applied the same criteria that we 
discussed in detail in the Phase I rule (66 FR 859-863, 69 FR 16056.)
    The reasons for dividing the rulemaking into Phases I and II are 
explained in Phase I (66 FR 859-860). The reason for this Phase III 
final rule is explained in Phase II (69 FR 16055-16056) and in this 
preamble. Phases I, II, and III of this rulemaking are intended to be 
read together as a unified whole. Phase I contains a legislative and 
regulatory history of the physician self-referral law, which is not 
repeated here (66 FR 857-859). Unless otherwise expressly noted, to the 
extent the preamble in Phase III uses different language to describe a 
concept addressed in Phase I or Phase II, our intent is to elucidate 
that discussion, not to change its scope or meaning. For clarity and 
ease of access for the general public to the entire set of physician 
self-referral regulations, we are republishing in its entirety in this 
Phase III final rule the regulatory text for Sec. Sec.  411.350 through 
411.361 (omitting Sec. Sec.  411.370 through 411.389 relating to 
advisory opinions, which were the subject of a separate rulemaking and 
remain unchanged, except for a technical correction to Sec.  411.370 
discussed below in section XIII). Please note that, for ease of 
reference, the regulatory text for Sec.  411.357 includes paragraphs 
(v) and (w) relating to the exceptions for arrangements involving 
donations of electronic prescribing and electronic health records 
technology, respectively. Those two exceptions were proposed and 
finalized in a separate rulemaking (70 FR 59182, 71 FR 45140.)
    This Phase III preamble is generally organized to track the statute 
and current regulations. We first address the definitions (although 
certain key definitions, such as ``isolated transaction,'' are 
addressed in the discussions of the exceptions to which they mainly 
relate), then the general prohibition, then the exceptions. Summary 
discussions are intended to aid the reader in understanding the 
regulations. More detailed discussions of particular points are 
included in the responses to public comments for each topic.

II. General Comments

A. General

    Comment: We received numerous comments regarding both ownership and 
compensation arrangements in which the commenter requested confirmation 
that the particular arrangement described in the comment met the 
requirements of an exception and, thus, did not violate section 1877 of 
the Act.
    Response: In this final rule, we provide guidance with respect to 
the provisions of Phase I and Phase II. When possible, we respond to 
commenters' specific inquiries regarding compliance with the physician 
self-referral law. However, several of the inquiries failed to provide 
sufficient facts to enable us to evaluate or respond to the inquiry. 
Moreover, we consider several other inquiries to be in the nature of a 
request for a binding opinion, which, as provided in Sec.  411.386, can 
be made only through the issuance of a formal advisory opinion.

B. Compliance With the Anti-Kickback Statute

    Comment: Numerous commenters objected to the inclusion of the 
requirement that arrangements must not violate the Federal anti-
kickback statute (section 1128B(b) of the Act; 42 U.S.C. 1320a-7b(b), 
hereinafter referred to as the anti-kickback statute), which appears in 
the regulatory exceptions created pursuant to the Secretary's authority 
under section 1877(b)(4) of the Act. According to the commenters, the 
condition is unnecessary and undercuts our efforts to create ``bright 
lines.''
    Response: We disagree with the commenters for the reasons set forth 
in Phase I (66 FR 863) and Phase II (69 FR 16108). Wherever possible, 
we have attempted to create bright-line rules. However, given the 
limitations on our regulatory authority under section 1877(b)(4) of the 
Act, inclusion of the anti-kickback statute condition is necessary to 
ensure that the exceptions promulgated under that authority do not pose 
a risk of program or patient abuse. Moreover, because parties' 
arrangements must not violate the anti-kickback statute irrespective of 
whether they satisfy the other requirements of an exception, any 
additional burden associated with the requirement is minimal.
    Comment: Two commenters suggested that the exceptions under the 
physician self-referral law and safe harbors under the anti-kickback 
statute should more closely parallel each other. The first commenter 
stated that, without parallel safe harbors under the anti-kickback 
statute and exceptions to the physician self-referral law, the 
physician self-referral law exceptions will be underutilized and 
ineffective. The second commenter suggested that an arrangement that 
meets an exception under the physician self-referral law should be 
deemed to be within a safe harbor under the anti-kickback statute.
    Response: We addressed the issue raised by the first commenter in 
Phase II (69 FR 16115). As explained in detail there, we do not believe 
it is feasible to except financial relationships solely because they 
fit in an anti-kickback statute safe harbor. The second commenter's 
suggestion is outside the scope of this rulemaking and our authority. 
We note that several of the regulatory exceptions under the physician 
self-referral law do, in fact, correspond to safe harbors issued by the 
Office of Inspector General (OIG). For example, the exceptions for the 
donation of electronic prescribing items and services (Sec.  
411.357(v)) and electronic health records software and

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information technology and training services (Sec.  411.357(w)) 
correspond to safe harbors issued by the OIG. In addition, the 
exceptions for referral services and obstetrical malpractice insurance 
subsidies in Sec.  411.357(q) and (r), respectively, mirror anti-
kickback statute safe harbors.
    Comment: One commenter asserted that the exceptions in Sec.  
411.357(q) and (r) that cross-reference safe harbors relating to 
referral services and obstetrical malpractice insurance subsidies, 
respectively, are too narrow. The commenter stated that any arrangement 
that has received a favorable advisory opinion from the OIG, even if 
the agreement in question does not fall within a safe harbor, should be 
permitted under the self-referral law.
    Response: Under section 1877(b)(4) of the Act, we may issue 
additional exceptions (that is, exceptions not specified in the 
statute) only where doing so would create no risk of program or patient 
abuse. As noted above, it is not feasible to except financial 
relationships under section 1877 of the Act solely because they fit in 
an anti-kickback statute safe harbor, nor would it be feasible or 
appropriate to do so because an arrangement is the subject of a 
favorable OIG advisory opinion on a different statute. As we explained 
in Phase II, in some instances, it is appropriate for us to refer to 
the criteria in an anti-kickback safe harbor when creating an exception 
under the physician self-referral law (69 FR 16115).

III. Definitions--Sec.  411.351

    We received public comments only on the specific definitions set 
out below. In addition to technical changes to several definitions, we 
are adding definitions for ``downstream contractor,'' ``physician 
organization,'' and ``rural area'' and modifying the definitions of 
``fair market value,'' and `` `incident to' services.'' The new 
definitions of ``downstream contractor'' and ``physician organization'' 
are discussed in sections IX.D and VI.B, respectively, below, together 
with the relevant provisions to which they apply.

A. Employee

    We are making no changes to the definition of ``employee'' in this 
Phase III final rule.
    Comment: One commenter asked us to clarify that, in order to 
qualify as an employee of a group practice, a group practice must 
exercise control over the employee; that is, the group practice must 
supply the equipment, personnel, and support necessary for the 
individual to provide the service, and the group practice must control 
how the work is done and have hiring and firing authority over the 
individual providing services. The commenter asked for clarification on 
this issue out of concern regarding arrangements in which a group 
practice ``hires'' an individual as a part-time employee of the group 
practice but, in reality, exercises no control over the individual.
    Response: As set forth in section 1877(h)(2) of the Act and the 
definition of ``employee'' at Sec.  411.351, an individual is 
considered an ``employee'' for purposes of the physician self-referral 
prohibition if the individual is considered an employee under the 
common law rules applicable to determining the employer-employee 
relationship, as applied for purposes of section 3121(d)(2) of the 
Internal Revenue Code of 1986. We agree with the commenter that the 
actual conduct of the relationship is determinative. To determine 
whether an employer-employee relationship exists, the various factors, 
including those regarding supervision, used by the Internal Revenue 
Service (IRS) to determine employee status apply. Whereas the receipt 
of a W-2 from an entity and the written terms of the arrangement are 
relevant, neither controls whether an individual meets the definition 
of ``employee'' for purposes of the physician self-referral law; 
rather, the focus is on the actual relationship between the parties.

B. Entity

    We are making no substantive changes to the definition of 
``entity'' in this Phase III final rule.
    Comment: One commenter objected to certain language in the 
definition of ``entity'' specifying that, in general, a person or 
entity is considered to be ``furnishing DHS'' if CMS makes payment to 
that person or entity, either directly, upon assignment on the 
patient's behalf, or upon reassignment in certain cases. According to 
the commenter, some arrangements are structured so that referring 
physicians own entities that lease space, equipment, staff, or 
management services to entities that furnish DHS, and, in turn, submit 
claims to Medicare. The commenter suggested that ``entity furnishing 
DHS'' should be expanded to include entities that derive a substantial 
amount of their revenues from the provision of services to entities 
furnishing DHS.
    Response: We note that, after the close of the Phase II comment 
period, the Medicare Payment Advisory Commission (MedPAC), in its March 
2005 Report to Congress, recommended that the Secretary ``should expand 
the definition of physician ownership in the physician self-referral 
law to include interests in an entity that derives a substantial 
proportion of its revenue from a provider of designated health 
services.'' Specifically, MedPAC wrote:

    Physician ownership of entities that provide services and 
equipment to imaging centers and other providers creates financial 
incentives for physicians to refer patients to these providers, 
which could lead to higher use of services. Prohibiting these 
arrangements should help ensure that referrals are based on 
clinical, rather than financial, considerations. It would also help 
ensure that competition among health care facilities is based on 
quality and cost, rather than financial arrangements with entities 
owned by physicians who refer patients to the facility.

(See http://www.medpac.gov/publications/congressional_reports/Mar05_EntireReport.pdf, at page 170.) We agree with the commenter that 
arrangements structured so that referring physicians own leasing, 
staffing, and similar entities that furnish items and services to 
entities furnishing DHS (also referred to herein as ``DHS entities''), 
but do not submit claims raise significant concerns under the fraud and 
abuse laws and would appear contrary to the plain intent of the 
physician self-referral law. These structures are particularly 
problematic because referrals by physician-owners of leasing, staffing, 
and similar entities to a contracting DHS entity can significantly 
increase the physician-owned entity's profits and investor returns, 
creating incentives for overutilization and corrupting medical 
decision-making. We intend to study further the types of arrangements 
described by the commenter and MedPAC, as well as other types of 
arrangements, to determine the best approach for addressing them in 
order to protect against program and patient abuse. We would make any 
change to address this issue, whether through the definition of 
``entity'' or otherwise, in a separate rulemaking that is subject to 
public comment.
    We note that the arrangements described by MedPAC remain subject to 
the physician self-referral prohibition. In most instances, these 
structures will constitute indirect compensation arrangements with DHS 
entities under Sec.  411.354(b) that must satisfy the requirements of 
the indirect compensation arrangements exception in Sec.  411.357(p). 
We intend to monitor these arrangements closely for compliance with the 
physician self-referral law. These arrangements appear

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highly suspect under the anti-kickback statute; participants in such 
arrangements should closely scrutinize the arrangements for compliance 
with that statute also. Importantly, we note that the indirect 
compensation arrangements exception in Sec.  411.357(p) includes a 
requirement that the arrangement not violate the anti-kickback statute.

C. Fair Market Value

    In Phase II, we created a ``safe harbor'' provision in the 
definition of ``fair market value'' at Sec.  411.351 for hourly 
payments to physicians for their personal services. The safe harbor 
consisted of two methodologies for calculating hourly rates that would 
be deemed ``fair market value'' for purposes of section 1877 of the 
Act. The first methodology requires that the hourly payment be less 
than or equal to the average hourly rate for emergency room physician 
services in the relevant physician market, provided there are at least 
three hospitals providing emergency room services in the market. The 
second methodology requires averaging the 50th percentile national 
compensation level for physicians in the same specialty, using at least 
four of six specified salary surveys, and dividing the result by 2,000 
hours to establish an hourly rate. If the relevant physician specialty 
does not appear in one of the recognized surveys, the parties must use 
the survey's reported compensation for general practice in order to be 
within the safe harbor. We emphasized that use of the safe harbor was 
entirely voluntary and that parties may establish fair market value 
through other methods. We received a large number of comments 
questioning the new safe harbor.
    Comment: Several commenters disliked the compensation survey 
methodology. In general, the commenters believed that the methodology 
was too prescriptive, and they urged more flexibility. Commenters noted 
that at least one of the listed surveys no longer exists, and that 
another is out of date. Another commenter stated that many of the 
survey companies will not sell their surveys to hospitals that do not 
participate in the surveys. According to the commenters, the available 
surveys are expensive. Another commenter asserted that other surveys, 
including the American Medical Group Association survey and Modern 
Healthcare's annual compilation of surveys, provide similar information 
at less expense. Several commenters objected to the use of national 
averages, because the national average masks significant regional 
differences in physician compensation.
    Some commenters suggested that the compensation survey methodology 
be modified in other respects. One commenter urged us to expand the 
fair market value safe harbor to compensation that falls within the 
25th to the 75th percentile of physician compensation. Commenters 
suggested that providers be able to use fewer than four surveys (for 
example, averaging the 50th percentile of any two surveys). Several 
commenters suggested that, where specialty-specific data is 
unavailable, providers should be able to use data from a similar 
specialty, rather than from general practitioners. According to the 
commenters, the compensation of physicians in one type of specialty is 
more similar to the compensation of physicians in other specialties 
than to the compensation of general practitioners. One commenter asked 
whether a contract could include a cost of living annual adjustment.
    Response: We share the commenters' concerns regarding the 
availability of the surveys identified in the safe harbor. We are aware 
that several of the surveys are no longer available (or may not be 
readily available to all DHS entities and physicians), making it 
impractical to utilize the safe harbor. In addition, it may be 
infeasible to obtain information regarding hourly rates for emergency 
room physicians at competitor hospitals. Therefore, we are not 
retaining the safe harbor within the definition of ``fair market 
value'' at Sec.  411.351. We emphasize, however, that we will continue 
to scrutinize the fair market value of arrangements as fair market 
value is an essential element of many exceptions.
    Reference to multiple, objective, independently published salary 
surveys remains a prudent practice for evaluating fair market value. 
Ultimately, the appropriate method for determining fair market value 
for purposes of the physician self-referral law will depend on the 
nature of the transaction, its location, and other factors. As we 
explained in Phase II, although a good faith reliance on an independent 
valuation (such as an appraisal) may be relevant to a party's intent, 
it does not establish the ultimate issue of the accuracy of the 
valuation figure itself (69 FR 16107). Our views regarding fair market 
value are discussed further in Phase I (66 FR 944) and Phase II (69 FR 
16107).
    Because we are eliminating the safe harbor, it is unnecessary to 
address the commenters' specific suggestions for identifying 
permissible surveys and expanding the range of acceptable physician 
compensation. With respect to the inquiry regarding cost of living 
adjustments, we note that contracts for physician services may include 
an annual salary adjustment, provided that the resulting compensation 
is fair market value and otherwise complies with an exception.
    Comment: A large number of nephrologists and groups representing 
nephrologists complained that the application of the safe harbor to 
their compensation for medical director duties at renal dialysis 
centers is inappropriate, especially given that the physician self-
referral prohibition does not apply to dialysis services for which 
payment is made under the ESRD composite rate. According to the 
commenters, the hourly rate under the safe harbor would not adequately 
compensate dialysis facility medical directors for the full array of 
their skills and services. Several commenters expressed concern that, 
notwithstanding the voluntary nature of the safe harbor, the 
methodology would become the preferred valuation methodology to the 
detriment of physicians.
    Response: For the reasons noted in the preceding response, we have 
eliminated the fair market value safe harbor in this Phase III final 
rule. With respect to existing arrangements, nothing in the physician 
self-referral regulations required use or application of the fair 
market value safe harbor; it was a wholly voluntary provision. 
Moreover, a physician's compensation arrangement with a dialysis 
facility implicates section 1877 of the Act only to the extent that the 
arrangement creates a direct or indirect financial arrangement with an 
entity that furnishes DHS, such as a dialysis facility that furnishes 
DHS not covered by the ESRD composite rate or a hospital that provides 
dialysis (66 FR 923-924).
    Comment: A number of commenters complained that the fair market 
value safe harbor methodology based on local hourly rates for emergency 
room physician services creates significant risk under the antitrust 
laws.
    Response: We have eliminated the fair market value safe harbor for 
payments to physicians.
    Comment: Two commenters asked us to comment on other valuation 
methodologies.
    Response: Nothing precludes parties from calculating fair market 
value using any commercially reasonable methodology that is appropriate 
under the circumstances and otherwise fits the definition at section 
1877(h) of the Act and Sec.  411.351. Ultimately, fair market value is 
determined based on facts and

[[Page 51016]]

circumstances. The appropriate method will depend on the nature of the 
transaction, its location, and other factors. Because the statute 
covers a broad range of transactions, we cannot comment definitively on 
particular valuation methodologies. We refer the commenter to previous 
discussions in Phase I and Phase II regarding valuation methodologies 
(66 FR 944-945, 69 FR 16107).
    Comment: One commenter wanted confirmation that a fair market value 
hourly rate could be used to compensate physicians for both 
administrative and clinical work. Another commenter asked whether the 
rate could be used to determine an annual salary.
    Response: A fair market value hourly rate may be used to compensate 
physicians for both administrative and clinical work, provided that the 
rate paid for clinical work is fair market value for the clinical work 
performed and the rate paid for administrative work is fair market 
value for the administrative work performed. We note that the fair 
market value of administrative services may differ from the fair market 
value of clinical services. A fair market value hourly rate may be used 
to determine an annual salary, provided that the multiplier used to 
calculate the annual salary accurately reflects the number of hours 
actually worked by the physician.

D. ``Incident to'' Services

    Under section 1877 of the Act, group practices are permitted to pay 
profit shares and productivity bonuses to their physicians in ways that 
other DHS entities cannot. Unlike other DHS entities, the statute 
permits group practices to pay a physician in the group a share of the 
overall profits of the group, or a productivity bonus based on services 
personally performed or services ``incident to'' such personally 
performed services, provided that the profit share or bonus is not 
determined in any manner that is directly related to the volume or 
value of the physician's referrals. At Sec.  411.351, we define 
``incident to'' services to mean those services that meet the 
requirements of section 1861(s)(2)(A) of the Act, the ``incident to'' 
billing rule in Sec.  410.26, and the relevant manual provisions, as 
those provisions may be amended or replaced from time to time, all of 
which set forth coverage criteria for ``services and supplies'' 
furnished ``incident to'' a physician's professional service.
    In the calendar year (CY) 2002 physician fee schedule final rule 
published on November 1, 2001 (66 FR 55246), we amended our ``incident 
to'' billing regulation in Sec.  410.26 to provide that ``incident to'' 
services and supplies means those services and supplies that are 
included in section 1861(s)(2)(A) of the Act and that are not 
specifically listed in the Act as a separate benefit. In the CY 2003 
physician fee schedule final rule (67 FR 79966), we clarified that only 
those services that do not have their own separate and independently 
listed benefit category may be billed as ``incident to'' a physician 
service, except as otherwise expressly permitted by statute (for 
example, physical therapy services to the extent authorized under 
section 1862(a)(20) of the Act) (67 FR 79994). Consequently, diagnostic 
x-ray tests, diagnostic laboratory tests, and other diagnostic tests, 
all of which comprise a single benefit category under section 
1861(s)(3) of the Act, may not be billed as ``incident to'' services 
under section 1861(s)(2)(A) of the Act. Thus, under section 1877 of the 
Act, a group practice physician may not receive a productivity bonus if 
the bonus is calculated based on such diagnostic tests, unless the 
physician personally performed the tests. Moreover, the bonus cannot be 
related directly to the volume or value of DHS referrals. We discuss 
the treatment of ``incident to'' services in further detail in section 
IV below.
    Given our intent to conform the physician self-referral regulations 
as much as possible to existing Medicare coverage and payment rules, we 
did not intend in Phase I or Phase II to distinguish between 
``services'' and ``supplies'' furnished ``incident to'' a physician's 
professional services. Accordingly, as discussed in more detail in 
section IV of this preamble, we are revising the definition of `` 
`incident to' services'' at Sec.  411.351 to clarify that the term 
includes both services and supplies (such as drugs) that meet the 
applicable requirements set forth in section 1861(s)(2)(A) of the Act, 
Sec.  410.26 of our regulations, and relevant manual provisions. We are 
also making a minor revision to make clear that the definition covers 
the terms `` `incident to' services'' and ``services `incident to' '' 
for purposes of these regulations.
    Comment: A commenter asserted that our interpretation in the CY 
2003 physician fee schedule final rule as to what services qualify as 
``incident to'' services (67 FR 79993-79994) is inconsistent with a 
previous interpretation we made in the CY 2002 physician fee schedule 
final rule (66 FR 55268). The commenter contends that ``incident to'' 
services may include separately listed and independent services, such 
as diagnostic tests. The commenter contends that our application of the 
``incident to'' billing rules in the physician self-referral context 
effectively prohibits group practice physicians from receiving a share 
of the group's overall profits or a productivity bonus based on 
diagnostic tests that were directly supervised by the physician or a 
member of his or her group practice. The commenter requested that we 
amend the definition of ``incident to'' at Sec.  411.351 to cover any 
services, including services that are listed separately and 
independently (such as diagnostic tests), that are directly supervised 
by the physician or a physician in the group practice, provided that 
they meet all of the other requirements under the ``incident to'' 
billing rules. According to the commenter, this interpretation appears 
consistent with the Congress' intent under section 1877 of the Act to 
favor group practice physicians with respect to the distribution of 
profits and productivity bonuses.
    Response: We are not amending the definition of ``incident to'' 
services at Sec.  411.351 as suggested by the commenter. We believe it 
would be confusing to define ``incident to'' services differently for 
physician self-referral purposes than for billing purposes. As we 
stated in Phase I, we intend to interpret the physician self-referral 
law in a manner that conforms to existing Medicare coverage and payment 
rules (66 FR 859). We specifically noted in Phase I (66 FR 909) and in 
the Phase II definition of ``incident to services'' (69 FR 16128) that 
the ``incident to'' services on which group practice physicians could 
be compensated must comply with existing billing requirements as they 
may be amended from time to time.
    We do not believe that our ``incident to'' billing rule in Sec.  
410.26 is inconsistent with the language of section 1877(h)(4)(B)(i) of 
the Act. Although ``incident to'' services are referrals for purposes 
of section 1877 of the Act, we believe that the Congress intended that 
these services nonetheless may be considered when calculating a 
physician's productivity bonus. For those services that are 
appropriately billed ``incident to'' under current Medicare rules, the 
group practice physician to whose personally performed services the 
``incident to'' services are incidental (that is, the ordering 
physician) may be paid a productivity bonus or profit share consistent 
with the special rules for such compensation set forth in Sec.  
411.352(i).
    As we discussed in the CY 2003 physician fee schedule final rule, 
we interpret Sec.  410.26(a)(7) literally; that is, ``incident to'' 
services and supplies

[[Page 51017]]

covered under section 1861(s)(2)(A) of the Act means services and 
supplies not having their own independent and separately listed 
statutory benefit category (67 FR 79994.) The commenter provided the 
example of diagnostic tests performed under the direct supervision of a 
physician and meeting the requirements under the ``incident to'' 
billing rules. Regardless of the physical possibility of diagnostic 
tests being performed under the direct supervision of a physician and 
meeting the requirements of certain billing rules, because these 
services have an independent and separately listed statutory benefit 
category (section 1861(s)(3) of the Act), they cannot be billed as 
``incident to'' a physician service. (We note that we are deleting 
Sec.  411.355(a)(3) because it is redundant and incorrectly suggests 
that diagnostic tests may be billed as ``incident to'' services.)

E. Physician in the Group Practice

    We are modifying the definition of ``physician in the group 
practice'' to clarify that an independent contractor physician must 
furnish patient care services for the group under a contractual 
arrangement directly with the group practice.
    Comment: A commenter asked that the definition of ``physician in 
the group practice'' be revised to delete the condition that a 
physician who is an independent contractor of a group practice is 
considered to be in the group practice only when he or she is 
performing services on the group practice's premises. The commenter 
noted that section 952 of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) revised the 
reassignment provisions in section 1842(b)(6) of the Act to permit 
independent contractor physicians to reassign their claims to a group 
practice for services performed off-premises (Sec.  424.80(b)(2)).
    Response: Section 1842(b)(6) of the Act generally prohibits Part B 
payment to any person or entity other than the beneficiary who received 
the service or the physician or other supplier who furnished the 
service. This section of the Act also enumerates specific exceptions, 
known as the reassignment exceptions, to this general rule. Prior to 
section 952 of the MMA, we were prohibited from making payment to an 
entity that received reassigned payments from a contractor physician or 
other contractor supplier, unless the physician or other supplier 
performed the service at issue on the premises of the entity billing 
for the service. Section 952 of the MMA amended section 1842(b)(6) of 
the Act, so that we are allowed to make payment to an entity that has 
received reassigned payments pursuant to a contractual arrangement, 
provided that the contractual arrangement meets the program integrity 
and other safeguards that the Secretary may determine are appropriate. 
Thus, although section 1842(b)(6) of the Act grants us general 
authority to honor certain reassignments made pursuant to a contractual 
arrangement, it does not require us to honor those we believe are 
potentially abusive. We note that section 952 of the MMA does not apply 
exclusively to arrangements with group practices, and, therefore, 
retains meaning in the context of reassignments between other parties. 
For these reasons, we do not believe that section 952 of the MMA 
requires us to change our definition of ``physician in the group 
practice'' so that an independent contractor physician qualifies as a 
``physician in the group practice'' irrespective of whether he or she 
is performing services on or off the group practice's premises. We draw 
attention to Sec.  424.80(a), which, in implementing section 952 of the 
MMA, we amended to state that nothing in Sec.  424.80 relieves a 
party's obligations under certain other rules, including the physician 
self-referral rules.
    We continue to believe that it is appropriate to consider an 
independent contractor physician a ``physician in the group practice'' 
only when he or she is performing services in the group practice's 
facilities and, thus, has a clear and meaningful nexus with the group's 
medical practice. The term ``physician in the group practice'' is 
central to the definition of a group practice and significant for 
purposes of two important exceptions in section 1877 of the Act: The 
physician services exception and the in-office ancillary services 
exception. These exceptions enable physicians to make referrals for DHS 
within their group practices provided that certain requirements are 
satisfied. Accordingly, the strong nexus with a group practice created 
by the requirement that an independent contractor physician practice in 
a group practice's facilities ensures that the physician is truly 
practicing ``in the group.''
    Comment: Two commenters expressed the need for clarification of the 
requirements for qualification as a ``physician in the group 
practice.'' These commenters asserted that a ``physician in the group 
practice'' is permitted to furnish only supervision services (which are 
not separately reimbursed by Medicare), and that any services for which 
a group practice actually bills Medicare must be provided by a member 
of the group. The commenters requested that we confirm their 
interpretation of the rules regarding billing for services of 
physicians in a group practice and members of a group practice. In the 
alternative, the commenters suggested that we require that any 
separately-billable services furnished by a ``physician in the group 
practice'' be provided in the same building where the group practice 
provides its full range of services, thus prohibiting a ``physician in 
the group practice'' from providing services in a centralized building. 
According to the commenters, this change would ensure that independent 
contractor physicians have a sufficient nexus to the group practice to 
justify the group's utilization of the in-office ancillary services 
exception.
    Response: The commenters are mistaken that, as defined at Sec.  
411.351, a ``physician in the group practice'' (who can be either a 
member of the group or an independent contractor) may furnish only non-
billable supervision services. The definition makes clear that a 
``physician in the group practice'' can include an independent 
contractor who is ``furnishing patient care services.'' ``Patient care 
services'' is defined at Sec.  411.351 to encompass a broad range of 
billable and non-billable services.
    In order to qualify as a ``group practice'' under Sec.  411.352, 
only members of the group practice (and not independent contractor 
physicians in the group practice) are required to furnish 
``substantially the full range of patient care services that the 
physician routinely furnishes, including medical care, consultation, 
diagnosis, and treatment, through the joint use of shared office space, 
facilities, equipment and personnel.'' In other words, an independent 
contractor ``physician in the group practice'' may furnish billable 
services, and may furnish services--in the group practice's 
facilities--that comprise less than the full range of the patient care 
services that he or she usually furnishes. This enables a group 
practice to hire, on a contract basis, a specialist or other physician 
without jeopardizing the group's ability to qualify as a group practice 
and utilize the in-office ancillary services exception, even if the 
contracted physician works for several physician practices or 
facilities. We note that qualifying as a group practice is not in and 
of itself sufficient to comply with the physician self-referral rules, 
and that use of the in-office ancillary services exception requires 
compliance with all of the conditions of that exception.

[[Page 51018]]

    Under our regulations, an independent contractor physician is a 
``physician in the group practice'' only when he or she is performing 
services in the group practice's facilities. We are concerned about 
reports that some group practices purport to rely on the in-office 
ancillary services exception in Sec.  411.355(b) when they: (1) 
Nominally comply with the centralized building requirements in Sec.  
411.355(b)(2)(ii) and (b)(2)(iii); (2) contract with independent 
contractor physicians to furnish or supervise services in the 
centralized building as ``physicians in the group practice''; (3) 
accept reassignment of the right to payment from those physicians; and 
(4) realize profits based on the services they refer to the independent 
contractor ``physicians in the group practice'' stationed in the 
centralized building. In the physician fee schedule proposed rule for 
CY 2007, we proposed changes to our reassignment rules and to the 
definition of ``centralized building'' to address potentially abusive 
arrangements (71 FR 48981, 49054-49057). We are reviewing the public 
comments to our proposal and intend to issue a final rulemaking on this 
subject.
    Comment: One commenter noted that the definition of ``member of the 
group'' at Sec.  411.351 specifically excludes leased employees who do 
not meet the definition of an ``employee'' at Sec.  411.351. The 
commenter questioned whether a leased employee who does not meet the 
definition of an employee may nevertheless meet the definition of a 
``physician in the group practice.'' The commenter noted that an 
independent contractor physician may be a ``physician in the group 
practice'' and asserted that there does not appear to be any 
distinction between an independent contractor and a leased employee who 
does not meet the definition of an ``employee'' that would justify 
excluding the latter type of individual from being a ``physician in the 
group practice.''
    Response: The definition of ``physician in the group practice'' 
clearly encompasses only members (that is, owners and employees) and 
independent contractors. We are not persuaded to include other types of 
employment relationships (such as arrangements involving a group 
practice ``leasing'' or borrowing a physician who is an employee or 
contractor of some other entity. In order to fit within the definition 
of ``physician in the group practice,'' an independent contractor must 
have ``a contractual arrangement with the group practice.'' We 
interpret this to require that the contractual arrangement be directly 
between the group practice and the independent contractor physician, 
and not between the group practice and another entity, such as a 
staffing company. We are expressly incorporating this interpretation 
into the regulations by modifying the definition of ``physician in the 
group practice'' at Sec.  411.351.
    Group practices receive favorable treatment under the physician 
self-referral law with respect to physician compensation. Accordingly, 
we believe that, in order to qualify as a group practice and receive 
such favorable treatment, the group practice's physicians must have a 
strong and meaningful nexus to the group practice. An independent 
contractor in direct contractual privity with a group practice has such 
a nexus; employees leased from other entities do not. We believe this 
justifies excluding a leased employee from being a ``physician in the 
group practice,'' contrary to the commenter's assertion that there is 
no distinction between an independent contractor and a leased employee. 
Moreover, we are concerned about potentially abusive arrangements, such 
as a situation in which a physician is employed by (and receives one W-
2 from) a staffing company that leases the physician to numerous group 
practices, none of which has to enter into an individual contract with 
the physician but all of which can consider the physician a ``physician 
in the group practice'' with the attendant benefits of such 
categorization.

F. Radiology and Certain Other Imaging Services and Radiation Therapy

    In Phase II, we defined ``radiology and certain other imaging 
services'' to exclude radiology procedures that are integral to the 
performance of a nonradiological medical procedure and performed during 
the nonradiological procedure, or immediately following the 
nonradiological procedure when necessary to confirm placement of an 
item placed during the nonradiological procedure (69 FR 16103). We 
declined to include nuclear medicine in the DHS category of ``radiology 
and certain other imaging services,'' but stated that we would continue 
to study the issue. One commenter stated that it disagreed with our 
decision. Based on this comment and further study, in the CY 2006 
physician fee schedule proposed rule, we proposed to include diagnostic 
nuclear medicine services within the meaning of ``radiology and certain 
other imaging services,'' and to include therapeutic nuclear medicine 
services within the meaning of ``radiation therapy and supplies'' (70 
FR 45854-45856). We adopted our proposal in the CY 2006 physician fee 
schedule final rule (70 FR 70283-70289), effective January 1, 2007.
    We are making no changes to the definition of ``radiology and 
certain other imaging services'' in this Phase III final rule.
    Comment: One commenter noted that, in Phase II, we specifically 
declined to exclude ophthalmic A-scans and B-scans from the definition 
of ``radiology and certain other imaging services'' (69 FR 16103). The 
commenter disagreed with our conclusion, particularly with respect to 
A-scans. The commenter stated that the applicable standard of care 
dictates that A-scans are integral to cataract and other refractive 
surgeries and that they are not diagnostic in nature because they guide 
how surgery will be performed, not whether surgery will be performed. 
According to the commenter, although the scan is not done during the 
operation, it is an integral part of the surgery and raises little risk 
of abuse or overutilization because it will be done only if cataract 
surgery has already been prescribed.
    Response: An A-scan involves the transmission of high-frequency 
sound waves through the eye and the measurement of their reflection 
from ocular structures. An A-scan provides a one-dimensional picture, 
most commonly used to measure the eye length and provide the data 
needed to calculate the power of the optical correction of the 
intraocular lens implant for cataract surgery. A B-scan, which is a 
two-dimensional cross section view of the eye, is used if the view 
inside the eye is obstructed by blood, an extremely dense cataract, or 
other cloudy media.
    The definition of ``radiology and certain other imaging services'' 
at Sec.  411.351 does not include radiology procedures that are 
integral to the performance of a nonradiological medical procedure and 
performed: (1) During the nonradiological medical procedure, or (2) 
immediately following the nonradiological medical procedure when 
necessary to confirm placement of an item placed during the 
nonradiological medical procedure. The commenter correctly states that 
often an A-scan (and a B-scan, as appropriate) is a pre-operative 
procedure performed prior to cataract surgery (which is a scheduled 
elective surgery). These scans are not performed during or just after 
cataract surgery. A-scans and B-scans are included in the definition of 
``radiology and certain other imaging services'' because, even though 
they are integral to the performance of a nonradiological medical 
procedure, they are not performed during the nonradiological medical 
procedure or

[[Page 51019]]

immediately following it to confirm placement of an item placed during 
the nonradiological medical procedure. However, in the CY 2008 
Outpatient Prospective Payment System notice of proposed rulemaking, we 
proposed to exclude from the definition of ``radiology and certain 
other imaging services'' at Sec.  411.351 radiology procedures that are 
``covered ancillary services'', as defined at Sec.  416.164(b) of this 
chapter for purposes of the revised ASC payment system. The term 
``covered ancillary services'' includes certain radiology services that 
are integral to, and performed on the same day as, a covered ambulatory 
surgical procedure.
    Comment: One commenter stated that it welcomed the exclusion from 
the definition of ``radiology and certain other imaging services'' of 
radiology services performed immediately after nonradiology services. 
The commenter asserted that it is standard protocol to order a CT scan 
in the aftermath of prostate brachytherapy in order to ensure that the 
radioisotopes have been placed properly. The commenter asserted that, 
although some may prefer to perform this service immediately after the 
procedure, it is better from a clinical standpoint to wait several 
weeks because the additional time allows for the prostate to become 
less swollen, thereby enabling the physician to determine more 
accurately whether the seeds were placed correctly. Therefore, the 
commenter suggested that we expand the exclusion from the definition to 
also include a CT scan taken within 6 weeks after the prostate 
brachytherapy to confirm proper placement of the isotopes.
    Response: We decline to adopt the commenter's proposal. As we 
stated in Phase I, where the radiology procedure is performed after the 
nonradiology procedure (as opposed to radiology procedures integral to 
and performed during a nonradiological procedure), referring physicians 
have discretion in choosing the entity that provides the radiology 
service independent of the entity providing the nonradiology procedure 
(66 FR 929). In Phase II, we excluded from the definition of 
``radiology and certain other imaging services'' radiology procedures 
performed immediately after the nonradiology procedure in order to 
confirm placement of an item because we believed there would be no risk 
of program or patient abuse by doing so (69 FR 16103). Where a 
radiology procedure is not performed immediately after the nonradiology 
procedure to confirm placement of an item, we believe there is a risk 
that the referring physician may direct referrals to an entity with 
which he or she has a financial interest, the very conduct addressed by 
the statute. As we noted in Phase II, depending on the facts and 
circumstances, exceptions, such as the in-office ancillary services 
exception in Sec.  411.355(b) or the rural provider exception in Sec.  
411.356(c)(1), may apply to referrals for radiology services furnished 
before or after the nonradiology procedure (69 FR 16103).
    We note also that, depending on the facts and circumstances, CT 
scans or other imaging ordered in the aftermath of prostate 
brachytherapy may qualify as ``necessary and integral'' ancillary 
services so as to come within the consultation exclusion from the 
definition of ``referral.'' We question whether a CT scan or other 
imaging performed as late as 6 weeks after the brachytherapy would be 
``necessary and integral'' to the brachytherapy, but decline to say 
that such a CT scan or other imaging could never be ``necessary and 
integral'' to the original procedure (and, thus, not be considered a 
``referral'' for purposes of the physician self-referral law); rather, 
the specific facts and circumstances control.

G. Referral

    Section 1877(h)(5)(c) of the Act defines ``referral'' as a request 
by a physician for an item or service for which payment may be made 
under Medicare Part B, including a request for a consultation and any 
DHS ordered or performed by the consulting physician or under the 
supervision of the consulting physician, and the request or 
establishment of a plan of care by a physician that includes the 
furnishing of DHS, with certain exceptions for a small subset of 
services provided or ordered by pathologists, diagnostic radiologists, 
and radiation oncologists in accordance with a consultation requested 
by another physician.
    In Phase I, we defined ``referral'' to exclude services personally 
performed by a physician who ordered the services, but to include DHS 
provided by the physician's employees or contractors or by other 
members of the physician's group practice (66 FR 871-872). In Phase II, 
we confirmed that a ``referral'' includes services performed by others 
``incident to'' the physician's services (69 FR 16063). Phase II also 
clarified that the definition of ``referral'' excludes referrals for 
necessary and integral DHS ordered and appropriately supervised by a 
radiation oncologist pursuant to a consultation (69 FR 16065).
    We received several comments addressing the issue of services 
performed by a physician's employees that are ``incident to'' the 
physician's personally-performed services. Other comments addressed the 
exclusions from the definition of ``referral'' for certain DHS 
requested by radiologists, pathologists, and radiation oncologists 
pursuant to a consultation. We are making no changes to the definition 
of ``referral'' in this Phase III final rule.
    Comment: Several commenters requested clarification of the 
statement in Phase II regarding whether there is a ``referral'' when 
antigens are prepared and furnished by a physician, or whether there is 
a ``referral'' when a physician refills an implantable pump (69 FR 
16063). The response in Phase II appeared, in the commenters' view, to 
indicate that, if a physician personally prepares and furnishes 
antigens or personally refills an implanted pump for a patient, there 
is no ``referral'' for purposes of the physician self-referral statute. 
From this statement, the commenter concluded that the physician could 
bill for these DHS without consideration as to whether the referrals 
satisfy the requirements of an exception.
    Response: In Phase II, we stated that the definition of 
``referral'' excludes services personally performed or provided by the 
referring physician, but specifically includes any services performed 
or provided by anyone else (69 FR 16063). This interpretation is 
codified in the definition of ``referral'' at Sec.  411.351. It is 
possible for a physician to order and personally furnish antigens to a 
patient and to order a refill for, and personally refill, an 
implantable pump. In such instances, there would be no ``referral'' for 
a designated health service, and no exception is needed.
    We note that the furnishing of durable medical equipment (DME) and 
supplies by a referring physician requires a different analysis than 
the mere refilling of an implantable pump. There are few, if any, 
situations in which a referring physician would personally furnish DME 
and supplies to a patient, because doing so would require that the 
physician himself or herself be enrolled in Medicare as a DME supplier 
and personally perform all of the duties of a supplier as set forth in 
the supplier standards in Sec.  424.57(c).
    DME suppliers are entities that provide services under the specific 
Part B benefit for the provision of medical equipment and supplies for 
use in the patient's home. These entities must be enrolled with the 
appropriate Medicare contractor as a DME supplier and must meet all of 
the professional supplier standards and quality standards that we 
require through regulations and

[[Page 51020]]

administrative or program instructions. The enrollment requirements and 
professional supplier standards are not waived in those situations in 
which a physician furnishes DME directly to the patient. The services 
to be personally performed by the physician would include, but not be 
limited to, the following, as appropriate--
     Personally fit the item for the beneficiary;
     Provide necessary information and instructions concerning 
use of the DME;
     Advise the beneficiary that he or she may either rent or 
purchase inexpensive or routinely purchased DME;
     Explain the purchase option for capped rental DME;
     Explain all warranties;
     (Usually) deliver the DME to the beneficiary at home; and
     Explain to the beneficiary at the time of delivery how to 
contact the physician in his or her capacity as a DME supplier by 
telephone.
    A referring physician claiming to provide DME personally would need 
to maintain adequate documentation to establish that the physician 
personally performed these and other required DME supplier activities. 
All of these supplier requirements would need to be satisfied in order 
for a physician to be considered to be providing personally DME items 
and supplies. This is true for all DME furnished by a physician, 
including, for example, continuous positive airway pressure (CPAP) 
equipment. We believe that it is highly unlikely that a referring 
physician would meet the criteria for personally performed services 
when dispensing CPAP or other DME equipment. Thus, the dispensing of 
CPAP equipment by a physician would almost always constitute a 
``referral'' for purposes of the physician self-referral statute, as 
would the dispensing of CPAP equipment by anyone else affiliated with 
the referring physician, such as a nurse or physician assistant. We 
note that CPAP equipment is DME that does not qualify for the in-office 
ancillary services exception.
    Comment: One commenter suggested that a ``referral'' should not 
include ``incident to'' services requested by a physician and performed 
by an employee or contractor, unless the services are performed by an 
employee or contractor who is licensed to provide the services without 
physician supervision and who could otherwise bill separately for the 
services. The commenter also requested that we provide further 
education to physicians on how these ``incident to'' services would fit 
into the in-office ancillary services exception.
    Response: The commenter provided no support for its suggestion, nor 
did the commenter explain why the in-office ancillary services 
exception does not provide adequate protection under the circumstances 
described. We decline to change our interpretation of ``referral'' as 
requested by the commenter. As we stated in Phase II:

We are adhering to our original determination that ``incident to'' 
services performed by others, as well as services performed by a 
physician's employees, are referrals within the meaning of section 
1877 of the Act. * * * As a practical matter, although ``incident 
to'' services and employee services are included in the definition 
of ``referrals'' for purposes of section 1877 of the Act, many of 
those referrals will fit in the in-office ancillary services 
[exception] or another exception.

(69 FR 16063.) We continue to conclude that requests for DHS performed 
by a physician's employees or independent contractors are ``referrals'' 
within the meaning of the physician self-referral prohibition, although 
these referrals may satisfy the requirements of an exception, including 
the in-office ancillary services exception in Sec.  411.355(b).
    Comment: Several commenters pointed out that, although we stated in 
Phase II that we were expanding the consultation exclusion to protect 
ancillary services that were necessary and integral to the provision of 
radiation therapy, the regulation text did not include any language to 
that effect (69 FR 16065). One commenter requested that the regulatory 
definition be amended to conform to the preamble discussion. Another 
commenter complained that the expansion of the consultation exclusion 
to include ancillary services that are necessary and integral to 
radiation oncology would increase utilization and Federal health care 
program costs and defeat the purposes of section 1877 of the Act. Two 
commenters, one representing brachytherapy providers, requested that 
interventional radiologists be permitted to provide diagnostic imaging 
services that are necessary and integral to their procedures.
    Response: In Phase II, we intended to revise the definition of 
``referral'' at Sec.  411.351 to exclude from the definition ancillary 
services that are necessary and integral to the provision of radiation 
therapy, but inadvertently neglected to amend the regulatory text. In 
the CY 2006 physician fee schedule final rule published November 21, 
2005, we made a technical correction that modified the language in 
paragraph (2) of the definition of ``referral'' at Sec.  411.351 to 
clarify that ancillary services necessary for and integral to the 
provision of radiation therapy are also protected by the consultation 
provision (70 FR 70330). We believe that the clarification was 
necessary to effectuate the statutory exclusion, and that it is 
sufficiently narrow to prevent abuse. No additional change is needed.
    We do not believe that it is appropriate to exclude from the 
definition of ``referral'' ancillary testing necessary and integral to 
interventional radiology procedures performed as a result of a 
consultation. Interventional radiologists perform minimally invasive 
procedures using imaging for guidance. Examples of these procedures 
include angiography, angioplasty, biopsy, stenting, cryotherapy, and 
embolization. Because it is our understanding that interventional 
radiology is surgical in nature, we believe that any necessary and 
integral services would be ancillary to a surgical procedure, rather 
than to a radiology procedure. Thus, the consultation provision would 
not apply. Depending on the facts and circumstances, diagnostic imaging 
services performed by interventional radiologists may fit within the 
exclusion from the definition of ``radiology and certain other imaging 
services'' for radiology procedures that are integral to the 
performance of a nonradiological medical procedure and performed during 
the procedure or immediately following the procedure to confirm 
placement of an item placed during the procedure.
    Comment: One commenter asked us to clarify whether the consultation 
exclusion for radiation oncologists in the definition of ``referral'' 
at Sec.  411.351 protects radiation oncology services personally 
performed by the radiation oncologist or by a radiation oncologist in 
the same group practice. The commenter noted that Phase II expanded the 
consultation exclusion from the definition of ``referral'' to permit 
radiation therapy requested by a radiation oncologist to be performed 
by or under the supervision of the radiation oncologist, or under the 
supervision of a radiation oncologist in the same group practice (69 FR 
16131). The commenter stated that, read literally, the exclusion from 
the definition of ``referral,'' as amended, would allow a radiation 
oncologist in the consulting radiation oncologist's group practice to 
supervise the radiation therapy, but not to perform it.
    Response: The commenters' reading of the definition of ``referral'' 
at Sec.  411.351 is correct. The consultation exclusion for radiation 
oncologists in

[[Page 51021]]

the definition of ``referral'' protects only radiation oncology 
services personally performed or supervised by the radiation oncologist 
or services supervised by a radiation oncologist in the same group 
practice. Requests by a pathologist for clinical diagnostic laboratory 
tests and pathological examination services and requests by a 
radiologist for diagnostic radiology services are treated similarly.
    Comment: Several commenters asked that we expand the consultation 
provision to include ``walk-in'' patients (that is, patients who are 
seen by a physician without having been referred to that physician by 
another physician), as well as patients referred by other physicians. 
According to the commenters, there is no reason these patients are more 
likely to receive unnecessary treatment.
    Response: We decline to make the change suggested by the 
commenters. We believe that walk-in patients for pathology, radiology, 
and radiation oncology are not common. Moreover, the fact that a 
patient ``walks in'' to a physician's office (whether a pathologist, 
radiologist, radiation oncologist, or other type of physician) is not 
determinative under the physician self-referral law with respect to DHS 
referrals made by the physician whose services are sought by the walk-
in patient. Thus, even if a patient initially self-refers to a 
pathologist, radiologist, or radiation oncologist, subsequent orders of 
items or services by the pathologist, radiologist, or radiation 
oncologist are referrals of DHS. Moreover, these referrals are subject 
to potential overutilization or other abuse.
    As we noted in Phase I (66 FR 874), the Congress regarded the 
specialists excepted under the definition of ``consultation'' as 
physicians who were not initiating a referral for services, but merely 
implementing the request of another physician who has already 
determined that the patient is likely to need the specialist's 
services. In these situations, the Congress indicated its belief that 
overutilization would not be likely. As we noted in Phase II (69 FR 
16064), the statutory consultation exception ``creates a narrow 
exception for a small subset of services provided or ordered by certain 
specialists in accordance with a consultation requested by another 
physician.'' The additional protection against overutilization of 
diagnostic radiology, pathology, and radiation therapy services 
implicit when a radiologist, pathologist, or radiation oncologist 
merely implements a determination made by another physician that the 
patient is likely to need the specialist's services (and those services 
meet the requirements of a consultation) are not present in the case of 
a patient who ``walks in'' for these services.
    We are mindful that services provided to walk-in patients will not 
meet the definition of ``consultation,'' and any subsequent DHS will, 
therefore, be the subject of a referral by the pathologist, 
radiologist, or radiation oncologist. Depending on the circumstances, 
these referrals may satisfy the requirements of an exception to the 
prohibition on physician self-referral. As noted in Phase II in 
response to similar concerns about self-referred patients (69 FR 
16066), changes made to the in-office ancillary services exception in 
Phase II should, in many circumstances, enable DHS referrals for self-
referred patients to fit in that exception.
    Comment: Several commenters requested that we clarify that the 
consultation exclusion covers the technical component of DHS ordered by 
hospital-based pathologists and radiologists pursuant to a 
consultation. Another commenter suggested that DHS ordered by 
anesthesiologists pursuant to a consultation should also be excluded 
from the definition of a referral.
    Response: We have previously considered the first issue and 
continue to believe that, where a physician orders the technical 
component of a designated health service (for example, an x-ray) and 
someone other than the physician performs the technical component, 
there is a referral to which section 1877 of the Act applies (66 FR 
871, 69 FR 16063). However, the commenters are correct with respect to 
the technical component of a designated health service ordered by a 
hospital-based pathologist, radiologist, or radiation oncologist, if 
the requirements of the consultation exclusion otherwise apply. 
Specifically, the technical components of DHS ordered by these types of 
physicians pursuant to a consultation are subject to the consultation 
exclusion from the definition of a ``referral'' at Sec.  411.351.
    With respect to extending the consultation provision to DHS ordered 
by anesthesiologists, we note that the statutory exception is limited 
to pathologists, radiologists, and radiation oncologists who meet 
certain criteria. We do not have the authority to extend the statutory 
consultation exception in the definition of ``referral'' to specialists 
other than those enumerated by the Congress. Moreover, we are not 
persuaded that any special regulatory exception is warranted for DHS 
referrals made by an anesthesiologist to an entity with which he or she 
(or his or her immediate family member) has a financial relationship. 
Depending on the circumstances, anesthesiologist referrals for DHS may 
qualify for an existing exception, including, for example, the 
exception for personal service arrangements or the exception for bona 
fide employment relationships.
    Comment: One commenter asked that the consultation exclusion from 
the definition of ``referral,'' which, according to the commenter, 
protects tests performed by other pathologists, radiologists, or 
radiation oncologists in the same group practice, be expanded to 
protect services furnished by physicians who are employees of the same 
entity, such as a hospital. The commenter gave the example of a 
hospital-employed radiologist who receives an order for diagnostic 
services and subsequently directs a second radiologist employed by the 
same hospital to perform the services. According to the commenter, 
there is no possibility of abuse in this situation, and the change is 
necessary to permit hospital-employed pathologists, radiologists, and 
radiation oncologists to provide coverage for each other.
    Response: We do not agree that an expansion of the consultation 
exception is warranted. Where physicians have a common hospital 
employer that bills for the technical components of a test (that is, 
the hospital is the DHS entity), the hospital and the referring 
physicians may avail themselves of the exception for bona fide 
employment relationships in Sec.  411.357(c). With respect to any 
professional component of the services that are DHS, the hospital 
should be able to bill pursuant to a reassignment (which would make the 
hospital the DHS entity), and the arrangement could be structured to 
satisfy the requirements of the exception for bona fide employment 
relationships.

H. Rural Area

    The term ``rural area'' is used throughout the physician self-
referral regulations. For ease of reference and to simplify the 
regulations, we are moving the definition to Sec.  411.351. For 
physician self-referral purposes, we are defining ``rural area'' as an 
area that is not an urban area as defined at Sec.  412.62(f)(1)(ii). 
The definition is consistent with the definition in the statutory 
exception for rural providers at section 1877(d)(2) of the Act.

IV. Group Practice--Sec.  411.352

    The determination of which organizations qualify as group practices 
for purposes of section 1877 of the Act is critical for several 
exceptions, including the in-office ancillary services exception. In 
addition, section 1877 of the Act allows group practices more 
flexibility in compensating physicians

[[Page 51022]]

(for example, only group practice physicians may be compensated in a 
manner that takes into account services furnished ``incident to'' a 
physician's personally performed services).
    Phase I addressed the requirements for qualification as a group 
practice under section 1877(h)(4) of the Act. (The regulatory 
requirements appear in Sec.  411.352.) Most commenters commended the 
changes made in Phase I. In Phase II, we made several minor changes to 
Sec.  411.352.
    This Phase III final rule makes one minor change to Sec.  411.352 
to reflect more closely the statutory scheme and our original intent in 
the Phase I final regulation that the ``incident to'' services need not 
themselves be personally performed by the referring physician: we are 
changing the parenthetical language in Sec.  411.352(i)(1) to permit a 
physician in the group to be paid a productivity bonus based on 
services that he or she has personally performed, or services 
``incident to'' such personally performed services or both.
    Comment: One commenter asked for confirmation that a separate 
corporation that is formed by a hospital and that has as its primary 
purpose being a physician group and employing physicians would meet the 
single legal entity requirement even if the physicians are divided into 
different divisions based on specialty.
    Response: A separate corporation formed by a hospital to employ 
physicians can constitute a single legal entity, provided that the 
specialty divisions are not separate legal entities and the arrangement 
otherwise satisfies the requirements of Sec.  411.352.
    Comment: One commenter asked that we clarify that a medical 
foundation qualifies as a group practice.
    Response: For the reasons noted in Phase I (66 FR 902-903) and 
Phase II (69 FR 16077), including those discussed below, we do not 
believe it is feasible to make a blanket determination that all medical 
foundations qualify as group practices. Moreover, we see no need to 
revisit the requirements for qualification as a group practice under 
Sec.  411.352 or the discussion in Phase II regarding whether a 
foundation can meet those requirements.
    The commenter has failed to convince us that many typical 
foundation-model practice arrangements satisfy the requirements for 
qualification as a group practice. Section 1877(h)(4)(A) of the Act 
defines ``group practice'' to include, inter alia, two or more 
physicians legally organized as a foundation. In one common variation 
of a foundation-model arrangement, it is the foundation, and not the 
physicians, that owns the medical practice; thus, the physicians are 
not legally organized as a ``foundation'' as that term is used in 
section 1877(h)(4)(A) of the Act. Instead, the foundation owns and 
operates all elements of the practice. However, because it cannot 
provide physician services, the foundation employs or contracts with 
physicians to furnish patient care services (66 FR 902.) In States in 
which a foundation (or other corporation) may provide physician 
services, a medical foundation may be a group practice if all of the 
group practice requirements are satisfied.
    As we noted in Phase II, if a particular foundation-model 
arrangement meets the single legal entity test (and has at least two 
physician employees), it may qualify as a group practice under Sec.  
411.352 and use the in-office ancillary services exception in Sec.  
411.355(b), provided that all other requirements of Sec.  411.352 and 
the in-office ancillary services exception are met (69 FR 16077).
    Comment: Two commenters inquired about the application of the 
indirect compensation arrangements exception and personal service 
arrangements exception to foundation-model practices. One commenter 
questioned whether foundation-model structures create indirect 
compensation arrangements between referring physicians and the DHS 
entity that owns the foundation, thus implicating the indirect 
compensation arrangements exception requirements.
    Response: With respect to the application of the indirect 
compensation arrangements exception and personal service arrangements 
exception to arrangements involving medical foundations, we reiterate 
that an arrangement need not satisfy the requirements of a specific 
exception to comply with the physician self-referral rules. An entity 
may rely on any exception that an arrangement satisfies (66 FR 916, 
919; 69 FR 16086.) With the new ``stand in the shoes'' provision 
(discussed below in section VI.B), many arrangements involving 
foundation-model structures may be deemed to be direct compensation 
arrangements and potentially qualify for the personal service 
arrangements exception. Whether a particular arrangement constitutes an 
indirect compensation arrangement pursuant to Sec.  411.354(c) will 
continue to depend on the specific facts and circumstances of the 
arrangement.
    Comment: One commenter asserted that a ``typical'' medical 
foundation arrangement is structured as follows: a nonprofit medical 
foundation owns and operates a nonprofit health care clinic and 
contracts with a medical group (organized as a professional 
corporation) to provide the professional services of the group's 
employed physicians at the foundation's clinic. The medical foundation 
pays the group aggregate compensation that is then divided among the 
group's physicians. The commenter inquired whether the medical group 
can qualify as a group practice within the meaning of the physician 
self-referral rules if the medical foundation bills and collects for 
the professional services of the medical group using a provider number 
assigned to the foundation.
    Response: As we observed in Phase II (69 FR 16077), foundation-
model physician practices exist in a variety of forms, depending on 
jurisdiction and other factors; therefore, it is difficult to 
generalize about these arrangements. Nothing in the physician self-
referral regulations precludes a foundation-model physician practice 
from qualifying as a ``group practice'' if it can satisfy every element 
of the requirements in Sec.  411.352.
    The fact that a medical foundation bills and collects for the 
professional services of the physicians in the medical group who 
provide services at the foundation's clinic using a billing number 
assigned to the foundation rather than a billing number assigned to the 
group does not necessarily disqualify the medical group from satisfying 
the requirements of Sec.  411.352. However, the fact that professional 
services of members of the medical practice are billed by the 
foundation using a billing number assigned to the foundation pursuant 
to a reassignment may affect the ability of the medical practice to 
satisfy the ``substantially all'' test in Sec.  411.352(d), which 
requires that substantially all (that is, at least 75 percent) of the 
patient care services of the physicians who are members of the group 
practice (for example, owners or employees) are provided through the 
group and are billed under a billing number assigned to the group and 
amounts so received are treated as receipts of the group. Where 
professional services are provided to a foundation clinic pursuant to a 
services contract between the group practice and the foundation, a 
group practice may count such services as services the physician 
provides through the group. For further explanation of the 
``substantially all'' test, see 66 FR 904-905 and 69 FR 16079.
    We note that, if a foundation-model practice qualifies as a group 
practice under Sec.  411.352, the practice may be able to use the 
physician services or in-office ancillary services exceptions for

[[Page 51023]]

DHS referrals where the group practice is the entity furnishing the DHS 
(that is, where the DHS are billed under the group practice's billing 
number, not the foundation's billing number). Referrals of DHS billed 
by the foundation would not qualify for these exceptions.
    Comment: One commenter asserted that faculty practice plans should 
be entitled to the same treatment as group practices with respect to 
methodologies for compensating the plan physicians. According to the 
commenter, the inclusion of faculty practice plans as entities eligible 
under the statutory definition of ``group practice'' in section 
1877(h)(4)(A) of the Act evidences the Congress's intent that faculty 
practice plans be treated as group practices. The commenters asserted 
that the failure to include faculty practice plans as group practices 
disadvantages physicians in academic practice.
    Response: Nothing in the regulations prevents a faculty practice 
plan from qualifying as a group practice if it can satisfy the 
conditions in Sec.  411.352 (66 FR 917). If these conditions are 
satisfied, the faculty practice plan may avail itself of the physician 
services exception in Sec.  411.355(a) and the in-office ancillary 
services exception in Sec.  411.355(b) for DHS referrals within the 
faculty practice plan, as well as the special rule for productivity 
bonuses and profit shares in Sec.  411.352(i). We note that neither the 
physician services exception, nor the in-office ancillary services 
exception, would protect referrals by faculty practice plan physicians 
to other components of an academic medical center, such as the 
affiliated hospital. In such circumstances, the academic medical center 
services exception may be useful.
    Comment: One commenter asked for clarification of the unified 
business test requirement that a group practice have centralized 
decision-making by a body representative of the group practice and its 
application to a nonprofit corporation. Under IRS rules, a majority of 
the board of a tax-exempt, nonprofit corporation must be composed of 
disinterested representatives of the community. The commenter suggested 
that, in these situations, the individuals that are representative of 
the group practice should not have to constitute a majority of the 
board.
    Response: The regulations in Sec.  411.352(f)(1)(i) require that 
the decision-making body be representative of the group practice and 
that the decision-making body, not the group practice, maintain 
effective control over the group's assets and liabilities. Nothing in 
the regulations requires that a majority of the decision-making body be 
physicians (although this might be a reasonable and prudent way to 
ensure fair representation). In Phase II, we noted that ``there must be 
substantial `group level' management and operation,'' but did not 
prescribe any particular process (69 FR 16080). Nothing in the 
regulations would preclude a tax-exempt, nonprofit group practice with 
a majority of its board composed of disinterested representatives of 
the community from satisfying the requirements of Sec.  
411.352(f)(1)(i) if the board maintains effective control over the 
group's assets and liabilities and is representative of the group 
practice.
    Comment: Several commenters requested confirmation that a group 
practice can compensate its members (including employed physicians) and 
``physicians in the group practice'' by directly taking into account 
the volume and value of items and services that are provided ``incident 
to'' the physicians' professional services. Commenters questioned the 
interplay between language in Sec.  411.352(g) that prohibits group 
members from receiving any compensation based directly or indirectly on 
the volume or value of referrals by the physician and the special rule 
for productivity bonuses and profit shares in Sec.  411.352(i), which 
provides:

    A physician in a group practice may be paid a share of overall 
profits of the group, or a productivity bonus based on services that 
he or she has personally performed (including services ``incident 
to'' those personally performed services as defined [at] Sec.  
411.351), provided that the share or bonus is not determined in any 
manner that is directly related to the volume or value of referrals 
of DHS by the physician.

    Response: The ``volume or value of referrals'' provision in Sec.  
411.352(g) (section 1877(h)(4)(A)(iv) of the Act) describes a ban, for 
purposes of the group practice definition, on compensating members of 
the group practice in any way that relates directly or indirectly to 
the volume or value of their DHS referrals. Notwithstanding this 
restriction, the ``special rule'' in Sec.  411.352(i) (section 
1877(h)(4)(B)(i) of the Act) permits group practices to compensate 
their physicians using profit shares and productivity bonuses that 
indirectly relate to DHS referrals without jeopardizing their ability 
to qualify as a group practice.
    Specifically, in order to qualify as a group practice, a physician 
practice may not compensate a physician who is a member of the practice 
directly or indirectly based on the volume or value of referrals by the 
physician. However, under the special rule for profit shares and 
productivity bonuses, a group practice may pay a physician in the group 
practice a share of overall profits of the group provided that the 
share is not determined in any manner that is directly related to the 
volume or value of referrals of DHS by the physician. A group practice 
may also pay a physician in the group practice a productivity bonus 
based on services that the physician has personally performed or 
services ``incident to'' such personally performed services, or both, 
provided that the bonus is not determined in any manner that is 
directly related to the volume or value of referrals of DHS by the 
physician.
    With respect to productivity bonuses based on ``incident to'' 
services, we stated in Phase I (66 FR 909) our view that group practice 
physicians can receive compensation directly related to the physician's 
personal productivity and to services incident to the physician's 
personally performed services. We noted that the services would have to 
comply with the requirements of section 1861(s)(2)(A) of the Act and 
section 2050 of the Carriers Manual (now section 60.1 of the CMS 
Internet-only Manual, publication 100-02, Medicare Benefit Policy 
Manual, Chapter 15 (Covered Medical and Other Health Services)) or 
other HHS rules and regulations affecting ``incident to'' billing. That 
is, the services would have to be directly supervised by the physician 
under the ``incident to'' billing rules (the physician must be present 
in the office suite and immediately available). We believe that this 
heightened supervision requirement provides some assurance that the 
``incident to'' DHS would not be the primary incentive for a self-
referral. In Phase II, we reaffirmed this interpretation and indicated 
that we were revising the regulations to make clear that productivity 
bonuses can be based directly on ``incident to'' services that are 
incidental to a physician's personally performed services (69 FR 
16080).
    Based on comments to the Phase II rule, we believe additional 
regulatory text refinement is warranted. Accordingly, we have revised 
Sec.  411.352(i) to read:

    A physician in the group practice may be paid a share of overall 
profits of the group, provided that the share is not determined in 
any manner that is directly related to the volume or value of 
referrals of DHS by the physician. A physician in the group may be 
paid a productivity bonus based on services that he or she has 
personally performed (or services ``incident to'' such personally 
performed services), provided that the bonus is not determined in 
any manner that is

[[Page 51024]]

directly related to the volume or value of referrals of DHS by the 
physician (except that the bonus may directly relate to the volume 
or value of DHS referrals by the physician if the referrals are for 
services ``incident to'' the physician's personally performed 
services).

The revised regulatory text makes clear that productivity bonuses can 
be based directly on ``incident to'' services that are incidental to 
the physician's personally performed services, even if those ``incident 
to'' services are otherwise DHS referrals (for example, physical 
therapy or outpatient prescription drugs). The productivity bonus 
cannot be directly related to any other DHS referrals, such as 
diagnostic tests or hospital admissions. We note that in Phase II (69 
FR 16080), we also indicated that overall profit shares could relate 
directly to ``incident to'' services. Upon further reflection, we have 
concluded that this interpretation is inconsistent with the clear 
statutory language, which includes ``incident to'' services only in the 
context of productivity bonuses, and with our Phase I interpretation 
(66 FR 908-909). Thus, we are withdrawing our statement in Phase II at 
69 FR 16080 with respect to overall profit shares and ``incident to'' 
services. Because an overall profit share under Sec.  411.352(i)(2) 
means the aggregation of profits derived from DHS of the group as a 
whole or of a component of at least five physicians, an overall profit 
share will necessarily include profits from DHS that are billed as 
``incident to'' services (66 FR 876,909). Under this Phase III final 
rule, profits must be allocated in a manner that does not relate 
directly to DHS referrals, including any DHS that is billed as an 
``incident to'' service. We note that the regulations provide a number 
of methods that satisfy this requirement.
    Comment: One commenter requested clarification that ``incident to'' 
drugs may be factored directly into productivity bonuses, given that 
Sec.  411.352(i) speaks only of ``services'' and not ``items.''
    Response: A physician in a group practice may be paid a 
productivity bonus based on services and supplies furnished ``incident 
to'' a physician's personally performed services. We defined `` 
`incident to' services'' at Sec.  411.351 to mean those services that 
meet the requirements of section 1861(s)(2)(A) of the Act and Sec.  
410.26 of our regulations, both of which set forth coverage criteria 
for ``services and supplies'' furnished incident to a physician's 
professional services. Given our intent to conform the physician self-
referral regulations as much as possible to existing Medicare coverage 
and payment rules, we did not intend in Phase I or Phase II to 
distinguish between ``services'' and ``supplies'' furnished incident to 
a physician's professional services. Accordingly, we are revising the 
definition of `` `incident to' services'' at Sec.  411.351 to clarify 
that the term includes both services and supplies (such as drugs) that 
meet the applicable requirements set forth in section 1877(h)(4)(B)(i) 
of the Act and Sec.  410.26 of our regulations.
    Comment: One commenter stated that many group practices, in order 
to avoid taxes, do not allocate ``profits'' to their members, but 
distribute ``bonuses.'' The commenter asked if the group practice has 
complied with Sec.  411.352(i) if it calculates its ``bonuses'' in a 
manner that complies with the profit-sharing requirements.
    Response: A group practice may compensate physicians with overall 
profit shares or productivity bonuses, or some combination of the two, 
provided that the allocation methodology complies with Sec.  
411.352(i)(2) or (i)(3), respectively. Whether the characterization of 
funds distributed to physicians as ``bonuses'' rather than ``profits'' 
meets IRS rules is outside the scope of this rulemaking.
    Comment: A commenter requested that the minimum size of a group 
practice component for purposes of profit-sharing under Sec.  
411.352(i)(2) be fewer than the current requirement of at least five 
physicians where the grouping constitutes an identifiable specialty or 
practice focus within the group practice. According to the commenter, 
one of every four orthopedic groups has two or three physicians, and 
many larger groups have subspecialties of fewer than five members.
    Response: We stated in Phase I (66 FR 908) and Phase II (69 FR 
16080-16081) that we saw no reason to reduce the minimum number of 
physicians in a component for profit-sharing purposes. We maintain this 
position. Our concern remains that smaller components increase the risk 
of overutilization of DHS and other abuse by strengthening the ties 
between an individual physician's compensation and his or her 
referrals. Setting the minimum number of physicians in a group practice 
component at five reduces the likelihood that a physician will be 
directly compensated for his or her own referrals.

V. Prohibition on Certain Referrals by Physicians and Limitations on 
Billing--Sec.  411.353

    Section 411.353 sets out the basic prohibition on physician self-
referral under section 1877 of the Act. Two provisions, Sec.  
411.353(e) and Sec.  411.353(f), address the potentially harsh results 
from inadvertent violations of the prohibition. Section 411.353(e), 
which was added in Phase I, provides that payment may be made to an 
entity that submits a claim to Medicare for DHS if the entity did not 
have actual knowledge of, and did not act in reckless disregard or 
deliberate ignorance of, the identity of the physician who referred the 
DHS to the entity, provided that the claim otherwise complies with all 
applicable Federal laws and regulations. Section 411.353(f), which was 
added in Phase II, permits DHS entities to submit claims and receive 
payment for DHS furnished during certain instances of temporary 
noncompliance. Specifically, Sec.  411.353(f) permits DHS entities to 
submit claims and receive payment for such claims if: (1) The 
arrangement had been in full compliance with an applicable exception 
for at least 180 consecutive calendar days immediately preceding the 
date on which the financial relationship became noncompliant; (2) the 
financial relationship fell out of compliance for reasons beyond the 
entity's control and the entity promptly moved to address the 
noncompliance; and (3) the financial relationship does not violate the 
anti-kickback statute and complies with all applicable Federal and 
State laws, rules, and regulations. Section 411.353(f) applies only to 
DHS furnished during the time it takes the entity to rectify the 
noncompliance, which must not exceed 90 consecutive calendar days 
following the date on which the financial relationship became 
noncompliant. We specified that an entity could not use the exception 
in Sec.  411.353(f) more than once every 3-years with respect to the 
same referring physician, and the provision could not be used if the 
exception with which the financial relationship previously complied was 
either Sec.  411.357(k) or (m) (regarding nonmonetary compensation and 
medical staff incidental benefits, respectively). In general, 
commenters welcomed the protections of Sec.  411.353(e) and (f), but 
asked that they be broadened. We are making no substantive changes to 
Sec.  411.353(e) or (f) in this Phase III final rule.
    Comment: Some commenters asked for clarification regarding how long 
a DHS entity would be precluded from submitting claims for DHS referred 
by a physician with whom the DHS entity had a financial relationship 
that failed to comply with an exception and for which Sec.  411.353(f) 
or Sec.  411.357(f) either may not be applicable or may not

[[Page 51025]]

provide what the commenters believed would be sufficient protection.
    Response: The statute provides no explicit limitation on the 
billing and claims submission prohibition. We are addressing this issue 
in another rulemaking.
    Comment: Some commenters objected to our decision not to extend to 
referring physicians the protection of Sec.  411.353(e) (regarding 
payments made to an entity that does not have knowledge of the identity 
of the physician who made the referral for DHS). The commenters 
acknowledged that a referring physician would not be subject to 
sanction under section 1877 of the Act unless the physician knowingly 
caused an improper claim or bill to be submitted (or knowingly engaged 
in a circumvention scheme). The commenters were concerned, however, 
that the referring physician who had no such intent could nevertheless 
be subject to liability under the civil False Claims Act, 31 U.S.C. 
3729.
    Response: Liability under the civil False Claims Act requires that 
the violator act knowingly. Only a physician who knowingly causes the 
submission of a bill or claim for a service for which payment may not 
be made under section 1877 of the Act would be subject to sanction 
under the civil False Claims Act for such conduct. Similarly, as the 
commenters' observe, a referring physician would not be subject to 
sanction under section 1877(g) of the Act unless the physician 
knowingly causes an improper claim or bill to be submitted (or 
knowingly engages in a circumvention scheme). Accordingly, we are not 
expanding the provision as suggested by the commenters.
    Comment: Several commenters asked that we extend for a longer 
period of time the 90-day window in Sec.  411.353(f)(2), which permits 
a physician and DHS entity that are parties to an arrangement that no 
longer satisfies the requirements of an exception to refer and submit 
claims, respectively, for DHS. Some commenters asked that the window 
run from the date of noncompliance until 30 or 90 days after the date 
on which the noncompliance was discovered. Commenters asserted that the 
other requirements of the exception, namely that the arrangement had to 
have been in compliance with an exception for at least 180-consecutive 
calendar days immediately preceding the date on which the financial 
relationship became noncompliant and that the noncompliance was due to 
actions beyond the control of the DHS entity, were sufficient to 
protect against possible program or patient abuse. One commenter 
suggested that the expanded noncompliance window be conditioned on the 
good faith of the DHS entity and the immateriality or inadvertence of 
the noncompliance. One commenter acknowledged that starting the window 
from the time of discovery of the noncompliance may provide an 
incentive for hospitals and physicians to remain ignorant about 
noncompliant arrangements, but stated that this ``minor'' risk could be 
mitigated by a condition that would negate the use of the exception if 
that behavior exists. Another commenter recommended that, in a 
situation in which an arrangement is out of compliance, but the 
physician is unable to make referrals due to a disability, active 
military duty, or some other reason, the time for correcting the 
noncompliance be tolled until the point at which the physician is again 
reasonably able to make referrals.
    Response: We disagree with the commenters that proposed a 
``discovery-based'' rule, as well as with the commenter that 
recommended that the period in which noncompliance must be corrected be 
tolled during the time in which (for whatever reason) referrals are not 
being made. Section 1877 of the Act is intended to deter inappropriate 
financial relationships through a strict liability regime. A discovery-
based rule is contrary to the statutory scheme. Moreover, such a rule 
creates a perverse incentive not to diligently monitor and enforce 
compliance. Tolling the time period for rectifying the noncompliance 
while a physician is unable to make referrals due to disability, 
military duty, or another reason is not necessary because it is not 
likely that the parties would violate the physician self-referral 
statute if no referrals are being made.
    The commenters' suggestions would create substantial enforcement 
problems because it may be difficult to establish the date on which the 
noncompliance was discovered. Imposing standards regarding the 
materiality of the noncompliance or the good faith of the parties would 
present similar enforcement difficulties and would be contrary to the 
statutory scheme. Finally, we do not believe that extending the 
noncompliance window in Sec.  411.353(f)(2) beyond the current 90-days 
is either warranted or necessary. Parties to an arrangement should 
monitor the continued compliance of the arrangement with the conditions 
of an applicable exception. We note, however, as discussed below at 
section IX.D, that we are establishing a 6-month holdover provision for 
personal service arrangements that otherwise meet the requirements in 
Sec.  411.357(d). We believe that this provision, along with the 
holdover provisions already available in the exceptions for the rental 
of office space and equipment in Sec.  411.357(a) and (b), should 
provide adequate relief to parties to arrangements of these types that 
would otherwise temporarily fall out of compliance with the physician 
self-referral law.
    Comment: A hospital trade association asked that we delete the 
requirement in Sec.  411.353(f)(1)(ii) that the noncompliance be due to 
reasons beyond the entity's control. Several commenters sought 
clarification as to what actions were beyond the control of the DHS 
entity. Two commenters asked whether a physician's failure to sign 
promptly a written contract that the hospital had sent in a timely 
manner and that otherwise complied with the personal service 
arrangements exception would be considered beyond the hospital's 
control. One commenter asked whether, in evaluating the failure to 
continue to satisfy the requirements of an exception, it made a 
difference that the hospital needed the services immediately, such as 
for on-call coverage. Specifically, the commenter gave the example of 
the provision of needed on-call coverage services prior to the formal 
execution of a written agreement for those services. Another commenter 
suggested that we clarify that an arrangement is eligible for the 
temporary noncompliance exception if it falls out of compliance with an 
exception due to the actions of a third party, such as the actions of 
the government through a change in the regulations or the removal of a 
Health Professional Shortage Area (HPSA) designation of an area for 
purposes of the physician retention exception.
    Response: We discussed in detail the application of the temporary 
noncompliance exception in Phase II (69 FR 16057.) We are not repeating 
that explanation here. With respect to the inquiry regarding on-call 
coverage for which there is an immediate need, we reiterate that the 
DHS entity may avail itself of the temporary noncompliance exception 
only when the arrangement was in full compliance with an exception to 
the physician self-referral law under Sec.  411.355, Sec.  411.356, or 
Sec.  411.357 prior to the temporary noncompliance. In the example 
provided by the commenter, the arrangement was never in compliance with 
the law, and therefore the temporary noncompliance exception would be 
unavailable to the DHS entity. With respect to the second commenter's 
example regarding noncompliance occurring due to loss of a HPSA 
designation, as we noted in Phase II,

[[Page 51026]]

such noncompliance would be considered beyond the entity's control (69 
FR 16057). With respect to other instances of noncompliance caused by 
third parties, a determination of whether such noncompliance was beyond 
the entity's control would have to be made on a case-by-case basis. 
Finally, we do not believe it necessary or practical to give specific 
guidance on documentation of the steps taken to rectify temporary 
noncompliance. Entities should maintain adequate and contemporaneous 
documentation of all financial relationships with referring physicians, 
including--
     The terms of each arrangement;
     Whether and how an arrangement fell out of compliance with 
an exception;
     The reasons for the arrangement falling out of compliance;
     Steps taken to bring the arrangement into compliance;
     Relevant dates; and
     Similar information.
    Comment: Two commenters recommended eliminating the requirement in 
Sec.  411.353(f) that the arrangement must have been in compliance with 
an applicable exception for 180 consecutive calendar days immediately 
preceding the date on which the financial relationship became 
noncompliant. According to the commenter, the program is adequately 
protected by the requirement that the noncompliance had to occur for 
reasons beyond the entity's control.
    Response: For the reasons noted in Phase II, we are retaining the 
requirement that the arrangement must have been in compliance with an 
exception under Sec.  411.355, Sec.  411.356, or Sec.  411.357 for 180 
consecutive calendar days (69 FR 16057). We continue to believe that 
the requirement is necessary to ensure that the temporary noncompliance 
exception is not subject to abuse.
    Comment: A commenter recommended that enforcement officials 
exercise their discretion by declining to pursue minor and technical 
violations. Another commenter stated that we should consider adding an 
exception that would permit physicians to refer for DHS and DHS 
entities to submit and receive payment for DHS claims if, in our sole 
discretion, there was no abuse. The commenter suggested that such an 
exception should be available only after: (1) receipt by the entity of 
a favorable advisory opinion; or (2) a voluntary disclosure by the 
entity or upon audit or investigation by the government.
    Response: The physician self-referral law is a strict liability 
statute, and we therefore do not have authority to waive the nonpayment 
sanction under the statute for ``minor'' and ``technical'' violations, 
or violations stemming from non-abusive arrangements. We lack the 
statutory authority to promulgate the exception suggested by the 
commenter, but we are open to creating additional regulatory exceptions 
that pose no risk of program or patient abuse.

VI. Financial Relationship, Compensation, and Ownership or Investment 
Interest--Sec.  411.354

    Section 411.354 defines the financial arrangements that are subject 
to the statutory prohibition. The section defines direct and indirect 
ownership and investment interests, and direct and indirect 
compensation arrangements. The section also establishes a number of 
rules governing various aspects of compensation arrangements.
    In Phase I, we established a three-part, ``bright line'' test for 
defining an ``indirect compensation arrangement'' that incorporates a 
knowledge element. To satisfy the knowledge element, a DHS entity must 
have actual knowledge of, or act in reckless disregard or deliberate 
ignorance of, the fact that the referring physician receives aggregate 
compensation that varies with or otherwise reflects the volume or value 
of referrals or other business generated for the DHS entity. Phase I 
established a corresponding new exception for indirect compensation 
arrangements. By (1) defining the universe of ``indirect compensation 
arrangements'' that potentially trigger disallowance of claims and 
penalties, and (2) creating an exception for the subset of ``indirect 
compensation arrangements'' that would not trigger disallowance or 
penalties, we structured the treatment of indirect compensation 
arrangements under section 1877 of the Act to parallel closely the 
treatment of direct compensation arrangements.
    Phase I also established several special rules applicable to 
certain key requirements in the various definitions and exceptions 
related to compensation arrangements, including when an arrangement was 
``set in advance'' and whether time-based or unit-based compensation 
methodologies took into account ``the volume or value'' of referrals or 
``other business generated between the parties.'' Finally, Phase I 
established that, in some limited instances, it is permissible for an 
employer, managed care organization, or entity with which a physician 
contracts to require a physician to refer to a particular DHS entity as 
part of certain compensation arrangements.
    Phase II addressed concerns raised by commenters regarding the 
Phase I definitions of the various types of financial relationships. 
The modifications set forth in Phase II included--
     Clarifying the meaning of direct and indirect ownership 
and affirming that, absent unusual circumstances, common ownership of 
an entity does not create an ownership interest by one common investor 
in another (69 FR 16061);
     Clarifying the relationship between the ``indirect 
compensation arrangement'' definition and the ``volume or value'' and 
``other business generated'' standards (69 FR 16061);
     Revising the definition of ``referring physician'' at 
Sec.  411.351 to provide that a referring physician is treated as 
``standing in the shoes'' of his or her wholly-owned professional 
corporation (PC) (69 FR 16125).
    We also solicited comments on whether to permit a physician to 
``stand in the shoes'' of a group practice of which he or she is a 
member (69 FR 16060). (Our response to comments on this issue is set 
forth in detail below in section VI.B of this preamble.)
    In response to Phase II, we received comments regarding aspects of 
the ownership provisions. Most comments, however, related to various 
aspects of the ``indirect compensation arrangement'' definition and the 
related exception.
    We are making two substantive and several minor changes to Sec.  
411.354. First, we are revising the regulation text in Sec.  
411.354(b)(3)(v) to provide that an ownership or investment interest 
does not include a security interest in the equipment of a hospital 
held by a physician who both sold the equipment to the hospital and 
financed its purchase through a loan to the hospital. (However, such 
transactions will create compensation arrangements.) Second, we are 
amending the regulations in Sec.  411.354(c) to add a ``stand in the 
shoes'' provision under which referring physicians will be treated as 
``standing in the shoes'' of their group practices (and certain other 
physician organizations) for purposes of applying the rules that 
describe direct and indirect compensation arrangements in Sec.  
411.354. As explained in greater detail below in response to comments, 
this change will reduce the risk of fraud and abuse by closing an 
unintended loophole in the definition of ``indirect compensation 
arrangement'' (by deeming more arrangements to be direct compensation 
arrangements) and will ease compliance by simplifying the analysis of 
many arrangements. This revised approach is conceptually an extension 
of the Phase II rule that treated referring physicians as standing

[[Page 51027]]

in the shoes of their professional corporations.
    In addition, we are making non-substantive changes to clarify that 
we do not interpret ``otherwise reflects'' and ``takes into account'' 
(with respect to referrals and as these terms are used in certain 
exceptions) as having separate and different meanings. That is, the 
terms were used interchangeably in Phase II, and we have made 
conforming changes for consistency. Other changes are discussed below.

A. Ownership

    Comment: One commenter stated that secured loans should not 
automatically create an ownership or investment interest in the entity 
granting the security interest (absent other indicia of ownership such 
as voting or other governance rights, profit participation, etc.). For 
example, a contract for a physician's sale of equipment to a hospital 
on an installment payment basis will commonly include a security 
interest in the equipment in case of nonpayment. According to the 
commenter, under the Phase II rule, such a security interest would 
create an ownership interest in part of a hospital, and thus create a 
prohibited financial relationship (69 FR 16063). The commenter believed 
that this interpretation is at odds with our indication in Phase II 
that a one-time sale using installment payments that are protected by a 
security interest could be eligible for the isolated transactions 
exception in Sec.  411.357(f). The commenter asserted that this type of 
arrangement should instead be viewed as a compensation arrangement, 
potentially qualifying for the isolated transactions exception. The 
commenter referenced our Phase II remarks with respect to the types of 
transactions that qualify for the protection of the exception for 
isolated transactions at Sec.  411.357(f) (69 FR 16098).
    Response: In Phase II, we indicated that loans or bonds secured by, 
or otherwise linked to, a particular piece of equipment or the revenue 
of a department or other discrete hospital operations would be 
considered an ownership interest in part of a hospital (69 FR 16063). 
We also stated that a one-time sale of property (which could be 
equipment), using installment payments that are appropriately secured, 
for example by a security interest taken in the property, could qualify 
for the isolated transactions exception in Sec.  411.357(f) if all 
other requirements of the exception are satisfied (69 FR 16098). After 
reconsidering the issue, we do not believe that the Congress intended a 
security interest taken by a physician in equipment sold to a hospital 
and financed by a loan from the physician to the hospital to create an 
ownership or investment interest in the hospital's property or a 
portion of the hospital's property (subject to a contrary provision in 
the security instrument or agreement of the parties). Instead, such a 
transaction is more appropriately analyzed as a compensation 
arrangement that must satisfy the requirements of an applicable 
exception if the physician-seller refers DHS to the hospital-purchaser. 
We have modified Sec.  411.354(b)(3), accordingly. We continue to 
believe that loans or bonds secured by, or otherwise linked to, the 
revenue of a department or other discrete hospital operations would be 
considered an ownership interest in a part of a hospital. Such 
interests would not qualify for protection under the whole hospital 
exception in Sec.  411.356(c)(3).
    Comment: A commenter objected to the treatment of bonds as an 
ownership interest in Sec.  411.354(b)(1) and suggested that there 
should be an exception for bonds issued by a tax-exempt entity that has 
a non-participatory interest. For example, an ownership interest should 
not include a bond issued by a tax-exempt entity if interest is not 
calculated on the earnings of the institution.
    Response: Section 1877 of the Act includes as a ``financial 
relationship'' both ownership and investment interests, except for 
those specifically excluded under sections 1877(c) and (d) of the Act. 
Section 1877 of the Act provides that ownership or investment interests 
can be through equity, debt, or other means. Because bonds are an 
investment interest based on debt, the purchase of bonds (regardless of 
whether the issuing entity is tax-exempt) creates an ownership or 
investment interest for purposes of the physician self-referral law.
    Comment: One commenter stated that some physicians were 
interpreting improperly the language in the Phase I preamble regarding 
the exclusion of any interest in a retirement plan from the definition 
of ``ownership or investment interest'' in Sec.  411.354(b)(3). 
According to the commenter, some physicians are using retirement plans 
to purchase DHS entities to which they refer patients for DHS. The 
commenter requested clarification of our position.
    Response: We agree with the commenter that the purchase of 
ownership interests in DHS entities by physicians through their 
retirement funds is inconsistent with the statutory intent. In addition 
to the information provided by this commenter, we have heard 
anecdotally that some physicians are purchasing ownership interests in 
DHS entities through their retirement plans. In the CY 2008 Physician 
Fee Schedule notice of proposed rulemaking (72 FR 38122), we proposed 
revisions to Sec.  411.354(b)(3) to address the issue of ownership in a 
retirement plan. We may finalize that proposal, or a similar change to 
the regulation, in a future rulemaking. We caution that, depending on 
the facts, arrangements involving a DHS entity owned through a 
physician's retirement plan may be part of an indirect compensation 
arrangement between the referring physician and the DHS entity 
(pursuant to Sec.  411.354(c)) that would need to satisfy the 
requirements of the exception in Sec.  411.357(p) for indirect 
compensation arrangements. In many cases, the referring physician would 
receive compensation from the retirement plan that takes into account 
the referrals to the DHS entity owned by the retirement plan. The 
arrangements described by the commenter are also problematic under the 
anti-kickback statute.
    Comment: A commenter asked whether a guaranty of a loan constitutes 
an ownership interest in the debtor and, if so, what exception would be 
available.
    Response: A guaranty does not create an ownership interest, but a 
guaranty usually creates a compensation arrangement between the 
guarantor and the debtor.

B. Compensation

    Phase II discussed at some length the definition of an indirect 
compensation arrangement. Some commenters on the Phase II rule 
requested further clarification, particularly regarding--
     The treatment of an indirect compensation arrangement;
     The relationship between the definition of ``indirect 
compensation arrangement'' and the exception for indirect compensation 
arrangements; and
     The relationship between the exception for indirect 
compensation arrangements and other exceptions.
    Many commenters sought clarification regarding the application of 
the indirect compensation arrangement definition in the context of 
financial arrangements in which a group practice was interposed between 
the entity furnishing DHS and the referring physician. According to 
some commenters, in most of these arrangements, there would not appear 
to be an indirect compensation arrangement within the meaning of the 
regulation, because the physician's compensation from the group 
practice would likely be based on his or her

[[Page 51028]]

productivity in the group practice, and not tied to referrals to the 
DHS entity with which the group practice has a financial arrangement. 
Other commenters stated that they continued to find the definition 
difficult to understand and apply.
    In Phase II, we specifically solicited comments with respect to 
whether we should permit physicians to ``stand in the shoes'' of their 
group practices for purposes of determining whether they have a direct 
or indirect compensation arrangement with a DHS entity (69 FR 16060). 
This Phase III final rule includes new provisions in Sec.  411.351 and 
Sec.  411.354 that address compensation arrangements in which a group 
practice (or other ``physician organization,'' as newly defined at 
Sec.  411.351) is directly linked to the physician in a chain of 
financial relationships between the referring physician and a DHS 
entity. Under the Phase I and II regulations, such arrangements did not 
fit in the definition of a direct compensation arrangement (66 FR 868, 
69 FR 16059-16060); rather such arrangements would have been analyzed 
under the as ``indirect compensation arrangements'' under Sec.  
411.354(c)(2). If an arrangement meets the definition of an ``indirect 
compensation arrangement,'' it must comply with the exception for 
indirect compensation arrangements at Sec.  411.357(p) if the physician 
refers DHS to the entity.
    This approach creates two issues. First, industry representatives 
have claimed that resorting to the indirect compensation arrangements 
definition and exception adds an unnecessary step when determining 
compliance with the physician self-referral prohibition. These parties 
believe that it would be easier, more efficient, and consistent with 
the purposes of the physician self-referral law to examine the 
relationship between the hospital and the group practice for compliance 
with a physician self-referral exception. They urge that a referring 
physician should ``stand in the shoes'' of his or her group practice, 
which acts on behalf of its physician members and contractors. This 
would, in turn, enable the parties to analyze the arrangement between 
the DHS entity and the group practice (for example, a lease of office 
space, personal service arrangement, or fair market value arrangement) 
under the various direct compensation arrangements exceptions, without 
using the indirect compensation arrangements definition or exception. 
We agree.
    Second, we are concerned about reports that parties may be 
construing the definition of an indirect compensation arrangement too 
narrowly, resulting in determinations that arrangements that involve 
financial incentives for referring physicians fall outside the ambit of 
the physician self-referral law. In particular, we are concerned that 
arrangements between DHS entities and group practices are often viewed 
as outside the application of the statute. The new ``stand in the 
shoes'' provisions should close this unintended loophole by treating 
compensation arrangements between DHS entities and group practices as 
if the arrangements are with the group's referring physicians. This 
approach incorporates a commonsense understanding of the relationship 
between group practices and their physicians. Thus, if a DHS entity 
leases office space to a group practice, the lease will be deemed to be 
a direct compensation arrangement with each physician in the group 
practice, and the lease will need to fit in the exception for rental of 
office space in Sec.  411.357(a) if the DHS entity wants to submit 
claims for DHS referrals from those physicians. For purposes of the 
``stand in the shoes'' provision, we are including in the definition of 
``physician organizations,'' in whose shoes the referring physician 
will stand, the referring physician's professional corporation, 
physician practice, or group practice.
    Specifically, under the new provision, a physician is deemed to 
have a direct compensation arrangement with an entity furnishing DHS if 
the only intervening entity between the physician and the DHS entity is 
his or her physician organization. In addition, for purposes of the 
definition of ``indirect compensation arrangement,'' a physician will 
be deemed to stand in the shoes of the physician organization with 
which he or she has a direct financial relationship (that is, the 
physician organization with which he or she is directly linked). When a 
physician stands in the shoes of his or her physician organization, he 
or she will be deemed to have the same compensation arrangement (with 
the same parties and on the same terms) as the physician organization 
has with the DHS entity. We have included language in the regulations 
in Sec.  411.354(c)(3)(i) to make clear that ``parties'' refers to the 
physician organization and all of its physician members, employees, and 
independent contractors. In the preceding example, the arrangement for 
the rental of office space would need to satisfy all of the 
requirements of the exception in Sec.  411.357(a), including, for 
example, the requirement that the rental charges not take into account 
the volume or value of referrals or other business generated between 
the parties. The ``parties'' to the arrangement would be the hospital 
and the group practice, including all members, employees, and 
independent contractors of the group practice. Thus, if the lease 
arrangement takes into account referrals or other business generated by 
the group practice (or any of its physicians) the arrangement will not 
be protected.
    We are mindful that many existing arrangements involving 
relationships with an interposed physician organization between the DHS 
entity and the referring physician, like the one discussed in the 
example above, may have been properly structured to comply with the 
indirect compensation arrangements exception in Sec.  411.357(p). It is 
not our intent to require that those arrangements be reexamined and 
revised to comply with a direct compensation arrangements exception. 
Except as provided below, as of the effective date of this Phase III 
final rule, all compensation arrangements must be analyzed under the 
``stand in the shoes'' provisions in Sec.  411.354 to determine what 
type of compensation arrangement exists (direct or indirect) and what 
corresponding exceptions might be available. However, arrangements that 
were entered into prior to the publication date of this Phase III final 
rule and that satisfied the requirements of the indirect compensation 
arrangements exception in Sec.  411.357(p) on the date of the 
publication of this Phase III final rule need not be amended during the 
original term of the arrangement or the current renewal term (that is, 
the renewal term the arrangement is in on the date of publication of 
this Phase III final rule) to comply with the requirements of another 
exception. Those arrangements may continue to use the exception in 
Sec.  411.357(p) during the original or current renewal term of the 
agreement as if the ``stand in the shoes'' doctrine does not apply.
    We are not making any changes at this time to the treatment of 
arrangements that, after application of the ``stand in the shoes'' 
provision, still do not meet the definition of a direct compensation 
arrangement. Those arrangements will continue to require analysis under 
the indirect compensation arrangements definition. In other words, 
arrangements involving an intervening entity other than a physician 
organization (for example, a chain that runs DHS entity to management 
company to referring physician) or involving more than one intervening 
entity (for example, a chain that runs DHS entity to management company 
to group practice to referring physician) would continue to be

[[Page 51029]]

analyzed under the Phase I and II rules for indirect compensation 
arrangements and the indirect compensation arrangements exception. 
Although we remain concerned that arrangements that interpose such 
entities are subject to abuse, we believe that we would benefit from 
additional public input on the best way to apply a ``stand in the 
shoes'' rule to these indirect relationships. We note that an 
arrangement that may not qualify as either a direct or an indirect 
compensation arrangement for purposes of the physician self-referral 
statute may still be suspect under the anti-kickback statute.
    We believe that this new provision will address the concerns raised 
in the comments, including comments discussed below in section VI.B, as 
well as simplify compliance with the physician self-referral 
regulations generally. Our responses to specific comments are discussed 
below.
    Comment: A number of commenters requested further clarification, 
for purposes of the indirect compensation arrangement definition, 
regarding the circumstances under which compensation received by a 
physician may ``otherwise reflect'' the volume or value of the 
physician's referrals to an entity furnishing DHS. Specifically, these 
comments addressed situations in which the physician has a direct 
financial relationship with an ``intervening entity'' that, in turn, 
has a direct relationship with the DHS entity to which the physician 
refers patients for DHS. Several commenters believed that payments by a 
hospital to a group practice for the recruitment of a physician should 
not implicate the general prohibition with respect to referrals made by 
physicians in the group other than the recruited physician, provided 
that the physicians in the group are not compensated based on the 
volume or value of their referrals to the hospital making the 
recruitment payment. Another commenter stated that, if we interpret the 
``otherwise reflect'' language to mean that a fixed payment may 
``reflect'' the volume or value of referrals if that payment exceeds 
fair market value, we should state that clearly. However, the commenter 
noted that such an interpretation would be very problematic, because 
the volume and value standard is critical to many of the statutory and 
regulatory exceptions.
    Response: First, in Phase II, we clearly stated that fixed 
compensation (that is, one lump payment or several individual payments 
aggregated together) can take into account or otherwise reflect the 
volume or value of referrals (for example, if the payment exceeds the 
fair market value for the items or services provided) (69 FR 16059). 
Whether the compensation does, in fact, take into account or otherwise 
reflect the volume or value of referrals will require a case-by-case 
determination based on the facts and circumstances.
    Many of the commenters' concerns regarding indirect compensation 
arrangements involving payments to group practices will become moot, 
given our decision to adopt a ``stand in the shoes'' policy, as 
described above. Many arrangements will need to satisfy a direct 
exception, and the group practice's method of compensating a physician 
will be irrelevant for purposes of determining compliance with an 
exception.
    Comment: Several commenters described financial arrangements 
between DHS entities and group practices that did not meet the 
definition of an indirect compensation arrangement. The commenters 
requested confirmation that, if there is no direct or indirect 
financial relationship (as defined in the regulations) between a DHS 
entity and a physician, section 1877 of the Act is not implicated.
    Response: Section 1877 of the Act prohibits only referrals from a 
physician to entities furnishing DHS with which the physician (or an 
immediate family member) has a financial relationship as defined at 
Sec.  411.354.
    We believe that the commenters' inquiries are addressed by the 
modifications we are making in this Phase III final rule regarding the 
treatment of certain compensation arrangements between entities 
furnishing DHS, group practices, and physicians in those group 
practices. Specifically, as discussed above, we are adding new 
provisions in Sec.  411.354 to treat a physician as ``standing in the 
shoes'' of his or her group practice or physician organization. 
Conceptually, this new provision has the effect of treating many 
compensation arrangements that previously would have been treated as 
indirect compensation arrangements as direct compensation arrangements 
and requiring them to satisfy the requirements of an exception for 
direct compensation arrangements. It also has the effect of treating 
some arrangements that may not previously have met the definition of 
either a ``direct compensation arrangement'' or an ``indirect 
compensation arrangement'' as a direct compensation arrangement for 
which an exception is needed. As many commenters to Phase II 
recognized, indirect compensation arrangements are clearly subject to 
the physician self-referral prohibition.
    Comment: One commenter sought clarification concerning the 
interplay between the use of the ``volume or value'' standard in the 
definition of an indirect compensation arrangement and the exception 
for indirect compensation arrangements. Specifically, the commenter 
asked how any indirect compensation arrangement could satisfy the 
exception's requirement that the arrangement not take into account the 
volume or value of referrals ``in any manner,'' given that, by 
definition, the compensation must vary with, or otherwise reflect, the 
volume or value of referrals.
    Response: In Phase II, we responded to a similar comment. In that 
rule (69 FR 16069), we stated:

    For purposes of determining whether an indirect compensation 
arrangement exists under the definition at Sec.  411.354(c), the 
inquiry is whether the aggregate compensation to the referring 
physician reflects the volume or value of DHS referrals or other 
business generated by the referring physician, even if individual 
time-based or unit-of-service based payments would otherwise be 
permissible (that is, the payments are fair market value at 
inception and do not vary over the term of the agreement). In short, 
many time-based or unit-of-service based fee arrangements will 
involve aggregate compensation that varies based on volume or value 
of services and thus will be ``indirect compensation arrangements'' 
under Sec.  411.354(c). However, in determining whether these 
arrangements fit into the indirect compensation arrangements 
exception at Sec.  411.357(p), which does not include an aggregate 
requirement, the relevant inquiry is whether the individual payments 
are fair market value not taking into account the volume or value of 
referrals or other business generated by the referring physician 
(and do not change after inception). In other words, the issue is 
whether the time-based or unit-of-service based fee is fair market 
value and not inflated to compensate for the generation of business.

In short, the definition looks to the aggregate compensation (that is, 
compensation that combines each individual payment under the 
arrangement), whereas the exception looks at individual payments 
without aggregating them.
    Comment: One commenter asked that we clarify that the conversion of 
a direct compensation arrangement that does not meet a direct 
compensation arrangements exception into an indirect compensation 
arrangement that meets the indirect compensation arrangements exception 
is not a prohibited circumvention scheme.
    Response: We are unclear about the exact nature of the arrangements 
described by the commenter. If an

[[Page 51030]]

arrangement between a referring physician (or immediate family member) 
and a DHS entity meets the definition of an ``indirect compensation 
arrangement'' and, in fact, satisfies the requirements of the indirect 
compensation arrangements exception in Sec.  411.357(p), referrals made 
between the referring physician (or immediate family member) and the 
DHS entity are not prohibited. The arrangement must satisfy the 
exception in operation, not just on the face of the documentation. 
Efforts to circumvent improperly the statute in any form may evidence 
improper intent for purposes of the physician self-referral statute, 
which may be relevant to enforcement actions for civil monetary 
penalties and false claims if the financial arrangement does not 
satisfy the requirements of an exception. Moreover, such efforts are 
also relevant in analyzing the intent of the arrangement for purposes 
of the anti-kickback statute. We note that the indirect compensation 
arrangements exception includes a condition that the arrangement not 
violate the anti-kickback statute. In addition, arrangements that 
interpose a leasing or other entity between the DHS entity and the 
referring physician may involve illegal kickbacks, even if they do not 
come within the definition of an indirect compensation arrangement.
    Comment: A hospital association asserted that some hospitals 
collect information regarding physicians' financial relationships for 
purposes of monitoring conflicts of interest and suggested that we not 
use such information in determining whether a DHS entity satisfies the 
knowledge criteria in Sec.  411.354(c)(2)(iii) for purposes of the 
indirect compensation arrangements definition.
    Response: Any information in the possession of a hospital may be 
relevant in assessing whether the hospital knew or had reason to know 
of an indirect financial relationship involving a referring physician.
    Comment: A commenter requested clarification of the example in 
Phase II regarding an indirect financial relationship involving a 
physician who has an ownership interest in a hospital that contracts 
for services with a clinical laboratory to which the physician refers 
(69 FR 16060). The commenter questioned our analysis, asserting that 
the hospital would not be receiving compensation that would vary with 
the volume or value of referrals, because the hospital would be paying 
for services furnished. The commenter requested further clarification.
    Response: As we stated in Phase II, the arrangement referenced by 
the commenter normally would not create an indirect compensation 
arrangement. Absent unusual circumstances, the hospital would not 
receive aggregate compensation that reflects the volume or value of 
referrals because the hospital would not be receiving any compensation 
from the clinical laboratory (assuming the contracted charges for the 
laboratory services are at fair market value) (69 FR 16060). However, 
if the laboratory charged the hospital less than fair market value for 
its services (resulting in remuneration to the hospital), the 
arrangement could meet the definition of an indirect compensation 
arrangement between the referring physician and the laboratory 
(depending on the facts and circumstances). The arrangement would not 
satisfy the requirements of the indirect compensation arrangements 
exception because payments for the laboratory services were not at fair 
market value.

C. Special Rules on Compensation

    Section 411.354(d) sets forth rules regarding several key terms, 
including ``set in advance,'' ``the volume and value of referrals,'' 
and ``other business generated between the parties.'' These terms are 
used in many of the compensation arrangements exceptions. In addition, 
Sec.  411.354(d)(4) provides that, in certain circumstances, it is 
permissible for a physician's compensation from an employer, or under a 
managed care or other contract, to be conditioned on referrals to 
particular entities, notwithstanding the general ban in many exceptions 
on compensation that takes into account the volume or value of 
referrals.
    In Phase I, we provided that compensation would be considered ``set 
in advance'' if the aggregate compensation or a time-based or per-unit 
of service-based amount is set in advance in the initial agreement in 
sufficient detail so that it can be effectively verified (66 FR 959). 
In Phase II, we modified the special rule to provide that compensation 
would also be considered ``set in advance'' if the specific formula for 
calculating the compensation is set out in an agreement between the 
parties before the furnishing of the items or services, and the formula 
is set forth in sufficient detail so that it can be effectively 
verified and is not changed during the course of the agreement in any 
manner that reflects (or takes into account) the volume or value of 
referrals or other business generated. The principal impetus for 
deeming formula-based compensation to be ``set in advance'' came from 
comments from associations representing physicians that urged us to 
accommodate common percentage compensation arrangements. This Phase III 
final rule retains flexibility for utilizing unit-based and percentage-
based compensation formulae for arrangements.
    In Phase I, we stated that unit-based compensation would be deemed 
not to take into account ``the volume or value of referrals'' if the 
compensation is fair market value and does not vary during the course 
of the arrangement in any manner that takes into account DHS referrals 
(66 FR 876). Similarly, in Phase I, we stated that unit-based 
compensation would be deemed not to take into account ``other business 
generated between the parties'' if the compensation is fair market 
value and does not vary during the course of the arrangement in any 
manner that takes into account other business generated by the 
referring physician, including private pay health care services (66 FR 
877). We made no changes in Phase II with respect to either the 
``volume or value'' or ``other business generated'' deeming provisions.
    The Phase I special rules on compensation permitted entities 
furnishing DHS to condition physician compensation in certain 
circumstances on the physician's compliance with referral restrictions, 
if certain conditions were satisfied. Phase II clarified that the 
required referral provision applies to employment, managed care, and 
personal service arrangements only, and set forth new requirements 
specifying that: (1) the required referrals must relate solely to the 
physician services covered by the arrangement; and (2) the referral 
requirement must be reasonably necessary to effectuate the legitimate 
purpose of the compensation arrangement (69 FR 16069). In this Phase 
III final rule, we are amending the regulatory text in Sec.  
411.354(d)(4) to include expressly contracts for personal services.
    Comment: Two commenters sought clarification that percentage-based 
compensation arrangements, the methodologies of which were fixed at the 
outset of the contract and did not vary during the term of the 
agreement, would satisfy the ``set in advance'' standard in Sec.  
411.354(d)(1) and be deemed not to take into account the ``volume or 
value'' of referrals or ``other business generated between the 
parties'' pursuant to Sec.  411.354(d)(2) and (d)(3), respectively. One 
commenter requested that the text of Sec.  411.354(d)(2) and (d)(3) be 
revised to reference percentage-based compensation specifically. 
Another commenter asked if compensation based on a percentage of 
collections satisfied

[[Page 51031]]

the requirements of the regulation, and another commenter asked about 
compensation that includes a percentage of the net revenues of a 
business unit for which the physician is responsible.
    Response: To satisfy the requirements of many compensation 
arrangements exceptions, compensation must be ``set in advance,'' 
consistent with fair market value, and not take into account the volume 
or value of referrals or other business generated by the referring 
physician.
    The first two commenters are correct that, under the Phase II 
special rule in Sec.  411.354(d), percentage-based compensation 
arrangements can be considered ``set in advance'' if the methodology is 
fixed at the outset of the contract with sufficient specificity and not 
changed during the course of the agreement in a manner that reflects 
referral volumes or other business generated.
    With respect to the comments about percentage of collections and 
percentage of revenues compensation methodologies, such methodologies 
may be able to meet the ``set in advance'' test, depending on the 
facts. However, such compensation arrangements must also meet the other 
terms of a relevant exception, such as the terms excluding compensation 
that takes into account the volume or value of referrals or other 
business generated between the parties. This would involve, among other 
things, testing the arrangements against the deeming provisions in 
Sec.  411.354(d)(2) and Sec.  411.354(d)(3) related to ``volume or 
value of referrals'' and ``other business generated between the 
parties''; these deeming provisions apply only to unit-based 
compensation and require that unit-based compensation be fair market 
value and unrelated to referrals. We cannot determine based on the 
facts provided whether the arrangements would comply with an exception. 
We are not persuaded that Sec.  411.354(d)(2)and (d)(3) should be 
revised to reference specifically percentage-based compensation 
arrangements.
    Comment: Three commenters objected to Sec.  411.354(d)(4), which 
provides that a physician's compensation from an employer or under a 
managed care or other contract may be conditioned on referrals to 
particular entities in certain circumstances. Two of the commenters 
also objected to our response to a comment in Phase II that stated that 
a hospital may require its employees to refer patients to its home 
health agency if the requirements in Sec.  411.354(d)(4) are satisfied 
(69 FR 16089). According to all three commenters, Sec.  411.354(d)(4) 
conflicts with section 4321 of the Balanced Budget Act of 1997 (BBA 
1997), which amended section 1861(ee)(2) of the Act, and which relates 
to hospitals' obligations under the discharge planning process to 
patients in need of home health services. Section 1861(ee)(2) of the 
Act requires the Secretary to develop guidelines and standards for the 
discharge planning process in order to ensure a timely and smooth 
transition to the most appropriate type of setting for post-discharge 
care. Section 4321 of BBA 1997 amended section 1861(ee)(2) of the Act 
to require, among other things, that the discharge plan advise the 
patient of participating home health agencies that serve the area in 
which the patient resides and that it identify any home health agency 
to which the patient is referred in which the hospital has a 
disclosable financial interest.
    One commenter stated that allowing an entity to condition 
employment on an agreement to refer patients to a particular provider 
may implicate the Federal anti-kickback statute, and may encourage a 
violation of Federal and State antitrust laws or State unfair trade 
practices laws. The commenter suggested that we delete Sec.  
411.354(d)(4).
    Response: Section 411.354(d)(4) does not conflict with the 
requirements of section 1861(ee)(2) of the Act, as amended by section 
4321 of BBA 1997. Under section 4321 of BBA 1997, as part of the 
discharge plan, a hospital is required to provide a patient needing 
home health services or skilled nursing facility services a list of 
local home health agencies or skilled nursing facilities, as 
appropriate. If, after being provided the list, the patient expresses a 
choice as to the particular provider from which he or she wishes to 
receive treatment, the hospital and the patient's treating physician 
are required to honor that choice. Nothing in Sec.  411.354(d)(4)(iv) 
permits a physician and the employing or contracting entity to override 
a patient's choice of provider. To the contrary, Sec.  
411.354(d)(4)(iv) affirmatively requires that the arrangement between 
the physician and the entity honor a patient's choice. Section 
411.354(d)(4)(iv) requires that the arrangement must provide that the 
physician is not obligated to refer to a particular provider, 
practitioner, or supplier if: the patient expresses a preference for a 
different provider, practitioner, or supplier; the patient's insurer 
determines the provider, practitioner, or supplier; or the referral is 
not in the patient's best medical interests in the physician's 
judgment. Section 411.354(d)(4)(v) further provides that the 
requirement to make referrals to a particular provider, practitioner, 
or supplier must relate solely to the physician's services covered by 
the scope of his or her employment or contract.
    Whether an arrangement implicates the anti-kickback statute is a 
matter for the Department of Justice (DOJ) and the OIG. Arrangements 
that include referral requirements may implicate the anti-kickback 
statute and should be closely scrutinized to ensure that no purpose of 
the compensation is to induce or reward referrals. An arrangement that 
fully complies with the requirements of Sec.  411.354(d)(4), however, 
does not necessarily raise concerns under Federal and State antitrust 
or unfair trade practices statutes. Accordingly, we are not persuaded 
that the potential for implication of the anti-kickback statute or the 
Federal and State antitrust laws noted by the commenters warrants 
withdrawal of Sec.  411.354(d)(4).
    Comment: Commenters asked whether an agreement between an entity 
furnishing DHS and a referring physician could be amended during the 
first year of the agreement and still satisfy the ``set in advance'' 
requirement. According to one commenter, the definition of ``set in 
advance'' implies that an amendment is permissible, provided that the 
amendment is not related to the volume or value of referrals or other 
business generated between the parties. According to the commenter, the 
implication is that any number of amendments for other, bona fide 
reasons is permissible.
    Response: The commenter is correct that amendments are permissible 
under the ``set in advance'' definition if they are made for bona fide 
reasons unrelated to the volume or value of referrals or other business 
generated between the parties. However, parties must still satisfy all 
requirements of an exception, including any requirements bearing on 
amendments of agreements. (See discussion in section IX.A below.)

VII. General Exceptions to the Referral Prohibition Related to Both 
Ownership and Compensation--Sec.  411.355

A. Physician Services

    Section 1877(b)(1) of the Act specifies that the general 
prohibition does not apply to physician services (as defined in section 
1861(q) of the Act) that are furnished: (1) Personally by another 
physician in the same group practice as the referring physician; or (2) 
under the supervision of another physician in the same group practice 
as the referring physician. In Phase I, we interpreted the

[[Page 51032]]

exception to apply to referrals to, or physician services supervised 
by, a ``member of the group practice'' or an independent contractor who 
qualifies as a ``physician in the group practice'' as defined at Sec.  
411.351 (69 FR 879). We made no changes to this exception in Phase II. 
In this Phase III final rule, we are making no substantive 
modifications to this exception; however, we are deleting Sec.  
411.355(a)(3), which incorrectly suggests that diagnostic tests are 
``incident to'' services. As we clarified in the CY 2003 Physician Fee 
Schedule final rule published December 31, 2002, any diagnostic service 
that has its own benefit category cannot be billed as an ``incident 
to'' service (67 FR 79994). In addition, Sec.  411.355(a)(3) is 
repetitive of Sec.  411.355(a)(2) and, therefore, is unnecessary.
    Comment: One commenter suggested that we amend the physician 
services exception by deleting from Sec.  411.355(a) ``physician in the 
same group practice'' (as defined at Sec.  411.351) from among the 
types of physicians who can be the ``referring physician.'' According 
to the commenter, this change would clarify that referrals within a 
group practice to independent contractor pathologists who perform 
services for the group in off-site ``pod labs'' are impermissible under 
the physician services exception. According to the commenter, the 
development of the concept of ``physician in the group practice'' was 
not intended to allow group practices simply to refer to independent 
contractors for whose services the group could then bill on 
reassignment.
    Response: The physician services exception in section 1877(b)(1) of 
the Act and Sec.  411.355(a) enables group practice physicians to make 
referrals within their group practices for physician services that are 
DHS and that are performed or supervised by either a member of the 
group practice or by a ``physician in the group practice.'' A 
``physician in the group practice'' is considered to be in the group 
practice only when he or she is performing services in the group 
practice's facilities. Accordingly, although professional services 
performed by a member of the group practice may be provided on or off 
the group practice's site for purposes of this exception, professional 
services performed by an independent contractor physician must be 
performed in the group practice's facilities. Thus, the exception is 
not applicable to services provided by independent contractors in off-
site locations that are not group facilities.
    However, we do not believe that it is appropriate to ban group 
practices from referring to any independent contractor physician. We 
appreciate the commenter's concerns regarding independent contractor 
pathologists who perform services for the group practice in off-site 
``pod labs'' and continue to study the issue. At this time, we decline 
to make the change to the physician services exception requested by the 
commenter. We note that, in addition to physician self-referral 
considerations, the provision of off-site services by group practices 
raises significant concerns under the anti-kickback statute.

B. In-office Ancillary Services

    The in-office ancillary services exception is one of the most 
important exceptions to the physician self-referral prohibition. 
Generally, it permits a physician or group practice to order and 
provide DHS, other than most durable medical equipment (DME), in the 
office of the physician or group practice, provided that the DHS is 
truly ancillary to the medical services furnished by the group 
practice. The statutory exception has four main components--
     The nature of the DHS;
     The personnel who perform or supervise the DHS;
     The location where the DHS are provided; and
     The manner in which the DHS are billed.
    The Phase I rule interpreted the statutory provision by permitting 
great flexibility in the provision of ancillary services in the ``same 
building'' (as defined at Sec.  411.351) where a physician or a group 
practice routinely provides the full range of their medical services, 
while limiting the availability of the ``centralized building'' (as 
defined at Sec.  411.351) option to premises that are used on an 
exclusive and full-time basis. With respect to the other requirements, 
the Phase I rule clarified the types of DHS that could be provided 
under the exception and relaxed the supervision requirements by 
incorporating the Medicare coverage and payment supervision rules and 
permitting independent contractor physicians to provide supervision on 
a group practice's premises.
    In response to public comments urging a more ``bright-line'' test, 
Phase II revised the criteria for determining when services are 
furnished in the ``same building'' where the physician or group 
furnishes the full range of their medical services. Under the revised 
location requirement, DHS qualify for the exception if they are 
furnished in the ``same building'' in which--
     The referring physician or his or her group practice has 
an office that is normally open to patients at least 35 hours per week, 
and the referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients in that office at least 30 hours per 
week; or
     The referring physician or his or her group practice has 
an office that is normally open to patients at least 8 hour per week, 
the referring physician regularly practices medicine and furnishes 
physician services to patients in that office at least 6 hours per 
week, and the patient receiving the DHS usually receives physician 
services from the referring physician or members of the referring 
physician's group practice at this location; or
     The referring physician or his or her group practice has 
an office that is normally open to patients at least 8 hours per week, 
the referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 6 hours per week, and the 
referring physician is present and orders the DHS during a patient 
visit on the premises or a member of the referring physician's group 
practice is present while the DHS are furnished.
    In each of the three alternative tests, the minimum hourly 
requirement for furnishing physician services must include some 
physician services that are unrelated to the furnishing of DHS payable 
by Medicare, any other Federal health care payer, or a private payer, 
even though the physician services may lead to the ordering of DHS.
    We received numerous comments on aspects of the in-office ancillary 
services exception. We are making no substantive changes to the in-
office ancillary services exception. We respond to issues of concern to 
the commenters below.
    We also received a large number of comments from physical and 
occupational therapists and groups representing physical and 
occupational therapists objecting to the in-office ancillary services 
exception, asserting that the exception has a detrimental effect on 
their practice. The in-office ancillary exception is a statutory 
exception and we have no discretion to eliminate the exception as 
requested by these commenters. However, we may propose additional 
changes to the exception in a future rulemaking.
    Comment: Several commenters requested further guidance regarding 
the amount of physician services that would be considered unrelated to 
the furnishing of DHS for purposes of satisfying the requirement that 
at least

[[Page 51033]]

``some'' physician services furnished in the same ``building'' are 
unrelated to the furnishing of DHS.
    Response: For the reasons previously set forth in Phase II, we 
decline to provide a quantitative measure of ``some'' non-DHS (69 FR 
16073). The critical factor is that the premises are used for the 
regular provision of the group practice's physician services, even if 
on a part-time basis, with respect to the requirements in Sec.  
411.355(b)(2)(i). In evaluating whether ``some'' physician services 
unrelated to DHS are performed in the building, we will take into 
account the nature of the group's overall practice (for example, the 
specialties of the group's physicians) and the referring physician's 
full range of practice. Creating a satellite office that appears to 
satisfy the ``same building'' requirements, but in fact is merely a 
sham arrangement, will result in claims denial. For example, renting 
office space part-time in a freestanding imaging facility purportedly 
to provide physician services unrelated to DHS at the facility location 
would be considered a sham if few or no such services were actually 
contemplated or provided. In addition, a part-time arrangement cannot 
meet the centralized building test. As we have noted in other contexts, 
the operation of an arrangement, not its form on paper, is 
determinative. Thus, for purposes of the in-office ancillary services 
exception, all of the conditions related to supervision, location, and 
billing must be strictly satisfied with respect to each claim for DHS 
submitted to the Medicare program.
    Comment: A physician professional association requested 
clarification regarding whether the requirements relating to the 
quantity and type of physician services necessary to satisfy the ``same 
building'' requirement can be met by including services provided to 
patients physically present in remote locations via telemedicine. 
Specifically, the commenter requested ``additional guidance * * * for 
practitioners with offices in rural locations in which they may not be 
physically present but nonetheless provide the requisite amount and 
types of care.''
    Response: We assume that the comment pertains to the situation in 
which a patient is present in one location and a physician, who is 
present in another location during an appointment with the patient, 
orders an item or service that he or she wishes to be furnished in the 
office in which the patient is located. We do not consider the ordering 
physician to be located in the rural office with the patient for 
purposes of satisfying any of the ``same building'' tests in Sec.  
411.355(b)(2)(i). Rather, the physician's time spent performing 
telemedicine services is counted for purposes of the ``same building'' 
requirement as time spent in the location where the physician is 
physically present. However, there are three alternate methods for 
meeting the ``same building'' test that provide considerable 
flexibility, even in situations where physicians provide some services 
via telemedicine. For example, in the case of a referring physician who 
is a member of a group practice, time spent by other physician members 
of the group at the patient's location would count toward the ``same 
building'' requirement.
    Comment: A commenter stated that it appreciated Phase II's added 
flexibility of the three alternative tests for determining whether 
services furnished in the ``same building'' meet the requirements of 
the in-office ancillary services exception. The commenter stated, 
however, that it was concerned that requiring physician presence, 
either by the referring physician when ordering, or by a member of the 
group practice when furnished, may be too onerous for some group 
practices. According to the commenter, it may be difficult for a group 
practice to distinguish its operations as clearly meeting one test or 
another, as well as to track and document its compliance with the 
alternative tests.
    Response: We believe that it should not be difficult for a group to 
distinguish and document the nature of the services furnished by the 
physicians at its various locations. To the extent that some additional 
complexity was added by Phase II, it is a necessary consequence of 
allowing additional flexibility through the three alternative tests.
    Comment: One commenter asked for further guidance on physicians who 
provide DHS to their patients in a shared space in the same building. 
Specifically, the commenter asked whether the physicians could use 
simultaneously the facilities (for example, an imaging suite, clinical 
laboratory, or physical therapy office) and simply share the costs and 
administration of the DHS without having to separately lease the 
facilities for specific blocks of time determined in advance.
    Response: A physician sharing a DHS facility in the same building 
must control the facility and the staffing (for example, the 
supervision of the services) at the time the designated health service 
is furnished to the patient. To satisfy the in-office ancillary 
services exception, an arrangement must meet all of the requirements of 
Sec.  411.355(b), not merely on paper, but in operation. As a practical 
matter, this likely necessitates a block lease arrangement for the 
space and equipment used to provide the designated health service. 
Shared facility arrangements must be carefully structured and operated 
(for example, with respect to billing and supervision of the staff 
members who provide DHS in the facility). We note that common per-use 
fee arrangements are unlikely to satisfy the supervision requirements 
of the in-office ancillary services exception and may implicate the 
anti-kickback statute.
    Comment: Several commenters strongly criticized the centralized 
building prong of the in-office ancillary services exception. They 
requested that the rule be changed to require, in addition to full-time 
use of the facility, that the arrangement meet a ``commercially 
reasonable'' test. According to the commenters, the Phase II rule 
permits numerous abusive arrangements that are designed solely to 
permit group practices and physicians to refer and bill for DHS that 
section 1877 of the Act would otherwise prohibit. Commenters objected 
to group practices developing satellite DHS facilities, sometimes in 
different states, specifically to capture ancillary income. Several 
commenters identified ``condominium'' pathology laboratories that rent 
space to urology groups as the types of abusive arrangements that are 
proliferating. On the other hand, one commenter complained that the 
requirement that the centralized building be occupied exclusively by 
the group practice is too restrictive.
    Response: Section 1877 of the Act permits group practices to 
furnish DHS in a centralized building. However, we recognize that part-
time, shared, off-site facilities are readily subject to abuse. To 
address this obvious potential for abuse, the Phase I final rule 
included the requirement that a centralized building be used on an 
exclusive basis (66 FR 881). In the CY 2007 update to the physician fee 
schedule, we proposed additional requirements for the centralized 
building test (71 FR 49056-49057). We will address those proposals in a 
separate rulemaking. In the meantime, we caution parties to 
arrangements such as those described by the commenters that, as with 
shared facilities in the same building, off-site arrangements must 
fully comply with the in-office ancillary services exception in 
operation, not only on paper. In other words, compliance is required 
with respect to every DHS claim filed. ``Condominium'' arrangements are

[[Page 51034]]

particularly vulnerable to non-compliance, and staff and operations at 
the off-site facility should be closely monitored. For example, a 
supervising physician who is an independent contractor of a group 
practice must be in the group practice's specific premises at the 
specific time a designated health service is furnished (and supervised) 
for a group practice patient. Moreover, these arrangements raise 
substantial concerns under the anti-kickback statute.
    Comment: Several commenters commended us for the flexibility 
provided by the in-office ancillary services exception. A number of 
other commenters complained that the exception effectively vitiated the 
prohibition on physician self-referral.
    Response: The in-office ancillary services exception allows a 
physician to provide DHS to his or her own patients, which may appear 
to undercut the purpose of the physician self-referral prohibition. 
Nevertheless, the statutory exception evidences intent by the Congress 
to permit a physician to furnish DHS to his or her own patients if 
certain conditions are met. We are considering whether certain types of 
arrangements, such as those involving in-office pathology labs and 
sophisticated imaging equipment, should continue to be eligible for 
protection under the in-office ancillary services exception.
    Comment: One commenter requested that we confirm that compliance 
with the in-office ancillary services exception is not necessary if an 
arrangement complies with the rural provider exception in Sec.  
411.356(c)(1).
    Response: Compliance with the in-office ancillary services 
exception is not necessary with respect to referrals from owners or 
investors if an ownership or investment interest complies with the 
rural provider exception in Sec.  411.356(c)(1). As a reminder, the 
rural provider exception protects ownership and investment interests 
only; it does not protect compensation arrangements. Thus, if the group 
practice submits claims for DHS referred by employed or contracted 
physicians, an exception, such as the in-office ancillary services 
exception, must apply.
    Comment: A commenter suggested that, where group practices or 
physicians in the same building share DHS facilities, the in-office 
ancillary services exception should be restricted to clinical 
laboratory and imaging services that are necessary on an urgent basis.
    Response: Without further review, we do not believe that it is 
appropriate or feasible to restrict the in-office ancillary services 
exception as suggested by the commenter. We will continue to monitor 
the situation to determine whether to propose additional restrictions 
to safeguard against program or patient abuse.
    Comment: One commenter requested that we confirm that a hospital-
employed physician would be treated the same as any other sole 
practitioner for purposes of satisfying the in-office ancillary 
services exception (that is, whether any non-group practice physician 
meeting the same requirements of personal supervision or personal 
performance and location may fit within the exception). The commenter 
asserted that when the facts are the same (that is, supervision, 
location, and other requirements are satisfied), it should not matter 
whether the employer is a group practice or a hospital. The commenter 
believed that hospitals in States that prohibit the corporate practice 
of medicine are disadvantaged because they cannot set up a group 
practice to employ the physician (who, presumably, could utilize the 
in-office ancillary services exception).
    Response: As set forth in section 1877(b)(2) of the Act, the in-
office ancillary services exception applies only to certain DHS 
furnished by a physician or group practice; it does not apply to 
inpatient or outpatient hospital services billed by a hospital 
employer. In order to utilize the in-office ancillary services 
exception, a hospital-employed physician, such as the one described by 
the commenter, must meet all of the requirements set forth in Sec.  
411.355(b). If a hospital-employed physician's referred DHS are billed 
by the hospital employer, the in-office ancillary services exception 
would not apply. The hospital would be the entity furnishing the DHS 
(not the physician or a group practice), and the hospital-employed 
physician would not meet the billing requirement in Sec.  
411.355(b)(3). We are not persuaded to create a similar exception for 
hospital-employed physicians. We see no disadvantage as described by 
the commenter. Hospitals may use other exceptions, including the 
exception for bona fide employment relationships, to protect legitimate 
arrangements with referring physicians.
    Comment: One commenter requested clarification that the in-office 
ancillary services exception did not override our policies on 
reassignment and purchased diagnostic tests. Another commenter 
requested clarification that the rules on purchased diagnostic tests 
and purchased test interpretations were not altered by our 
implementation of section 952 of the MMA.
    Response: The physician self-referral rules do not supersede 
Medicare payment and billing rules and policies, including rules on 
reassignment, supervision, or purchased diagnostic tests; however, the 
physician self-referral rules do affect their application. For example, 
following enactment of section 952 of the MMA, we amended Sec.  424.80 
of our regulations to provide that an independent contractor physician 
may reassign to an entity his or her right to bill Medicare, regardless 
of whether the services were performed on the premises of the entity 
(as required prior to section 952 of the MMA) or off the premises of 
the entity. However, where the independent contractor physician who 
wishes to reassign to a DHS entity with which he or she has a financial 
relationship, it is not enough that the rules on reassignment are met. 
Rather, the rules on physician self-referral must also be satisfied. 
For example, where an independent contractor physician wishes to 
reassign his or her right to receive Medicare payment for DHS to a 
group practice to which he or she will refer DHS, an exception such as 
the physician services exception or the in-office ancillary services 
exception must be met. The services performed by the independent 
contractor in this example must be performed in the group practice's 
facilities (see the definition of ``physician in the group'' at Sec.  
411.351).
    Conversely, the fact that an arrangement complies with the 
physician self-referral rules does not negate the relevancy of other 
rules, such as the rules on reassignment and purchased diagnostic 
tests. For example, where an independent contractor physician furnishes 
DHS in a centralized building of a group practice and the other 
requirements of the in-office ancillary services exception are 
satisfied, the anti-markup rules would nonetheless apply if the service 
at issue is a diagnostic test of the type that is covered under the 
provision at Sec.  414.50 and the physician and the group have effected 
a valid reassignment (including completing the 855-R).
    We are amending Sec.  411.350 to state clearly that nothing in the 
physician self-referral rules alters a party's obligation to comply 
with--
     The rules regarding reassignment of claims (Sec.  424.80);
     The rules regarding purchased diagnostic tests (Sec.  
414.50);
     The rules regarding payment for services and supplies 
``incident to'' a physician's professional services (Sec.  410.26); or
     Any other applicable Medicare laws, rules, or regulations.

[[Page 51035]]

    We note that Sec.  424.80 states that nothing in that section 
alters a party's obligation to comply with the physician self-referral 
statute and other authorities.
    Comment: Commenters asked whether, in order to satisfy the 
requirements of the in-office ancillary services exception, a physician 
who is an independent contractor with a group practice must perform DHS 
supervision services on the premises of the group practice, regardless 
of coverage policies.
    Response: For purposes of compliance with the physician self-
referral rules, independent contractor physicians are ``physicians in 
the group practice'' only when performing services on the group 
practice's premises, regardless of whether reassignment or coverage 
rules would allow an independent contractor physician to perform 
services off the premises of the billing entity. Therefore, in order to 
satisfy the requirements of the exception, an independent contractor 
must supervise services on the premises of the group practice.
    Comment: Section 1877(b)(2)(B) of the Act and Sec.  411.355(b)(3) 
require that, in order for the in-office ancillary services exception 
to apply, the services must be billed by one of the following: The 
physician performing or supervising the service; the group practice of 
which the performing or supervising physician is a member under a 
billing number assigned to the group practice; the group practice if 
the supervising physician is a ``physician in the group practice'' 
under a billing number assigned to the group practice; or by an entity 
that is wholly-owned by the physician or the group practice under the 
entity's own billing number or under a billing number assigned to the 
physician or group practice. Two commenters asked for clarification 
that the billing requirement in the in-office ancillary services 
exception in Sec.  411.355(b)(3) can be satisfied by an entity (that 
is, a billing entity) that is wholly-owned by the group members in 
their individual capacities (as opposed to being owned by the group 
practice), but structured to mirror the group practice (for example, 
ownership of the billing entity is contingent on membership in the 
group practice). According to the commenters, the separate structure is 
common to avoid tax liability.
    Response: We disagree with the commenters. Section 1877(b)(2)(B) of 
the Act and the corresponding regulations in Sec.  411.355(b)(3)(iv) 
require that the supervising physician, the referring physician, or the 
group practice must wholly own the billing entity. The arrangement 
described by the commenters would not satisfy this requirement. The 
regulations make clear that claims submitted by a wholly-owned entity 
must be submitted under a billing number assigned to the entity or 
under a billing number assigned to the physician or group practice. 
Moreover, the arrangement may not comply with our rules on 
reassignment. Under our longstanding policy, only individuals may 
reassign benefits. If the commenter is, in effect, asking whether a 
physician member or a ``physician in the group practice'' is allowed to 
reassign benefits to the group, which would then reassign benefits to 
the billing entity, we do not believe that the arrangement would comply 
with our rules on reassignment. Nothing in the regulations prohibits 
the use of an independent billing company in an administrative capacity 
to process and submit claims on behalf of billing physicians or group 
practices under billing numbers assigned to them.

C. Services Furnished by an Organization (or Its Contractors or 
Subcontractors) to Enrollees

    Section 1877(b)(3) of the Act creates an exception for services 
provided pursuant to certain Medicare managed care arrangements. In 
Phase I, we interpreted the provision broadly and updated the 
references to covered managed care plans in light of changes to the 
Medicare program. In Phase II, we again expanded the exception, which 
appears at Sec.  411.355(c), to include Medicaid managed care plans. 
This Phase III final rule makes no changes to Phase II.
    Comment: Comments submitted on behalf of Alaskan tribal health 
organizations requested that we create an exception for referrals made 
by physicians under compensation arrangements with tribal health care 
providers. According to the commenter, the native tribal organizations 
have assumed much of the responsibility for carrying out the programs 
of the Indian Health Service. In discharging that responsibility, the 
tribes have developed a comprehensive, integrated health care system 
that utilizes primary, secondary, and tertiary caregivers and clinics 
staffed by employees, independent contracting practitioners, Federal 
employees, and commissioned officers. The commenter asserted that, 
because of limited funds, utilization of services is carefully 
monitored and strictly controlled, giving them many characteristics of 
managed care organizations. According to the commenter, services are 
prioritized so that only certain services are covered, and firm 
policies exist requiring prior authorization for non-emergent care and 
notice for emergency care at non-tribal or Indian Health Service 
facilities. The commenter stated that the tribal health care providers 
have three principal types of compensation arrangements. First, and 
most frequently, the providers have physician employees. Second, the 
providers have personal service arrangements with physicians. Third, 
the providers enter into agreements with the Indian Health Service 
under which Federal employees are assigned to work for a specific 
tribal health program, and under which the providers are responsible 
for the costs of such employees. The commenter asserts that monitoring 
and reviewing the myriad compensation arrangements with physicians in 
the Alaska tribal health network consumes scarce time and financial 
resources. In light of the system's integration and strong elements of 
managed care, the commenter urged that referrals in the network be 
protected.
    Response: We agree that many of the arrangements between the Indian 
Health Service and various Indian nations have many of the 
characteristics of managed care. However, when Medicare services are 
furnished, the exception in Sec.  411.355(c) for services furnished to 
enrollees of a prepaid health plan would not apply. We decline to 
create an exception at this time to address the commenter's concerns 
for two reasons. First, we question whether we have the legal authority 
to expand the exception in Sec.  411.355(c) or to create a new 
exception without first proposing such an expansion or new exception 
through a notice of proposed rulemaking. Second, the commenter has not 
supplied us with an adequate explanation thus far as to why existing 
exceptions such as those for bona fide employment relationships (Sec.  
411.357(c)) or personal service arrangements (Sec.  411.357(d)) would 
be insufficient to protect the arrangements at issue. The commenter 
appears to recognize that these exceptions are available, but states 
that monitoring and reviewing the compensation arrangements consumes 
scarce time and financial resources. We believe, however, that the 
parties should be able to design model structures for the compensation 
arrangements, which would be applicable for existing and newly hired 
physicians. Monitoring and reviewing for compliance is necessary and 
prudent to ensure compliance with the physician self-referral law, 
other fraud and abuse laws, and other Medicare rules and regulations.

[[Page 51036]]

D. Reserved

    There is no regulation at Sec.  411.355(d). Section 411.355(d) 
continues to be ``reserved'' in this Phase III final rule.

E. Academic Medical Centers

    In Phase I, we created a new exception for payments to faculty of 
academic medical centers that meet certain conditions that ensure that 
the arrangements pose no risk of fraud or abuse (66 FR 916). The 
exception required that the referring physician: (1) Is a bona fide 
employee of a component of an academic medical center on a full-time or 
substantial part-time basis; (2) is licensed to practice medicine in 
the State(s) in which he or she practices medicine; (3) has a bona fide 
faculty appointment at the affiliated medical school; and (4) provides 
either substantial academic or substantial clinical teaching services 
for which the referring physician receives compensation as part of his 
or her employment relationship with the academic medical center. In 
addition, the exception required the total compensation paid to the 
referring physician for the previous 12-month period from all academic 
medical center components to be set in advance, in the aggregate not 
exceed fair market value for the services provided, and not be 
determined in a manner that takes into account the volume or value of 
any referrals or other business generated within the academic medical 
center.
    Phase II made several changes to broaden the applicability of the 
academic medical centers exception. We expanded the definition of an 
academic medical center to allow hospitals or health systems that 
sponsor four or more medical education programs to qualify as a 
component of an academic medical center. We revised the exception to 
include not-for-profit supporting organizations (whose primary purpose 
is supporting the teaching mission of the academic medical center) as a 
potential component of an academic medical center. We revised the 
regulatory text to make clear that the majority of physicians on the 
medical staff must be on the faculty of an affiliated medical school 
and that the aggregation of faculty from any affiliated medical school 
is permitted. We expanded the exception modestly to cover DHS referrals 
within an academic medical center if the money the academic medical 
center pays to the referring physician for research is used for 
teaching services in addition to bona fide research (if consistent with 
the terms and conditions of the grant). To guard against fraud and 
abuse, we declined to extend the protection of the exception to DHS 
referrals to an academic medical center if the academic medical center 
pays the referring physician for research and the research funds are 
used for indigent care or community service. Finally, we modified the 
requirement that the relationship among the components of the academic 
medical center be set out in a written agreement; the revised provision 
allows the relationship to be memorialized in multiple writings.
    In Phase II, we also added a ``safe harbor'' provision that deems 
any referring physician who spends at least 20 percent of his or her 
professional time or, in the alternative, 8 hours per week providing 
academic services or clinical teaching services to be compliant with 
the requirement in Sec.  411.355(e)(1)(i)(D) that the physician provide 
``substantial academic services or clinical teaching services.'' We 
also deleted the requirement, formerly in Sec.  411.355(e)(2)(ii), that 
the faculty practice plan (or plans) be organized as a tax-exempt 
organization under either section 501(c)(3) or (c)(4) of the Internal 
Revenue Code.
    In Phase II, we made clarifications to the academic medical centers 
exception, including: (1) that the referring physician may be on the 
faculty of the affiliated medical school or the accredited academic 
hospital; (2) that an academic medical center may have more than one 
affiliated faculty practice plan (and that the faculty practice plans 
may be affiliated with other components such as the teaching hospital, 
the medical school, or the accredited academic hospital); (3) that a 
hospital or health system under Sec.  411.355(e)(2)(i) may be the same 
hospital that meets the ``affiliated hospital'' requirement in Sec.  
411.355(e)(2)(iii); and (4) that the substantial services test may be 
met through either academic services or clinical teaching services, or 
a combination of both. We declined to extend the protection of the 
exception to services referred by a physician who is not an employee of 
a component of an academic medical center, where the referring 
physician does not provide substantial academic services or clinical 
teaching services (as may be the case with volunteer and primary care 
physicians), or where the referring physician does not meet the other 
requirements in Sec.  411.355(e)(1)(i).
    This Phase III final rule adopts the Phase II rule with minor 
clarifications. For example, for purposes of determining whether the 
majority of physicians on the medical staff consists of faculty 
members, the affiliated hospital must include or exclude all physicians 
holding the same class of privileges at the affiliated hospital.
    Comment: One commenter asked us to clarify that the academic 
medical centers exception protects payments to physicians for the 
provision of indigent care or community service. The commenter sought 
an explanation of our statement in Phase II that payments to referring 
physicians for indigent care or community service may be structured to 
fit other exceptions. (69 FR 16110-16111.)
    Response: Nothing in Sec.  411.355(e) prohibits academic medical 
centers from compensating faculty members for the provision of indigent 
care or community service, provided that the funds do not derive from 
research funding (see Sec.  411.355(e)(1)(iii)(C)); the total 
compensation paid to the referring physician is fair market value and 
satisfies the other requirements of Sec.  411.355(e)(1)(ii); and the 
physician also performs the requisite clinical teaching or academic 
services under Sec.  411.355(e)(1)(i)(D). The Phase II language 
referenced by the commenter was in response to a suggestion that we 
revise the definition of ``academic medical center'' at Sec.  
411.355(e)(1)(iii). Section 411.355(e)(1)(iii) provided that, to 
qualify as an academic medical center for purposes of the exception, 
all research grant money paid to a referring physician must be used 
solely to support bona fide research. The Phase II comment suggested 
that we revise the provision to include the use of research money for 
teaching, indigent care, and community service (as opposed to for bona 
fide research only). (69 FR 16110-16111.) We agreed in part with the 
commenter and revised the provision in Sec.  411.355(e)(1)(iii) to 
require that any money paid to a referring physician for research must 
be used solely to support bona fide research or teaching, which are 
core academic medical center functions. However, we declined to extend 
the provision to cover the use of research money for indigent care and 
community service, explaining that research grants can be subject to 
potential abuse. (66 FR 917.) We note that the academic medical center 
exception is available for DHS furnished by academic medical centers 
that pay physicians to provide indigent care and community service, 
provided that all other provisions of the exception are met and the 
money used for the payments does not come from research grant funds. If 
an academic medical center pays a physician using research funds and 
the payments are used for purposes other than bona fide research or 
teaching, the academic medical

[[Page 51037]]

center would not satisfy the conditions of Sec.  411.355(e)(1)(iii), 
and the exception would be unavailable for any DHS furnished by the 
academic medical center.
    Comment: A commenter stated that the requirement in Sec.  
411.355(e)(1)(ii) that the total compensation paid by all components of 
an academic medical center to the referring physician be ``set in 
advance'' was unnecessary. According to the commenter, the flows of 
money within an academic medical center support the missions of patient 
care, education, and research, which are the core of any academic 
medical center. The commenter asserted that the other criteria for 
meeting the exception provide adequate assurances that abuses will not 
occur. Because the exception is available only to bona fide employees 
of an academic medical center component, the criteria for compensation 
should mirror those for the exception for bona fide employment 
arrangements, which does not require that compensation be set in 
advance.
    Response: The commenter misunderstands the purpose of the academic 
medical centers exception. It is designed to protect compensation 
received by the physician from all components of the center, not only 
the component with which he or she has an employment relationship. 
Therefore, although the employment exception may protect the 
compensation the physician receives from the component that employs the 
physician, it does not protect the physician's aggregate compensation. 
We disagree with the commenter that the ``set in advance'' requirement 
for aggregate compensation from all components of the academic medical 
center is unnecessary. We believe that it is appropriate to treat 
physician compensation under the academic medical center exception the 
same as compensation for independent contractor physicians under the 
exception for personal service arrangements. (69 FR 16066.)
    Comment: One commenter asked that we clarify that the condition in 
Sec.  411.355(e)(1)(ii), which requires that the total compensation to 
referring physicians be set in advance, does not require that the 
actual amount of the compensation be set in advance. The commenter also 
asked that we confirm its understanding that our use of ``total'' 
compensation was intended to reflect that faculty physicians in an 
academic medical center setting may be paid by more than one component 
of the academic medical center and that each such payment arrangement 
must meet each of the requirements of the exception, namely that the 
compensation be set in advance, not exceed fair market value for the 
services provided, and that it not take into account the volume or 
value of referrals or other business generated by the referring 
physician within the academic medical center.
    Response: The commenter is correct that the actual dollar amount of 
the referring faculty physician's compensation need not be set in 
advance. It is sufficient if the contribution of each component of the 
academic medical center to the aggregate compensation uses a 
methodology that qualifies under Sec.  411.354(d). The commenter is 
also correct that, where a physician is paid by more than one component 
of the academic medical center, each such payment arrangement must not 
take into account the volume or value of referrals or other business 
generated by the referring physician within the academic medical 
center. The commenter is incorrect, however, that the exception 
requires that compensation paid by each component must satisfy a fair 
market value test. Rather, Sec.  411.355(e)(1)(ii) states that the 
aggregate (that is, the total from all components) compensation cannot 
exceed fair market value for the services provided. We have clarified 
the language of Sec.  411.355(e)(1)(ii).
    Comment: An association of medical schools asserted that, due to 
the numerous and complex criteria of the academic medical center 
exception, we should provide advisory opinions to entities that submit 
a request for a definitive opinion as to whether they meet those 
criteria.
    Response: We believe that the criteria set forth in the academic 
medical centers exception are clear and that most entities should be 
able to determine whether they qualify as an academic medical center. 
We believe that an advisory opinion, although appropriate in some 
circumstances, would normally not be needed. In addition, institutions 
that do not satisfy the definition of an academic medical center may be 
able to comply with one or more of the other physician compensation 
arrangements exceptions.
    Comment: A commenter asked for clarification regarding Sec.  
411.355(e)(2)(iii), which defines an academic medical center to include 
an affiliated hospital in which, among other things, ``a majority of 
the physicians on the medical staff consists of physicians who are 
faculty members.'' The regulation provides that any faculty member 
``may'' be counted for purposes of this requirement, including courtesy 
and volunteer faculty. The commenter sought confirmation that an 
affiliated hospital may exclude courtesy staff when determining whether 
the majority of the physicians on its medical staff are faculty members 
of the affiliated medical school.
    Response: An affiliated hospital may exclude courtesy staff when 
determining whether the majority of the physicians on its medical staff 
are faculty members of the affiliated medical school or on the faculty 
of the educational programs at the accredited affiliated hospital. We 
are modifying Sec.  411.355(e)(2)(iii) to clarify that, if a hospital 
elects to include or exclude a physician holding a particular class of 
privileges (for example physicians holding courtesy privileges), the 
hospital must include or exclude, respectively, all individual 
physicians with the same class of privileges at the affiliated hospital 
when determining whether the majority of the physicians on its medical 
staff are faculty members of the affiliated medical school or are on 
the faculty of the educational programs at the accredited academic 
hospital.
    Comment: One commenter stated that the requirement in Sec.  
411.355(e)(2)(iii) that faculty members order the majority of hospital 
admissions is difficult for many accredited hospitals to control and, 
effectively, renders most community hospitals ineligible for the 
academic medical center exception. According to the commenter, 
community hospitals that sponsor four or more approved education 
programs (and which potentially could constitute an academic medical 
center) frequently provide substantial services unrelated to those 
training programs, particularly if there are few other hospitals 
serving that area.
    Response: We believe that the requirement that faculty members 
order the majority of admissions is a good measurement of a hospital 
being sufficiently integrated into an academic medical center. As we 
noted in Phase II, it is important to ensure that the relationship 
between the components is sufficiently focused on the academic medical 
center's core mission (69 FR 16109). The tests for affiliated hospital 
faculty and admissions set forth in Sec.  411.355(e)(2)(iii) are strong 
indicators of that core relationship. The academic medical centers 
exception is designed to supplement--not supplant--other exceptions, 
such as the exception for bona fide employment relationships in Sec.  
411.357(c) and the exception for personal service arrangements in Sec.  
411.357(d). To the extent that a hospital or other entity cannot take 
advantage of the academic medical centers exception, it should be able 
to

[[Page 51038]]

structure its legitimate compensation arrangements with physicians to 
meet another exception.
    Comment: One commenter stated that a newly-affiliated hospital 
might not qualify as an academic medical center because it fails to 
meet ``the two majority tests'' in Sec.  411.355(e)(2)(iii) (that is, 
the majority of physicians on the medical staff are faculty members and 
the majority of admissions are made by faculty members). According to 
the commenter, the hospital may execute an academic affiliation 
agreement under which it increases the number of physicians on its 
medical staff who are faculty members so that it meets the requirement 
that a majority of its medical staff are faculty members, but the 
hospital would not immediately meet the requirement that a majority of 
admissions are made by the faculty (as the new faculty will begin 
admitting only upon execution of the agreement). The commenter 
requested guidance that would clarify when a hospital could rely on the 
academic medical centers exception in such circumstances.
    Response: We disagree that the regulation is unclear as to when a 
compensation arrangement between a physician and a newly-affiliated 
hospital will satisfy the academic medical centers exception. We 
believe that the regulation is clear that all conditions must be met at 
the time the referral is made. To the extent that the commenter is 
suggesting that we allow a transition period during which the two 
majority tests would not apply or would be relaxed, we decline to do 
so. If an arrangement does not meet the academic medical centers 
exception, another exception may be available.
    Comment: Two commenters asked for clarification regarding the 
applicability of Sec.  411.357(p), the indirect compensation 
arrangements exception, in the academic medical center setting. One of 
the commenters asserted that many academic medical centers have 
organizational structures that enable them to satisfy the requirements 
of the exception for indirect compensation arrangements, citing the 
situation where a referring physician does not have a direct financial 
relationship with an affiliated hospital. For example, a hospital 
component of an academic medical center could be an organization 
separate and distinct from the university that operates the faculty 
practice plan as a wholly-owned division of the university in 
connection with the university's school of medicine. According to the 
commenter, any financial arrangements between the hospital and the 
university with respect to the physicians in the faculty practice plan 
would be indirect. Moreover, if the physicians were salaried employees 
of the university, with no compensation paid from the hospital to the 
physicians, there would be no direct or indirect compensation 
arrangement within the meaning of the definition at Sec.  411.354(c)(2) 
if the physician's compensation did not vary with or otherwise reflect 
the physician's referrals to the hospital. According to the commenter, 
even if this arrangement were construed as being an ``indirect 
compensation arrangement'' (which the commenter did not believe was the 
case), it would qualify for the exception for indirect compensation 
arrangements in Sec.  411.357(p) if the physician's compensation were 
fair market value and not determined in any manner that takes into 
account the volume or value of referrals or other business generated by 
the physician for the hospital. The second commenter simply asked that 
we confirm that the exception for indirect compensation arrangements 
applies in the academic medical center setting.
    Response: The definition of ``indirect compensation arrangement'' 
at Sec.  411.354(c)(2) and the exception for indirect compensation 
arrangements in Sec.  411.357(p) are potentially applicable to 
arrangements involving academic medical centers and physicians. As we 
have stated previously and in this Phase III final rule, parties 
generally may utilize any exception that the arrangement between them 
satisfies. If the academic medical centers exception applies to the DHS 
referrals at issue, it would not be necessary for another exception to 
apply. With respect to the situation described by the commenter, as 
discussed above, we have revised Sec.  411.354 to clarify the 
application of the indirect compensation definition at Sec.  
411.354(c)(2) and the indirect compensation arrangements exception in 
Sec.  411.357(p).

F. Implants Furnished by an Ambulatory Surgical Center

    In Phase I, we established a new exception in Sec.  411.355(f) for 
implants furnished by an ambulatory surgical center (ASC) when acting 
as an entity furnishing DHS. The new exception was intended to allow a 
physician-owner of an ASC that is not in a rural area (and thus not 
covered by the rural provider exception) to order and perform surgeries 
that implant DME, prosthetics, or prosthetic devices that are not 
reimbursed as part of the composite ASC payment rate. The new exception 
was necessary because many implantable items are DHS but are not 
bundled in the ASC composite rate. Without the exception, an ASC (which 
is often owned by one or more physicians) would become a DHS entity 
when it furnishes the implant. We did not make any changes to Sec.  
411.355(f) in Phase II, nor are we making any in this Phase III final 
rule.
    Comment: One commenter referenced the discussion in Phase II where 
we noted that the exception in Sec.  411.355(f) applies only when the 
implant is billed by the ASC and that, when the physician submits the 
claim for the implant, the physician is the entity furnishing DHS (69 
FR16111). The commenter asked whether the exception in Sec.  411.355(f) 
applies if the ASC furnishes and submits the claim for the implant 
procedure, but the physician furnishes and submits the claim for the 
device.
    Response: The exception does not apply in the situation described 
by the commenter. Under Medicare payment policy (section 10.3-10.4 of 
the CMS Internet-only Manual, publication 100-04, Claims Processing 
Manual, Chapter 14 (ambulatory surgical centers)), whenever an implant 
is performed during an ASC procedure, the provider/supplier (that is, 
the ASC) must bill for the implanted item. We did not mean to imply 
that any individual or entity other than the ASC may bill for an item 
implanted during an ASC procedure.

G. EPO and Other Dialysis-Related Drugs Furnished in or by an End-Stage 
Renal Disease Facility

    Phase I created a new exception in Sec.  411.355(g) for epoetin 
(EPO) and certain other dialysis-related outpatient prescription drugs 
furnished in or by an end-stage renal dialysis (ESRD) facility. The 
drugs that may qualify for this exception were initially identified by 
CPT and HCPCS codes in Phase I (66 FR963-964), and updates to that list 
appear on our Web site and in annual updates published in the Federal 
Register. There were no changes to Sec.  411.355(g) in Phase II, nor 
are we making any in this Phase III final rule.
    Comment: A commenter wrote that the list of ESRD drugs in Sec.  
411.355(g) was incomplete. The commenter asked that the exception be 
expanded to include all drugs furnished as part of a dialysis 
treatment, whether in a home or at a facility. Alternatively, the 
commenter asked that the exception include by reference our Single Drug 
Pricer file. [The Single Drug Pricer file is a drug-pricing file used 
prior to January 1, 2004 that contains the allowable price for each 
drug covered ``incident to'' a physician's service. This includes the 
allowable price for drugs furnished by independent dialysis facilities 
that are separately billable

[[Page 51039]]

from the composite rate and for clotting factors to inpatients.] The 
commenter voiced concern that a dialysis center with physician-owners 
or other financial relationships with physicians would not be able to 
deliver the same convenient, quality care that could be provided by a 
center without these relationships.
    Response: We believe that the list of ESRD drugs, as updated 
annually, is complete and that we are acting within the constraints of 
the statute. Section 1877(h)(6) of the Act specifically includes 
outpatient prescription drugs as DHS. However, we established a broad 
exception in Sec.  411.355(g) using our authority under section 
1877(b)(4) of the Act, which allows the Secretary to establish an 
exception if there is no risk of program or patient abuse. We intend 
for the exception to include drugs that have to be administered at the 
time of dialysis ``that are required for the efficacy of dialysis.'' 
(69 FR 16117.) For the reasons stated in Phase II, we believe that we 
cannot further expand the list as suggested by the commenter without 
creating a risk of program or patient abuse (69 FR 16117-16118). 
Although we do not want to burden Medicare beneficiaries unnecessarily 
by making them go elsewhere for intravenous drugs, the Congress 
prohibited physician self-referrals for outpatient prescription drugs, 
and we are concerned that expanding the list of drugs subject to this 
exception may lead physicians to order intravenous administration of a 
drug when oral administration is as effective, or to not choose the 
most cost-effective appropriate drug.
    To the extent that individuals or organizations believe that 
specific drugs should qualify for the exception because they are 
required for the efficacy of dialysis and must be administered at the 
time of dialysis, they may contact us. We also note that the list of 
drugs that qualify for this exception is updated annually in the 
Physician Fee Schedule, and comments on the list are accepted upon 
publication of the proposed rule for the Physician Fee Schedule. We 
note that the Single Drug Pricer file is no longer in use.

H. Preventive Screening Tests, Immunizations, and Vaccines

    In Phase I, we created a new regulatory exception for certain 
preventive screening tests, immunizations and vaccines furnished under 
circumstances that do not pose a risk of abuse (66 FR 923). The 
exception requires that: (1) The preventive screening tests, 
immunizations, and vaccines are subject to CMS-mandated frequency 
limits; (2) the arrangement does not violate the anti-kickback statute; 
(3) the arrangement does not violate any Federal or State law or 
regulation governing billing or claims submission; and (4) the 
preventive screening tests, immunizations, and vaccines are covered by 
Medicare and listed as eligible for this exception on the list of CPT/
HCPCS codes. Phase I included a listing of the CPT and HCPCS codes for 
screening tests that qualify for the exception if all of the other 
requirements of the exception are satisfied.
    In Phase II, we made no major changes to the exception (69 FR 
16116). We did, however, decline to expand the exception to protect 
referrals for diagnostic Pap smears or mammography tests, as we were 
unpersuaded that these types of referrals would not pose a risk of 
program or patient abuse. We clarified in Phase II that we recognized 
that some of the vaccines covered under the exception may be paid by 
Medicare using a different reimbursement system than the fee schedule 
required under the exception. To avoid confusion we deleted the 
requirement that the preventive screening tests, immunizations, or 
vaccines be reimbursed by Medicare under a fee schedule.
    We received no comments to Phase II regarding Sec.  411.355(h) and 
are making no changes in this Phase III final rule.

I. Eyeglasses and Contact Lenses Following Cataract Surgery

    In Phase I, we created a new regulatory exception for eyeglasses 
and contact lenses following cataract surgery (66 FR 923). The 
exception requires that: (1) The eyeglasses or contact lenses are 
provided in accordance with Medicare coverage and payment policies 
(Sec.  410.36(a)(2)(ii) and Sec.  414.228, respectively); (2) the 
arrangement does not violate the anti-kickback statute; and (3) the 
arrangement does not violate any Federal or State law or regulation 
governing billing or claims submission.
    Phase II made no changes to Sec.  411.355(i) (nor were any comments 
received on Phase I). We received no comments to Phase II regarding 
this exception. We are not making any changes to Sec.  411.355(i) in 
this Phase III final rule.

J. Intra-Family Rural Referrals

    Phase II created a new exception in Sec.  411.355(j) for certain 
referrals from a referring physician to his or her immediate family 
member or to a DHS entity with which the physician's immediate family 
member has a financial relationship. The exception requires that the 
patient being referred reside in a rural area and that there is no 
other person or entity available to furnish the referred DHS in a 
timely manner, in light of the patient's condition, either: (1) At the 
patient's residence (in the case of home health services or other DHS 
required to be furnished in the patient's home); or (2) within 25 miles 
of the patient's residence (in the case of services furnished outside 
the patient's home). In addition, the exception requires that the 
referring physician make reasonable inquiries as to the availability of 
other persons or entities and that the financial relationship does not 
violate the anti-kickback statute or any other Federal or State law or 
regulation governing billing and claims submission. We are making one 
modification to Sec.  411.355(j) in this Phase III final rule. 
Specifically, we are modifying the exception to include an alternative 
distance test based on transportation time from the beneficiary's 
residence.
    Comment: One commenter stated that, notwithstanding the exception 
in Sec.  411.355(j), the prohibition on intra-family referrals leads to 
unfair results, especially where one of the family members is a general 
practitioner or surgeon and the other is a pathologist or a 
radiologist, and the pathologist or radiologist is part of a group of 
physicians that provides services for local hospital inpatients and 
outpatients. The commenter asserted that, in these circumstances, the 
general practitioner or surgeon is unable to refer hospital patients 
for pathology or radiology services to the family member's group 
practice. In addition, the commenter stated that a physician should not 
be prohibited from referring patients to a member of his or her 
immediate family (for example, a brother or sister) if the referring 
physician receives no economic benefit from the referral. The commenter 
suggested that we accept an attestation from the referring physician 
that he or she receives no economic benefit from referrals to the 
family member.
    Another commenter asserted that CMS should revise the intra-family 
rural referral exception (or modify the definition of ``referral'') to 
allow a physician to make referrals to an immediate family member (or 
his or her employer) provided that the immediate family member has an 
excepted financial arrangement under which the family member does not 
receive remuneration that takes into account the volume or value or 
referrals or other business generated by the family member.

[[Page 51040]]

    Response: Section 1877(a) of the Act prohibits referrals for DHS to 
entities in cases in which a physician ``or an immediate family member 
of such physician'' has a financial relationship with the entity, 
unless an exception applies. The law does not authorize a case-by-case 
inquiry into whether the referring physician actually benefits from 
referrals to entities with which an immediate family member has a 
financial relationship.
    We recognize the commenters' concerns, but section 1877(b)(4) of 
the Act allows us to create an exception only if there is no risk of 
program or patient abuse. We are not expanding the exception in Sec.  
411.355(j) in the manner recommended by the commenters because we do 
not believe that it would be consistent with congressional intent, nor 
do we believe that we could do so without creating a risk of program or 
patient abuse.
    Comment: One commenter asked that we modify Sec.  411.355(j) to 
include patients in any medically underserved area or Healthcare 
Professional Shortage Area (HPSA). The commenter also requested that we 
modify the exception to permit a referring physician to refer to an 
immediate family member (or to an entity furnishing DHS with which the 
immediate family member has a financial relationship) after the 
referring physician determined, following reasonable inquiry, that 
there was no other available person or entity to furnish the referred 
DHS.
    Response: The definition of rural is sufficiently broad to 
encompass many HPSAs and medically underserved areas, and we do not 
believe that the change suggested by the commenter regarding HPSAs and 
medically underserved areas is necessary. With respect to the 
commenter's second inquiry, we have reconsidered Sec.  411.355(j) as it 
pertains to the availability of services in a rural area. We believe 
that a test that takes into account distance, posted speed limits, and 
weather conditions would be an appropriate alternative to a test that 
considers only whether a provider is a specific distance from a 
patient's home. Therefore, we are modifying Sec.  411.355(j) to permit 
parties to utilize an alternative test that allows a physician to refer 
a patient to an immediate family member (or to a DHS entity with which 
the immediate family member has a financial relationship) for DHS if 
the DHS cannot be provided otherwise within 45 minutes transportation 
time from the patient's home at the time the referral for the DHS is 
made. We are making no changes to the 25-mile rule in Sec.  411.355(j). 
Referring physicians are free to choose either of the tests (that is, 
25 miles from the beneficiary's residence or 45 minutes transportation 
time from the beneficiary's residence) when determining whether a DHS 
referral may be made to an immediate family member under Sec.  
411.355(j). However, whichever test the physician chooses must be 
applied both for purposes of Sec.  411.355 (j)(1)(ii) (determining 
distance or transportation time from available services) and Sec.  
411.355(j)(2) (the physician's reasonable inquiry as to the 
availability of persons or entities to provide the needed DHS).
    The new alternative test requires a case-by-case analysis of the 
conditions that exist at the time of the referral for the DHS. Although 
a bright-line test may be preferred by many physicians, we do not 
believe that such a test always provides sufficient flexibility to 
ensure that our beneficiaries receive needed DHS in a timely manner and 
in a location that is convenient to the beneficiary. The modification 
to Sec.  411.355(j) would permit some intra-family referrals when the 
distance to the closest non-family member physician (or entity) is less 
than 25 miles from the beneficiary's residence.
    We note that, when the new alternative test is utilized, because 
compliance will be determined on a case-by-case basis, an intra-family 
referral that is permitted at one time (for example, in the winter 
months when snow covers mountain roads and limits access) may not be 
permitted at a different time (for example, in the summer months when 
roads are clear and a non-family member physician (or entity) is 
available to provide the needed DHS within 45 minutes transportation 
time from the beneficiary's residence). Physicians utilizing the 45 
minutes transportation time test should maintain documentation of the 
information used in determining the transportation time. Resources 
including websites that provide detailed mileage and drive time (such 
as Mapquest or MapBlast) and published weather reports (either online 
or in print, for example, in the newspaper) should be consulted when 
determining a beneficiary's transportation time from his or her 
residence to the location of the available DHS.
    Comment: One commenter noted that we stated in Phase II that the 
exception ``does not take into account the quality of other available 
DHS entities'' and that other laws exist to address quality issues. The 
commenter asserted that this statement suggests that the physician 
would not be able to refer to an immediate family member if there is 
another entity furnishing DHS within 25 miles of the patient's 
residence, even if that entity does not participate in the patient's 
health plan or has lesser qualifications (for example, no board 
certification). The commenter requested that we clarify what we meant 
by this statement.
    Response: For the reasons noted in Phase II, we do not believe that 
it is feasible to craft an objective, qualitative measure in the 
exception for intra-family rural referrals as suggested by the 
commenter. As we stated in Phase II, this exception ``looks to timely 
availability of DHS, [but] it does not take into account the quality of 
other available DHS entities'' (69 FR 16084). However, in a situation 
such as that described by the commenter in which the only entity that 
can furnish the DHS needed by a beneficiary within 25 miles of or 45 
minutes transportation time from the beneficiary's home does not 
participate in Medicare, the entity should be treated as if it does not 
exist. In other words, the beneficiary constructively cannot obtain 
needed DHS within 25 miles of or 45 minutes transportation time from 
his or her home.
    Comment: We received two comments concerning urban hospitals that 
have exclusive arrangements with a radiology group practice for 
performing the professional component of radiology services. The 
commenters were concerned that a physician in the community would not 
be able to refer patients to the hospital for radiology services when 
the physician's immediate family member is a member of the group 
practice with the exclusive arrangement.
    The first commenter asserted that the prohibition on referring 
Medicare patients to immediate family members is a severe hardship for 
the patients of physicians with immediate family members who are 
radiologists, radiation therapists, or pathologists, and that many such 
family situations exist. The commenter noted that a physician could 
refer a patient to an immediate family member for other types of 
physician services without implicating the physician self-referral 
rules and, therefore, it is difficult to understand why radiologists, 
radiation therapists, and pathologists are treated differently. This 
commenter recommended that we either not consider the professional 
component of a service to be a designated health service, or allow 
referrals if the physician's immediate family member personally 
performs the DHS.

[[Page 51041]]

    The second commenter suggested that we modify the definition of 
``radiology and certain other imaging services'' to permit referrals in 
the situation described above, or that we modify the definition of 
``referral'' so that the referral in this situation would be deemed a 
referral to the hospital rather than to the group practice in which the 
immediate family member practices. The commenter offered what it 
considered to be program safeguards that could be included in a new 
exception or a modification of an existing exception or definition.
    Response: We note that the comments pertained to situations in 
which the patient would not be located in a rural area and, thus, the 
exception in Sec.  411.355(j) for intra-family referrals would not be 
applicable. We decline to adopt either of the suggestions offered by 
the first commenter.
    We do not believe that it would be consistent with congressional 
intent to include as DHS only the technical component, and not the 
professional component, of radiology, radiation therapy, or pathology 
services. The physician self-referral rules treat radiology, radiation 
therapy, and pathology services differently than other physician 
services because section 1877(h)(6) of the Act specifically includes 
these services, which have a significant professional component, as 
DHS, whereas other physician services specifically are not subject to 
the physician self-referral prohibition.
    We are not modifying the exception for intra-family rural referrals 
because we are authorized under section 1877(b)(4) of the Act to create 
regulatory exceptions only where doing so would pose no risk of program 
or patient abuse, and we do not believe that the fact that the family 
member would personally perform the services, by itself, would remove 
all risk of abuse. For the same reasons, we do not believe that it is 
appropriate to modify the definition of ``referral'' as requested by 
the commenter. Where the requirements of the exception for intra-family 
rural referrals cannot be satisfied, the parties to the arrangement can 
take certain actions to avoid any potential problems arising from 
intra-family referrals. For example, where the referral to the group 
practice comes from a physician whose immediate family member is a 
physician in the group practice, the group practice could forward the 
referral to a physician outside the group to perform the service and 
bill for it. Alternatively, the group practice could have one of the 
physicians in the group practice (other than the family member) perform 
the service and bill for it directly (instead of reassigning his or her 
right to bill to the group practice).

VIII. Exceptions to the Referral Prohibition Related to Ownership or 
Investment Interests--Sec.  411.356

A. Publicly-Traded Securities and Mutual Funds

    Section 1877(c) of the Act creates an exception for ownership in 
certain publicly-traded securities and mutual funds that may own DHS 
entities to which the physician may refer patients. As we explained in 
the 1998 proposed rule, ``we believe that the purpose of this exception 
is to allow physicians or family members to acquire stock in large 
companies if the transaction does not particularly favor the physicians 
over other purchasers'' (63 FR 1698). To qualify for the exception in 
section 1877(c)(1) of the Act:
    (1) The securities must be securities that may be purchased on 
terms generally available to the public;
    (2) The securities must (i) be listed on the New York Stock 
Exchange, the American Stock Exchange, or any regional exchange in 
which quotations are published on a daily basis, or (ii) be foreign 
securities listed on a recognized foreign, national, or regional 
exchange, or (iii) be traded under the automated inter-dealer quotation 
system operated by the National Association of Securities Dealers; and
    (3) The securities must be in a corporation that had shareholder 
equity exceeding $75 million at the end of the corporation's most 
recent fiscal year or on average during the previous three fiscal 
years.
    In addition, section 1877(c)(2) of the Act permits ownership of 
investments in mutual funds with total assets exceeding $75 million at 
the end of the most recent fiscal year or the average of the last three 
fiscal years. Investment securities include shares or bonds, 
debentures, notes, or other debt instruments.
    In Phase II, we interpreted the statutory provision in section 
1877(c)(1) of the Act, which requires that the investment securities be 
those that ``may be purchased on terms generally available to the 
public,'' to mean that the ownership interest must be in securities 
that are generally available to the public at the time of the DHS 
referral (69 FR 16081). We are making no changes in this Phase III 
final rule to Sec.  411.356(a) (regarding publicly-traded securities) 
or Sec.  411.356(b) (regarding mutual funds).
    Comment: One commenter supported our clarification that the 
investment interest must be available to the public at the time the 
referral is made and not at the time the interest is acquired. However, 
the commenter was concerned that it will be difficult for either the 
physician or the entity furnishing DHS to determine if the entity is in 
compliance.
    Response: We disagree. The inquiry turns on objective facts that 
are readily ascertainable to the physician or the entity furnishing 
DHS.

B. Hospitals Located in Puerto Rico

    Section 1877(d)(1) of the Act provides that an ownership or 
investment interest in a hospital located in Puerto Rico is not 
considered a financial relationship within the meaning of section 1877 
of the Act. In the January 1998 proposed rule, we proposed to 
incorporate this exception into our regulations at Sec.  411.356(c)(2) 
(63 FR 1667). We received no comments to Sec.  411.356(c)(2) and made 
no changes in Phase I to the exception. Phase II similarly made no 
changes to the exception (69 FR 16082). We received no comments on 
Phase II regarding Sec.  411.356(c)(2) and are making no changes to the 
exception in this Phase III final rule.

C. Rural Providers

    Section 1877(d)(2) of the Act provides an exception for ownership 
or investment interests in entities that furnish DHS in a rural area if 
substantially all of the DHS are furnished to individuals residing in a 
rural area. Section 507 of the MMA amended section 1877(d)(2) of the 
Act to specify that, for the 18-month period beginning on December 
8,2003, the rural provider exception was not available for specialty 
hospitals. Section 507 of the MMA defined the term ``specialty 
hospital'' in new section 1877(h)(7) of the Act. The moratorium expired 
on June 7, 2005.
    In the January 1998 proposed rule, we defined a ``rural provider'' 
as an entity that furnishes at least 75 percent of its total DHS to 
residents of a rural area. Consistent with the statute, the proposed 
rule provided that, although the DHS entity (that is, the ``rural 
provider'') need not be located in a rural area, the exception applied 
only in the case of DHS furnished in a rural area. The proposed rule 
would have defined rural area as an area that is not considered to be 
an urban area pursuant to Sec.  412.62(f)(1)(ii) (that is, an area 
outside of a Metropolitan Statistical Area (MSA)).
    Phase II adopted the January 1998 proposed rule without change. 
This Phase III final rule makes no substantive changes to Sec.  
411.356(c)(1).

[[Page 51042]]

    Comment: One commenter asked for confirmation that, if an entity 
furnishing DHS qualified for the rural ownership exception in Sec.  
411.356(c), the arrangement did not also have to meet the in-office 
ancillary services exception in Sec.  411.355(b).
    Response: The commenter is correct with respect to the referring 
physician's ownership or investment interest. Any compensation 
arrangement would have to meet a compensation arrangements exception, 
such as the in-office ancillary services exception in Sec.  411.355(b). 
We address this issue more fully in section VI.B of this preamble.
    Comment: A commenter complained that it was difficult to determine 
if a specific location qualified as ``rural'' for purposes of the 
exception. The commenter suggested that we provide a list of rural zip 
codes on our Web site. Another commenter asked that we clarify the 
definition of ``rural.'' The commenter recommended that we provide our 
own definition of ``rural'' rather than cross-referencing to other 
statutes. The commenter also requested confirmation that the definition 
of rural does not include Micropolitan Statistical Areas.
    Response: We decline to create a list of all zip codes in counties 
that are considered rural for physician self-referral purposes because 
the amount of resources that would be required to create and update a 
list of zip codes is significantly greater than the effort required for 
health care entities with physician ownership to determine whether they 
are furnishing DHS in a rural area to patients who reside in a rural 
area. However, we explain below how a health care entity would 
determine whether a particular location is in a rural area.
    For physician self-referral purposes, a location is in a rural area 
if it is not located in a MSA. This test differs from the rural/urban 
test that a hospital uses for wage index purposes. To determine whether 
an entity is furnishing DHS in a rural area for physician self-referral 
purposes, see the current list of MSAs on the Web site of the Office of 
Management and Budget (OMB). This list, which includes the constituent 
cities and counties of each MSA, currently may be accessed at 
(www.whitehouse.gov/omb) by typing in ``update of statistical area 
definitions,'' and by then locating the list entitled ``Metropolitan 
Statistical Areas.'' We also will provide a link to the OMB Web site on 
our physician self-referral Web site.
    A Micropolitan Statistical Area is an area containing a single 
urbanized core population of at least 10,000 but less than 50,000. (65 
FR 82230, 82233.) Micropolitan Statistical Areas are not within MSAs; 
thus, for purposes of the physician self-referral rules, Micropolitan 
Statistical Areas are not considered urban and are, therefore, rural 
areas.
    The rural provider exception in section 1877(d)(2) of the Act 
applies to rural areas as defined in section 1886(d)(2)(D) of the Act 
(regarding the computation of urban and rural standardized amounts 
under the inpatient hospital prospective payment system). The non-
codified material following section 1886(d)(2)(D) of the Act states 
that ``the term `urban area' means an area within a [MSA] (as defined 
by [OMB]) or within such similar area as the Secretary has recognized 
under subsection (a) by regulation * * *.'' In Phase II, we defined a 
``rural area'' as ``an area that is not an urban area pursuant to Sec.  
412.62(f)(1)(ii) of this chapter,'' that is, an area outside a MSA (69 
FR 16082-16083). Although we no longer use MSAs to determine urban 
areas for purposes of the inpatient hospital prospective payment 
system, we decline to adopt a categorization other than MSAs for 
physician self-referral purposes.
    Comment: A commenter stated that DHS entities serving patients 
located in rural areas that subsequently are classified as urban should 
continue to receive some protection. The commenter related a situation 
in which an existing hospital/physician joint venture owned a MRI 
machine. The county in which the joint venture served patients 
previously was not a constituent county in a MSA and thus was 
considered to be located in a rural area for physician self-referral 
purposes. However, the county was later reclassified as a constituent 
county of a MSA and physician-investor referrals to the joint venture 
would now violate the physician self-referral provisions. The commenter 
stated that it was no longer able to satisfy the rural provider 
ownership exception, despite the fact that the area was designated as 
medically underserved and the only other MRI machine was located 30 
miles away. The commenter requested that we adopt alternative criteria 
for the exception in Sec.  411.356(c)(1) that would address the 
situation, such as location in a medically underserved area in which 
the nearest DHS entity (except for the one owned by the physician) is 
at least 30 miles away.
    Response: The rural provider ownership exception is statutory. A 
physician who invests in an entity furnishing DHS in a rural area takes 
a risk that the area will subsequently be classified as an urban area.
    Section 1877(b)(4) of the Act allows us to create an exception only 
if there is no risk of program or patient abuse. We do not believe that 
an across-the-board exception for a medically underserved area in which 
the nearest DHS entity (except for the one owned by the physician) is 
at least 30 miles away is appropriate because we cannot determine that, 
even with this restriction, there would be no risk of program or 
patient abuse. Physician ownership of DHS entities is at the heart of 
the physician self-referral law and is precisely the conduct at which 
the statute is aimed. The Congress provided limited exceptions for 
ownership of DHS entities, expressly carving out a rural provider 
exception with a very specific definition of ``rural.''

D. Ownership Interest in a Whole Hospital

    Section 1877(d)(3) of the Act provides that, with respect to DHS 
provided by a hospital, an ownership or investment interest in a 
hospital (and not merely in a subdivision of the hospital) is not a 
financial relationship within the meaning of section 1877 of the Act if 
the referring physician is authorized to perform services at the 
hospital. Section 507 of the MMA amended section 1877(d)(3) of the Act 
to provide that, effective for the 18-month period beginning on 
December 8, 2003, the ownership or investment interest must not be in a 
specialty hospital. Section 507 defined the term ``specialty hospital'' 
in a new subsection 1877(h)(7) of the Act. The moratorium expired on 
June 7, 2005.
    The January 1998 proposed rule interpreted the requirement that the 
DHS be ``provided by the hospital'' to mean that the services had to be 
furnished by the hospital and not by another hospital-owned entity, 
such as a skilled nursing facility or a home health agency (63 FR 
1698). We stated that the exception protects only services provided by 
an entity that is a ``hospital'' under the Medicare conditions of 
participation and that the referring physician must be authorized to 
perform services at the hospital to which he or she wishes to refer. In 
addition, the interest must be in the whole hospital, not in a part or 
department of the hospital. We further explained that a physician can 
have an ownership or investment interest in a hospital by virtue of 
holding an interest in an organization (such as a health system) that 
owns a chain of hospitals that includes the particular hospital, 
because the statute does not require the

[[Page 51043]]

physician to have a direct ownership or investment interest in the 
hospital. (63 FR 1713.)
    The Phase I final rule adopted the proposed rule with incidental 
conforming changes. Phase II made no changes other than conforming 
amendments to incorporate the provisions of section 507 of the MMA. 
This Phase III final rule makes no changes to Sec.  411.356(c)(3). We 
discuss issues related to the moratorium in section XI, below.
    Comment: Two commenters objected to our decision to limit the 
protection of Sec.  411.356(c)(3) to referrals to the hospital, rather 
than extending the protection to separately-licensed subsidiary 
providers or suppliers, such as a hospital's wholly-owned home health 
agency, skilled nursing facility, or durable medical equipment 
supplier. According to one commenter, the requirement that services be 
provided directly by the hospital is not found in the language of the 
statute and does not serve a public policy purpose. The second 
commenter stated that, if a physician owns an interest in the whole 
hospital, the exception should apply to referrals for all services 
provided by the hospital and its affiliates or subsidiaries because the 
nexus between a physician's referrals and his or her return on 
investment is extremely limited or non-existent, thereby causing little 
or no risk of program or patient abuse.
    Response: For the reasons stated in Phase II, we believe that our 
interpretation of the statute is faithful to its language and purpose 
(69 FR 16084-81605). As we explained in Phase II, we believe that the 
better reading of the statute is that the Congress intended to protect 
ownership and investment interests in a hospital with respect to 
services furnished by the hospital. Therefore, we decline to modify the 
exception. Further, we do not believe that the Congress intended to 
create a blanket exemption for physician ownership in for-profit 
hospital conglomerates, which would, in our view, intensify rather than 
diminish the incentive to refer due to increased profit opportunities.
    Comment: One commenter stated that, whereas CMS has some legitimate 
concerns that expanding the exception in Sec.  411.356(c)(3) to cover 
all services provided by a hospital and its affiliates or subsidiaries 
could result in an overbroad exception, we should consider that the 
definition of an ownership interest is very broad and includes a 
security interest. Thus, a physician's security interest ``in a 
hospital,'' even if extremely attenuated, could result in a prohibition 
on referrals to other entities owned by the hospital. Therefore, if we 
decline to expand the exception to cover ownership in providers owned 
by a hospital, we should consider allowing the exception to cover 
ownership in providers owned by a hospital where such ownership derives 
only from a security interest in the hospital.
    Response: It is unclear whether the commenter is referring to a 
security interest in equipment sold to a hospital or a security 
interest in the hospital itself. As noted in section VI.A of this Phase 
III final rule, we are clarifying that a security interest in equipment 
sold to a hospital by a physician and financed through a loan to the 
hospital by the physician is not an ownership interest in the hospital, 
but rather a compensation arrangement. A security interest in the 
hospital itself is an ownership interest in the hospital (and an 
indirect ownership interest in any subsidiary owned by the hospital). 
We decline to expand the exception to protect the referrals of a 
physician who has, by virtue of a security interest in the hospital, an 
ownership interest in DHS entities owned by a hospital.

IX. Exceptions to the Referral Prohibition Related to Compensation 
Arrangements--Sec.  411.357

A. Rental of Office Space and Equipment

    Sections 1877(e)(1)(A) and (e)(1)(B) of the Act set forth 
exceptions for certain lease arrangements for space and equipment that 
meet six specific criteria:
    (i) The lease is in writing, signed by the parties, and specifies 
the space or equipment covered by the lease;
    (ii) The space or equipment rented or leased does not exceed what 
is reasonable and necessary for the legitimate business purposes of the 
lease or rental (except that space leases may include appropriately 
prorated payments for common areas), and, when used by the lessee, is 
done so exclusively;
    (iii) The rental or lease term is at least 1 year;
    (iv) The rental charges over the term of the lease are set in 
advance, consistent with fair market value, and not determined in a 
manner that takes into account the volume or value of any referrals or 
other business generated between the parties;
    (v) The lease would be commercially reasonable even if there were 
no referrals between the parties; and
    (vi) The lease meets other requirements set forth by the Secretary 
to protect against program or patient abuse.
    ``Fair market value'' is defined at section 1877(h)(3) of the Act 
as the value of rental property for general commercial purposes (not 
taking into account the property's intended use). For rentals or leases 
where the lessor is a potential source of patient referrals to the 
lessee, fair market value means general commercial value not taking 
into account intended use or the additional value the prospective 
lessee or lessor would attribute to the proximity or convenience to the 
lessor. The August 1995 final rule established Sec.  411.357(a) and (b) 
(exceptions for the rental of office space and rental of equipment, 
respectively), which tracked the statutory language, including the 
definition of ``fair market value.''
    In the January 1998 proposed rule, we proposed several 
clarifications to the statutory provisions. Leases could be terminated 
for cause within the initial 1-year period, provided that the parties 
did not enter into another lease until after the expiration of the 
original term (63 FR 1713). Any renewal of a lease would have to be for 
at least 1 year, thereby precluding holdover month-to-month leases (63 
FR 1713). Subleases would be prohibited unless the sublease itself 
satisfied the conditions of the exception (63 FR 1714). Capital leases 
would not qualify for the exceptions (63 FR 1714). ``Per click'' (for 
example, per-use or per-service) equipment rental payments would 
qualify for the equipment rental exception, unless the payments were 
for the use of the equipment on patients referred by the lessor-
physician (63 FR 1714).
    Phase II adopted the provisions of the January 1998 proposed rule, 
with several changes (69 FR 16085). Specifically--
     Leases or rental agreements may be terminated with or 
without cause during the term of the agreement as long as no further 
agreement is entered into between the parties within the first year of 
the original lease term. (Any new lease would need to satisfy the 
requirements of an exception on its own terms (Sec.  411.357(a)(2) for 
space leases or Sec.  411.357(b)(3) for equipment leases.)
     Month-to-month holdover leases for up to 6 months, 
immediately following the expiration of an agreement of at least 1 year 
that met the conditions of a rental exception, will continue to satisfy 
the requirements of the exception if the holdover is on the same terms 
and conditions as the immediately preceding lease (Sec.  411.357(a)(7) 
for space leases or Sec.  411.357(b)(6) for equipment leases).

[[Page 51044]]

     All leases or rental agreements, whether operating or 
capital, are eligible for the lease exceptions if they meet the 
applicable criteria.
     A lease (or sublease) is considered to satisfy the 
``exclusive use test'' provided that the lessee (or sublessee) does not 
share the rented space or equipment with the lessor during the time it 
is rented or used by the lessee (or sublessee) (Sec.  411.357(a)(3) for 
space leases or Sec.  411.357(b)(2) for equipment leases). (We note 
that a subleasing arrangement could create a separate indirect 
compensation arrangement between the lessor and a sublessee that would 
need to be evaluated under the indirect compensation rules.)
     ``Per-click'' rental payments are permitted for DHS 
referred by the referring physician provided that the payments are fair 
market value and do not take into account the volume or value of 
referrals or other business generated by the referring physician, as 
those concepts are defined at Sec.  411.351 and Sec.  411.354.
    We are making no substantive changes to Sec.  411.357(a) or (b).
    Comment: Two commenters sought clarification as to whether lease 
agreements between physicians and entities furnishing DHS may be 
amended prior to the stated termination of the agreement. The 
commenters asked about several different scenarios involving amendments 
to lease agreements prior to their expiration, specifically:
    (1) Whether the parties to an agreement may amend an agreement 
during or after the first year of a multi-year agreement if the 
amendment is not related to the volume or value of referrals or other 
business generated between the parties;
    (2) Whether an amended agreement must continue for an additional 
term of at least 1 year following the amendment even if the termination 
date of the original agreement would occur in less than 1 year;
    (3) Whether a ``without cause'' termination clause in a multi-year 
agreement is permissible and whether the parties could simply amend an 
agreement they wish to change, rather than go through the formality of 
terminating the original agreement and entering into a new agreement; 
and
    (4) Whether there is a limit on the number of amendments that may 
be made in the first year of an agreement.
    Response: In order to satisfy the requirements of Sec.  411.357(a) 
and (b), rental charges for the rental of office space and equipment 
must be set in advance, consistent with fair market value, and not 
determined in a manner that takes into account the volume or value of 
referrals or other business generated between the parties. In addition 
to these and other requirements, the written agreement must provide for 
at least a 1-year term. An amended lease agreement must comply with 
these four criteria, as well as the remaining conditions of the 
exception. Changes to the rental charges (including changes to the 
methodology for calculating the rental charges) and changes to certain 
other terms that are material to the rental charges (for example, a 
change to the amount of space rented) may jeopardize compliance with 
one or more of these four criteria, and thus, Sec.  411.357(a) or (b).
    Because rental charges, including the methodology used to calculate 
rental charges, must be ``set in advance,'' as defined at Sec.  
411.354(d)(1), parties may not change the rental charges at any time 
during the term of the agreement. Parties wishing to change the rental 
charges must terminate the agreement and enter into a new agreement 
with different rental charges and/or other terms; however, the new 
agreement may be entered into only after the first year of the original 
lease term (regardless of the length of the original term). In 
addition, the new lease must be for a term of at least 1 year and must 
comply with all other criteria in the relevant rental exception. As we 
stated in Phase II (69 FR 16085), leases or rental agreements may 
provide for termination with or without cause.
    Parties may amend a lease agreement multiple times during or after 
the first year of its term, provided that the rental charges are not 
changed and all other requirements of the exception are satisfied. 
However, changes to terms that are material to the rental charges, such 
as the amount of space leased, may cause the rental charges to fall out 
of compliance with the fair market value and ``volume and value of 
referrals'' requirements. For example, if the original rental charges 
were $5,000 per month for 200 square feet of space and the amended 
lease added 100 square feet of space but did not require additional 
payment beyond the original monthly payment of $5,000, the rental 
charges under the new agreement likely would not be consistent with 
fair market value and may take into account the volume or value of 
referrals or other business generated between the parties.
    An amended agreement need not continue for an additional 1 year 
following its amendment if the original termination date of the 
agreement would occur sooner. Rather, because the exceptions in Sec.  
411.357(a) and (b) require a term of 1 year from the inception of the 
lease or rental agreement, the amended agreement may terminate upon the 
original expiration date, provided that the original term of the 
agreement is at least 1 year. As we noted above, rental charges may not 
be amended.
    If the parties merely wish to end an arrangement prior to the 
original termination of the written agreement, as we stated in Phase 
II, they may terminate without cause at any time (subject to the terms 
of the agreement, of course), provided that the parties do not enter 
into a new lease agreement within the first year of the original term 
and any new agreement complies with an exception (69 FR 16085-16086). 
As we also stated (69 FR 16085), leases and rental agreements may 
provide for termination with or without cause.
    Comment: One commenter asked for clarification regarding the 
termination of a lease. The commenter wanted confirmation that the 
prohibition on entering into a new lease agreement in Sec.  
411.357(a)(2) applied only to a new lease for the same office space. 
According to the commenter, the parties should not be prohibited from 
entering into a personal service arrangement or even a lease agreement 
for different office space.
    Response: The commenter is correct that the prohibition on entering 
into a new lease applies to only a new lease for all or part of the 
same office space. The parties are not prohibited from entering into a 
personal service arrangement or a lease agreement for completely 
different office space.
    Comment: One commenter described a ``time-share'' leasing 
arrangement under which a physician or group practice pays the lessor 
for the right to use office space exclusively on a turn-key basis, 
including support personnel, waiting area, furnishings, and equipment, 
during a schedule of time intervals for a fair market value rate per 
interval of time or in the aggregate. The commenter suggested that, 
although this arrangement may qualify under the exceptions for the 
rental of space and equipment, it would be addressed more appropriately 
in the fair market value exception (Sec.  411.357(l)) or payments by a 
physician exception (Sec.  411.357(i)). The commenter urged us to 
clarify that such ``time-share'' arrangements may qualify under Sec.  
411.357(l) or (i).
    Response: We disagree with the commenter. As we stated in Phase II, 
we decline to permit space leases to be eligible for the fair market 
value exception in Sec.  411.357(l) (69 FR 16086). Similarly, we are 
not persuaded that

[[Page 51045]]

Sec.  411.357(i) should protect space leases (69 FR 16099).
    Comment: A number of commenters sought clarification regarding the 
application of Sec.  411.357(a)(3) and (b)(2) to office-sharing 
arrangements in which several physicians and/or groups share facilities 
and some limited equipment without exclusivity. According to these 
commenters, sharing of facilities is extremely common for physicians 
and may not readily fit into the leasing exceptions.
    Response: Irrespective of whether the office-sharing arrangements 
described by the commenters are common, both the statute and our 
regulations require that the lessee have exclusive use of the leased 
space or equipment when the lessee uses the space or equipment. In 
effect, Sec.  411.357(a)(3) and (b)(4) require that space and equipment 
leases be for established blocks of time.
    Comment: One commenter asked that we clarify that a sublessor and 
sublessee may share common areas. Another commenter requested guidance 
with respect to what is meant by ``common areas'' for the purposes of 
the exception. One commenter questioned whether the ability to share 
``common space'' permitted parties to share actual office space (for 
example, exam rooms) if the arrangement is at fair market value.
    Response: As we stated in Phase II, common areas may be shared if 
the rent is appropriately prorated (69 FR 16086). By common areas, we 
mean foyers, central waiting rooms, break rooms, vending areas, etc., 
to the extent that the areas are, in fact, used by the sublessee. (That 
is, the sublessee cannot pay rent for a break room that it will never 
use). Common areas do not include exam rooms. Common areas that contain 
certain limited equipment may be shared, such as hallways used by non-
physician staff to weigh patients or draw fluid samples. Permissible 
equipment in shared common areas is limited to the type that is not 
usually separately leased (for example, scales). Non-exclusive 
arrangements, other than for common space (as described above), do not 
satisfy the requirements of Sec.  411.357(a)(3) and (b)(2).
    Comment: Several commenters expressed concern about the language in 
Sec.  411.357(a)(3) and (b)(2) prohibiting a lessee from sharing space 
or equipment with a lessor or any person or entity related to the 
lessor. The commenters requested guidance on specific shared leasing 
arrangements, including whether the physician self-referral law 
prohibits the subleasing of space or equipment by a physician from a 
physician employed by or a group owned by a hospital.
    Response: To prevent parties from circumventing the exclusive use 
requirement, we modified the space and equipment rental exceptions in 
Phase II (69 FR 16086) to preclude the sharing of rented office space 
or equipment with the lessor or any person or entity related to the 
lessor, including group practices, group practice physicians, or other 
entities owned or operated by the lessor. Determining whether a lessee 
is sharing space or equipment with a person or entity related to the 
lessor will require a case-by-case review of the facts. Nothing in 
Sec.  411.357(a)(3) or (b)(2) prohibits physicians from subleasing 
space or equipment from a hospital, a hospital-owned group, or 
physicians employed by a hospital, provided that the sublessee has 
exclusive use of the space or equipment that is the subject of the 
sublease and all other requirements of the exception(s) are satisfied.
    Comment: One commenter asked how tenant improvements should be 
addressed for purposes of compliance with the exception for the rental 
of office space. Specifically, the commenter asked whether the costs of 
any capital improvements should be allocated over the useful life of 
the improvements or be passed on in their entirety to the physician 
lessee who requested the improvements during the term of his or her 
lease.
    Response: For accounting purposes, tenant improvements should be 
accounted for in accordance with generally accepted accounting 
practices. For purposes of determining the fair market value for rental 
charges, whether the costs of capital improvements should be allocated 
over the useful life of the improvements or be passed on in their 
entirety to the physician lessee who requested them will depend upon 
the facts and circumstances of the particular case. Specifically, if a 
lessor provides improvements for the benefit of a physician lessee that 
are unlikely to be chargeable to a subsequent tenant, the lessor should 
allocate the entire cost of these improvements to the lessee for whose 
unique benefit they are made. Improvements that the lessor reasonably 
expects would be chargeable to subsequent lessees may be allocated over 
their expected useful life.
    Comment: A number of commenters welcomed the flexibility provided 
by Sec.  411.357(a)(7) and (b)(6) with regard to lessees who hold over 
upon the expiration of space and equipment leases. The commenters 
requested confirmation that lessors could enforce leases that imposed 
higher fees during holdover tenancies, provided that the provisions 
were contained in the written lease at the time of initial or renewal 
execution of the lease. One commenter asked that the holdover grace 
period be extended indefinitely, provided that, during the holdover 
period, the lessor continually was taking steps to evict the lessee.
    Response: We agree that lessors can charge a holdover rental 
premium, provided that the amount of the premium was set in advance in 
the lease agreement (or in any subsequent renewal) at the time of its 
execution and the rental rate (including the premium) remains 
consistent with fair market value and does not take into account the 
volume or value of referrals or other business generated between the 
parties. We decline to permit the holdover grace period to last for the 
length of time that the landlord is taking steps to evict the tenant as 
suggested by the commenter. We believe that the 6-month holdover period 
permitted in the regulations is sufficient.

B. Rental of Equipment

    The exception in Sec.  411.357(b) and the comments we received in 
response to Phase II are discussed above in section IX.A in conjunction 
with the exception in Sec.  411.357(a) for the rental of office space.

C. Bona Fide Employment Relationships

    Section 1877(e)(2) of the Act sets forth an exception for payments 
made by an employer to a physician (or immediate family member of the 
physician) with whom the employer has a bona fide employment 
relationship, if certain conditions are met. The August 1995 final rule 
incorporated the provisions of section 1877(e)(2) of the Act into our 
regulations in Sec.  411.357(c) without change (60 FR 41975, 41981). 
The January 1998 proposed rule proposed to prohibit productivity 
bonuses paid to employed physicians based on DHS personally performed 
by the referring physician.
    Phase II adopted the January 1998 proposed rule without the 
limitation on productivity bonuses given the Phase I determination that 
personally performed DHS are not referrals for purposes of section 1877 
of the Act (69 FR 16087). We also declined to expand the definition of 
employee at Sec.  411.351 in Phase II to include leased employees as 
defined by State law (69 FR 16087).
    We received no comments concerning the exception in Sec.  
411.357(c) for bona fide employment relationships and we are making no 
changes.

D. Personal Service Arrangements

    Section 1877(e)(3) of the Act establishes an exception for personal 
service arrangements that satisfy certain

[[Page 51046]]

requirements. The August 1995 final rule incorporated the personal 
service arrangements exception into the regulations in Sec.  
411.357(d). The January 1998 proposed rule would have retained the 
exception and proposed technical corrections and some additional 
interpretations (63 FR 1701).
    Phase II adopted the January 1998 proposed rule with several 
modifications. In Phase II, we qualified the requirement in Sec.  
411.357(d)(1)(iv) that the term of an arrangement must be for at least 
1 year to permit an arrangement to be terminated during the initial 
term with or without cause, provided that the parties do not enter into 
the same or substantially the same arrangement during the first year of 
the original term of the agreement (69 FR 16090). In Phase II, we 
modified the regulation to allow cross-referencing to a master list of 
contracts, in addition to the existing option of incorporation of 
multiple agreements by reference. We also added a requirement that a 
master list (or lists) be made available for inspection by the 
Secretary upon request (69 FR 16091). In Phase II, we declined to 
extend the exception beyond contracts between DHS entities and 
physicians or group practices. In addition, we declined to modify the 
exception to allow physicians to hire independent contractors or use 
wholly-owned companies to perform services they have contracted to 
provide, due to the potential for abuse (69 FR 16090).
    Phase II also made minor changes to the physician incentive plan 
exception but did not expand significantly the exception. We clarified 
that the exception applies to downstream subcontractor arrangements 
related to health plan enrollees (69 FR 16090).
    This Phase III final rule makes minor modifications to the personal 
service arrangements exception, including the addition of a provision 
in Sec.  411.357(d)(1)(vii) to permit a holdover personal service 
arrangement similar to the holdover provisions in the exceptions for 
the rental of office space and equipment. We modified Sec.  
411.352(d)(2) to refer consistently to ``downstream contractor,'' a 
term for which we added a definition at Sec.  411.351, as noted above.
    Comment: One commenter asked how long the master list kept by an 
entity must include a record of a personal service agreement between 
the DHS entity and a referring physician. At some point, an expired 
agreement becomes irrelevant, according to the commenter. The commenter 
suggested 5 years after termination or expiration as the appropriate 
retention period. Another commenter asked for clarification as to 
whether the master list needs to include personal service agreements 
between the DHS entity and the physician that involved ``similar or 
related'' transactions, as opposed to all compensation and ownership 
arrangements between the parties. The commenter also asserted that the 
master list should have to include arrangements between the identical 
parties only, and not, for instance, contracts with the physician's 
family members.
    Response: We note that the exception permits, but does not require, 
the use of a master list. Parties seeking protection under this 
exception must have a written agreement that covers all of the services 
to be furnished to the entity by the physician (or an immediate family 
member of the physician) or group practice. A master list may be used 
to meet this requirement. The master list must include all personal 
service arrangements with any physician, family member, or group 
practice. The condition in the exception requiring that the arrangement 
cover all services is not limited to ``similar or related'' services 
between the entity and the physician, but covers all services. This 
requirement is a bright-line rule that promotes transparency and is not 
dependent on subjective determinations of similarity or relatedness. 
Moreover, personal service arrangements with a physician's immediate 
family members must be included on the master list because section 
1877(d) of the Act treats a financial relationship with an immediate 
family member of a physician the same as a financial relationship with 
the physician.
    Comment: Two comments involved physician incentive payments 
referenced in Sec.  411.357(d)(2). One commenter asked that we define a 
``downstream contractor'' as used in Sec.  411.357(d). A second 
commenter asked that the physician incentive plan exception be expanded 
to permit hospitals to pay physicians on a capitated or risk-sharing 
basis for services to hospital patients who are not enrolled in a 
managed care plan.
    Response: We are revising the definition of ``physician incentive 
plan'' at Sec.  411.351 to reference newly defined ``downstream 
contractor.'' As defined at Sec.  411.351, and for purposes of Sec.  
411.357(d)(2), a ``downstream contractor'' means both a ``first tier 
contractor'' as defined at Sec.  1001.952(t)(2)(iii) and a ``downstream 
contractor'' as defined at Sec.  1001.952(t)(2)(i). Therefore, for 
physician self-referral purposes, a downstream contractor includes both 
an individual or entity that has a contract directly with an eligible 
managed care organization to provide or arrange for items and services 
(that is, a first tier contractor) and an individual or entity that has 
a subcontract directly or indirectly with a first tier contractor for 
the provision of or arrangement for items or services that are covered 
by an agreement between an eligible managed care organization and the 
first tier contractor. We also note that, in Sec.  411.357(d)(2), we 
used the terms ``downstream contractor'' and ``downstream 
subcontractor'' interchangeably. We have revised Sec.  411.357(d)(2) to 
use only the term ``downstream contractor''.
    The commenter wants DHS entities to be allowed to provide 
incentives to physicians for their services in connection with fee-for-
service patients provided that the incentives ``fit the general 
structure of the [personal service arrangements] exception (for 
example, no payment to reduce medically necessary services).'' We are 
not persuaded to make such a change. In the exception for personal 
service arrangements, the Congress included a statutory provision 
permitting certain physician incentive plan payments (structured to 
protect patient care) that would otherwise run afoul of the general 
restriction on compensation determined in a manner that takes into 
account the volume or value of referrals or other business generated 
between parties. This provision facilitates certain managed care 
arrangements that conceptually compensate physicians based on limiting 
the volume of care provided or ordered by a ``gatekeeper'' physician. 
The exception proposed by the commenter, for similar payments related 
to fee-for-service patients, would pose a risk of program or patient 
abuse. (For example, see section 1128A(b)(1) of the Act, which 
authorizes civil monetary penalties for payments made by hospitals to 
physicians to reduce or limit services to hospital patients.) However, 
as we discussed in Phase II, compensation related to patient 
satisfaction goals or other quality measures unrelated to the volume or 
value of business generated by the referring physician and unrelated to 
reducing or limiting services would be permitted under the personal 
service arrangements exception, provided that all requirements of the 
exception are satisfied (for example, compensation to reward physicians 
for providing appropriate preventive care services where the 
arrangement is structured to satisfy the requirements of the exception) 
(69 FR 16091).
    CMS is working on two demonstration projects that concern

[[Page 51047]]

hospital incentives paid to physicians in connection with the provision 
of high quality care, as authorized under section 646 of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and 
section 5007 of the Deficit Reduction Act of 2005 (DRA). In addition, 
section 5001(b) of the DRA requires CMS to propose a demonstration for 
FY 2009 that would provide incentives to hospitals for the provision of 
high quality care. This will be a ``rewards sharing'' demonstration 
under which hospitals will share money with physicians based on quality 
of care rather than on reducing or limiting medically necessary 
services.
    Comment: Several commenters raised issues regarding the exceptions 
for personal service arrangements and indirect compensation 
arrangements as they are applied to relationships involving a DHS 
entity, a group practice, and the physicians employed by the group 
practice who refer patients to the DHS entity. One commenter requested 
confirmation that, if a hospital contracts with a group practice for 
the provision of services, the relevant analysis is whether the 
arrangement meets the indirect compensation arrangements exception in 
order to ensure that referrals from individual physician-employees in 
the group practice are protected. One commenter asked for clarification 
that the personal service arrangements exception does not apply to most 
medical foundations because they typically contract with a group 
practice which, in turn, employs or contracts with physicians. Another 
commenter asserted that, if the personal service arrangements exception 
would protect an arrangement directly between a DHS entity and a 
physician, it should also be applicable to and protect an arrangement 
pursuant to which the physician has an indirect relationship with the 
DHS entity. Finally, one commenter asked for clarification that 
compliance with either the personal service arrangements or indirect 
compensation arrangements exception is sufficient to protect a 
compensation arrangement.
    Response: As discussed in section VI.B, we now consider a physician 
to ``stand in the shoes'' of his or her group practice or physician 
organization. In the hypothetical situations posed by the first two 
commenters, the referring physician would stand in the shoes of the 
group practice that employs the physician and be considered to have a 
direct relationship with the hospital or the medical foundation, 
respectively, on the same terms as the hospital's or medical 
foundation's arrangement with the group practice. Thus, in the first 
hypothetical situation, the financial relationship between the hospital 
and the physician (who is standing in the shoes of the group practice) 
must meet an exception in order for the physician to be able to refer 
patients to the hospital. However, if the hospital contracts with a 
medical foundation which, in turn, contracts with the group practice 
which employs the physician (who stands in the shoes of the group 
practice), compliance with the indirect compensation arrangements 
exception would still be necessary for the physician to refer patients 
to the hospital (assuming that the arrangement meets the definition of 
an indirect compensation arrangement at Sec.  411.354(c)(2)). The chain 
of financial relationships would be hospital--foundation--group 
practice--physician. However, if the physician makes a referral to the 
medical foundation's clinic (as opposed to a hospital with which the 
medical foundation contracts) for DHS furnished by the clinic, then the 
relationship between the physician (standing in the shoes of his or her 
group practice) and the medical foundation's clinic would be deemed to 
be a direct relationship (that is, medical foundation clinic--physician 
standing in the shoes of his or her group).
    As we noted in Phase II, the exception for personal service 
arrangements would apply to payments made by a nonprofit medical 
foundation under a contract with an individual physician to provide 
health care services (69 FR 16077, citing H. R. Conf. Report No. 103-
213 at 814 (1993)). Upon the effective date of this final rule, when 
the group practice physician stands in the shoes of the group practice 
with which the medical foundation has contracted, the medical 
foundation may apply the personal service arrangements exception to the 
arrangement between it and the group practice in order to protect 
referrals from the physician.
    Finally, as we discussed in Phase I, where more than one exception 
can apply to a financial relationship, the relationship needs to 
satisfy the requirements of only one of the applicable exceptions (66 
FR 916).
    Comment: One commenter asked that we revise the exception in Sec.  
411.357(d)(1) to permit a holdover personal service arrangement on 
terms similar to those specified in the equipment and space lease 
context.
    Response: We agree and have modified the regulation accordingly by 
adding a new provision in Sec.  411.357(d)(1)(vii).
    Comment: One commenter asked for clarification regarding when and 
on what terms a contract for personal services can be amended.
    Response: A personal service contract can be amended in the same 
manner as an office space or equipment lease as noted above in section 
IX.A.

E. Physician Recruitment

    Section 1877(e)(5) of the Act excepts remuneration provided by a 
hospital to a physician to induce the physician to relocate to the 
geographic area served by the hospital in order to be a member of the 
hospital's medical staff. To qualify for the protection of the 
exception, the following requirements must be satisfied--
     The physician is not required to refer patients to the 
hospital;
     The amount of remuneration under the arrangement is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any referrals by the referring physician; and
     The arrangement meets any other requirements imposed by 
the Secretary to protect against program or patient abuse.
    The August 1995 final rule incorporated the provisions of section 
1877(e)(5) of the Act into our regulations in Sec.  411.357(e), with 
the additional requirements that the arrangement and its terms be in 
writing and signed by both parties, and that the physician not be 
precluded from establishing staff privileges at another hospital or 
referring to another entity. The January 1998 proposed rule would have 
made minor editorial changes.
    Based on public comments, Phase II substantially modified the rule 
(69 FR 16094-16095) in the following respects--
     A physician must relocate his or her practice, rather than 
his or her residence. To be eligible for the exception, a physician 
must be new to the hospital's medical staff and relocate to the 
geographic area served by the hospital (defined as the lowest number of 
contiguous postal zip codes from which the hospital draws at least 75 
percent of its inpatients).
     Relocation of a physician's practice to the geographic 
area served by the hospital must involve either: (1) Relocating the 
physician's office a minimum of 25 miles; or (2) establishing that at 
least 75 percent of the physician's revenues from services provided by 
the physician to patients (including services to hospital inpatients) 
are derived from services provided to new patients.
     Residents and physicians who have been in medical practice 
less than 1 year will not be considered to have an established practice 
and will, therefore,

[[Page 51048]]

be eligible for compensation under the physician recruitment exception 
regardless of whether the physician actually moves his or her practice 
location.
     Federally qualified health centers may make recruitment 
payments to physicians on the same basis as hospitals.
     Recruitment payments made through existing group practices 
(rather than directly to the recruited physician) are permitted under 
certain conditions. (These conditions are designed to ensure that any 
remuneration in connection with recruiting a new physician that flows 
from the hospital through an existing group is remuneration for the 
benefit of the recruited physician and does not inure to the benefit of 
the group.)
    We received a substantial number of comments regarding the 
physician recruitment exception. We are making several changes to the 
exception in response to the comments, and are clarifying our 
interpretation of certain provisions as requested by commenters. 
Because the exception in Sec.  411.357(e) applies to federally 
qualified health centers and (now) rural health clinics in the same 
manner as it applies to hospitals, references to ``hospital'' below 
also implicitly include federally qualified health centers and rural 
health clinics.
    Amendments to the text of Sec.  411.357(e) include--
     Permitting rural health clinics to utilize the exception;
     Deeming the geographic area served by a hospital to be the 
area comprised of all of the contiguous zip codes from which the 
hospital's inpatients are drawn when the hospital draws fewer than 75 
percent of its inpatients from contiguous zip codes;
     Permitting a hospital located in a rural area to determine 
the ``geographic area served by the hospital'' using an alternative 
test that encompasses the lowest number of contiguous (or in some 
cases, noncontiguous) zip codes from which the hospital draws at least 
90 percent of its inpatients;
     Permitting a more generous income guarantee under certain 
circumstances in the case of a physician who is recruited to replace a 
deceased, retiring or relocating physician;
     Permitting group practices to impose certain practice 
restrictions;
     Permitting rural hospitals to recruit physicians into an 
area outside of the hospital's geographic service area if it is 
determined through a CMS advisory opinion that the area has a 
demonstrated need for the recruited physician;
     Exempting from the relocation requirement a physician who, 
for the 2 years immediately prior to the recruitment arrangement, was 
employed on a full-time basis by a Federal or State bureau of prisons 
(or similar entity operating correctional facilities), the Department 
of Defense or Department of Veterans Affairs, or facilities of the 
Indian Health Service, provided that the physician did not maintain a 
separate private practice in addition to such full-time employment;
     Exempting from the relocation requirement those physicians 
whom the Secretary has deemed in an advisory opinion not to have an 
established medical practice comprised of a significant number of 
patients who are or could become patients of the recruiting hospital;
     Clarifying that a physician must relocate his or her 
practice from outside the geographic service area to a location inside 
the service area and either: (1) Move his or her medical practice at 
least 25 miles; or (2) have a new medical practice that derives at 
least 75 percent of its revenues from professional services furnished 
to patients (including hospital inpatients) not seen or treated by the 
physician at his or her prior medical practice site during the 
preceding 3 years, measured on an annual basis (fiscal or calendar 
year); and
     Clarifying that Sec.  411.357(e)(4)(iii) pertains to any 
type of income guarantee.
    Comment: Many commenters requested clarification as to the effect 
of Phase II on pre-existing recruitment arrangements that did not meet 
the Phase II requirements. Commenters urged us to grandfather any pre-
existing recruitment arrangements.
    Response: We posted guidance regarding pre-existing physician 
recruitment agreements on July 14, 2004 on the physician self-referral 
website in the form of a question and answer (www.cms.hhs.gov/physicianselfreferral). We are still not persuaded that we should 
grandfather pre-existing arrangements. Thus, any arrangement that was 
in effect as of July 26, 2004, should have been amended to comply with 
Phase II, whether the arrangement was in a payout period or in a 
forgiveness period.
    Comment: Two commenters questioned the need for the requirement in 
Sec.  411.357(e)(1) that the recruited physician not already be on the 
medical staff. One commenter said it was unnecessary in light of the 
relocation requirement. The other commenter stated that the requirement 
should not apply to physicians who are not active or who are on the 
hospital's courtesy staff only.
    Response: We disagree with the first commenter. Section 1877(e)(5) 
of the Act states that the recruited physician must ``relocate * * * in 
order to be a member of the medical staff of the hospital.'' This 
language makes clear that the recruited physician cannot already be a 
member of the hospital's medical staff. We believe that the relocation 
requirement is insufficient to establish that a physician who is 
already a member of the hospital's active staff needs an incentive to 
move his or her practice. We are not persuaded that permitting 
recruitment of physicians who are not on a hospital's ``active'' 
medical staff, but who hold some type of medical staff privileges (for 
example, courtesy privileges), poses no risk of program or patient 
abuse. Moreover, defining ``active'' privileges is difficult, as many 
hospitals use different terminology to refer to different types of 
medical staff privileges.
    Comment: One commenter objected to the conditions in Sec.  
411.357(e)(1)(iii) and (e)(4)(v) that the remuneration not directly or 
indirectly take into account the volume or value of actual or 
anticipated referrals or other business generated by the recruit or the 
physician practice, if it received any payments. According to the 
commenter, hospital recruitment arrangements always anticipate 
referrals to the hospital.
    Response: We recognize that parties to a physician recruitment 
arrangement may anticipate some referrals by the recruited physician. 
In this context, the ``volume and value'' condition prohibits the 
amount of assistance payable to the physician or the group practice 
from taking into account, in any manner, the volume or value of past or 
anticipated referrals to the hospital. The unconditional payment of 
actual moving expenses, for example, would not take into account the 
volume or value of referrals.
    Comment: One commenter asserted that a Mississippi statute 
prohibits physician employees of county- or city-owned hospitals from 
having any contractual relationship with the hospital other than an 
employment contract. Because of this restriction, these hospitals that 
recruit physicians as employees are unable to enter into a recruitment 
agreement that is separate and distinct from the employment agreement 
between the hospital and the recruit. The commenter requested that, in 
order to avoid placing community hospitals in a position where they 
have to choose between obeying State law or our physician self-referral 
regulations, we delete the word ``separate'' from the

[[Page 51049]]

phrase ``except as referrals may be restricted under a separate 
employment or services contract'' in Sec.  411.357(e)(1)(iv).
    Response: The commenter misunderstands the purpose of the quoted 
language in Sec.  411.357(e)(1)(iv). This language appears in, and 
pertains to, the physician recruitment exception, not the employment 
exception (which would apply if the hospital was to employ the 
recruited physician directly and all requirements of the exception were 
satisfied). The purpose of the physician recruitment exception is to 
allow hospitals, subject to certain conditions, to provide remuneration 
directly or indirectly to physicians in order to induce them to 
relocate their medical practices to the hospital's geographic service 
area. The exception contemplates that recruited physicians will either 
practice on their own or as part of a physician practice. The exception 
does not contemplate that the recruited physicians will be employees of 
the recruiting hospitals, although nothing in the exception 
specifically precludes this result if all requirements of the exception 
are satisfied. Section 411.357(e)(1)(iv) provides that, as a condition 
of compliance with the recruitment exception, the recruited physician 
must be allowed to establish staff privileges at any other hospital(s) 
and to refer business to any other entities, except to the extent that 
referrals may be restricted under a separate employment, managed care, 
or services contract that complies with Sec.  411.354(d)(4). The 
``separate employment contract'' contemplated in the regulation would 
be between the recruited physician and, for example, a group practice 
that employs the physician recruited by a hospital. Where a hospital 
wishes to recruit a physician as an employee, it need comply only with 
the requirements of the exception in Sec.  411.357(c) for bona fide 
employment relationships, and, if it wishes to restrict the ability of 
the physician-employee to refer patients to other entities, with the 
requirements in Sec.  411.354(d)(4) (special rule on compensation). 
Neither the employment exception nor the special rule on compensation 
requires the employing hospital to set forth referral restrictions in 
an agreement separate and distinct from the underlying employment 
contract.
    Comment: Several commenters objected to the explanatory language in 
the Phase II preamble that appeared to condone credentialing 
restrictions aimed at restricting a recruited physician from competing 
with the recruiting hospital (69 FR 16095). Two commenters were 
concerned that such language lends itself to ``economic credentialing'' 
and objected to what they characterized as an inconsistent 
interpretation of what would be considered an inappropriate practice 
restriction on physicians. One commenter asked for examples of what we 
mean by ``reasonable credentialing restrictions.''
    Response: The preamble discussion referenced by the commenters was 
primarily concerned with clarifying that recruited physicians cannot be 
prohibited from establishing staff privileges at other hospitals and 
from referring to other hospitals, even if such hospitals are 
competitors of the hospital that recruits the physician. We also 
intended to convey that the exception does not prevent hospitals from 
imposing reasonable credentialing restrictions on physicians when they 
compete with the recruiting hospital. Such restrictions must not take 
into account the volume or value of referrals. We take no position as 
to the application of any other State or Federal law or regulation 
pertaining to such credentialing restrictions. We merely intended to 
clarify that the physician self-referral law and our regulations do not 
prohibit reasonable credentialing restrictions that do not take into 
account in any way the volume or value of referrals or other business 
generated by the physician.
    Comment: Some commenters asked that Sec.  411.357(e) be expanded to 
protect recruitment of mid-level non-physician practitioners into a 
hospital's service area, including into an existing group practice. 
Other commenters asked that Sec.  411.357(e)(5) be expanded to protect 
rural health clinics.
    Response: Section 1877(e)(5) of the Act limits the recruitment 
exception to physicians, and, under section 1877(b)(4) of the Act, we 
cannot create a new exception unless there is no risk of program or 
patient abuse.
    The physician recruitment exception in Sec.  411.357(e) applies 
only to payments made directly (or, in some circumstances, passed 
through) to a recruited physician. Recruitment payments made by a 
hospital directly to a non-physician practitioner would not implicate 
the physician self-referral law, unless the non-physician practitioner 
serves as a conduit for physician referrals or is an immediate family 
member of a referring physician. Payments made by a hospital to 
subsidize a physician practice's costs of recruiting and employing non-
physician practitioners would create a compensation arrangement between 
the hospital and the physician practice for which no exception would 
apply. These kinds of subsidy arrangements pose a substantial risk of 
fraud and abuse.
    We are, however, persuaded to modify the exception to include rural 
health clinics, subject to the same conditions that apply to recruiting 
hospitals. We do not believe that such an expansion poses a risk of 
program or patient abuse. We have amended the regulation text 
accordingly.
    Comment: A number of commenters objected to the condition in Sec.  
411.357(e)(1) that a hospital may recruit physicians only into the 
``geographic area served by the hospital,'' which is defined at Sec.  
411.357(e)(2) as the lowest number of contiguous zip codes from which 
the hospital draws at least 75 percent of its inpatients. Commenters 
noted that this condition prevents hospitals from recruiting physicians 
into outlying parts of their service areas where there is likely to be 
greater need. Some commenters asserted that this condition hurts rural 
hospitals, and that it is very difficult for federally qualified health 
centers to satisfy the condition. Still other commenters stated that 
the restriction was unnecessary in light of the requirement that the 
physician relocate at least 25 miles or establish a practice with 75 
percent of revenues derived from professional services provided to 
patients not seen or treated by the physician within the preceding 3 
years. Although most of these commenters requested that we eliminate 
this condition, some commenters suggested that, in the event the 
geographic restriction is retained, we should revise the regulation. 
Suggested revisions included: expanding the geographic area served by 
the hospital to 90 percent of zip codes from which the recruiting 
hospital draws its inpatients; making the 75 percent of inpatients/
least number of zip codes requirement a minimum service area; 
permitting case-by-case determinations for good cause; and allowing a 
hospital to use any methodology permitted by the State in which it is 
located to determine the hospital's service area.
    Response: We are not persuaded to eliminate the requirement that a 
recruited physician establish his or her medical practice within the 
geographic area served by the hospital; however, we are persuaded by 
some of the commenters that suggested an expansion of the definition of 
``geographic area served by the hospital.'' With respect to a hospital 
located in a rural area, the ``geographic area served by the hospital'' 
may be the area composed of the lowest number of contiguous zip codes 
from which the

[[Page 51050]]

hospital draws at least 90 percent of its inpatients. If the hospital 
draws fewer than 90 percent of its inpatients from all of the 
contiguous zip codes from which it draws inpatients, the ``geographic 
area served by the hospital'' may include noncontiguous zip codes, 
beginning with the noncontiguous zip code in which the highest 
percentage of the hospital's inpatients resides, and continuing to add 
noncontiguous zip codes in decreasing order of percentage of 
inpatients. A rural hospital will continue to have the option of 
determining the ``geographic area served by the hospital'' using the 
methodologies applicable to all hospitals. We believe that this 
expansion will address much of the concern that Phase II did not permit 
recruiting into outlying portions of a rural hospital's service area. 
We are also modifying the regulation by adding a new provision in Sec.  
411.357(e)(5) to permit rural health clinics, rural hospitals, and 
federally qualified health centers located in rural areas to recruit a 
physician into an area outside the entity's geographic service area if 
it is determined by the Secretary in an advisory opinion issued under 
section 1877(g)(6) of the Act that the area has a demonstrated need for 
the recruited physician.
    Comment: Some commenters asked for clarification regarding what 
they perceive as an inconsistency between the regulation text and the 
preamble language in Phase II regarding whether a recruited physician 
must relocate his or her practice from outside the geographic area 
served by the hospital (as defined in the regulation) into the area, or 
whether the physician may simply relocate his or her practice within 
the geographic service area as long as the physician either: (1) Moves 
the site of his or her practice a minimum of 25 miles; or (2) derives 
at least 75 percent of the relocated practice's revenues from services 
provided by the physician to new patients.
    Response: With respect to the commenters' concern regarding what 
they perceive as an inconsistency between the regulation text and the 
preamble language in Phase II, we confirm that the final regulation 
requires that the recruited physician relocate his or her medical 
practice from outside the ``geographic area served by the hospital'' 
(as defined in the regulation) into the area, and that the recruited 
physician must also either: (1) move the site of his or her practice a 
minimum of 25 miles; or (2) derive at least 75 percent of his or her 
practice's revenues from services provided by the physician to new 
patients. To the extent that the Phase II preamble discussion 
inadvertently suggested a different interpretation, we are clarifying 
our intent here. Our interpretation here is consistent with the 
regulatory text in Phase II. We are making additional conforming 
changes in the regulatory text in Sec.  411.357(e)(2)(iv) for greater 
clarity.
    Comment: Commenters raised a number of specific questions 
concerning the use of zip codes for purposes of determining the 
geographic area served by a hospital, including:
    (1) What is the appropriate geographic service area if the zip 
codes contiguous to the hospital account for only 69 percent of the 
hospital's inpatients? Specifically, the commenter asked what a 
hospital should consider to be its geographic service area if the 
contiguous zip codes proximate to the hospital account for only 69 
percent of the hospital's inpatients and, due to the national 
reputation of the hospital and its medical staff, the remainder of the 
hospital's inpatients are drawn from distant, noncontiguous zip codes.
    (2) What if there is a zip code ``hole'' in the contiguous area 
(with the geographic service area resembling a donut)? May a hospital 
recruit a physician to establish his or her medical practice location 
in the zip code that forms the hole?
    (3) What if multiple configurations of zip codes will satisfy the 
75 percent requirement?
    (4) How often can a hospital determine its service area and what, 
if anything, must a hospital do if the service area changes after a 
physician is recruited by the hospital?
    (5) If a health system has two hospitals, is the geographic service 
area determined at the hospital or system level?
    Response: Phase II defined ``geographic area served by the 
hospital'' at Sec.  411.357(e)(2) as the area composed of the lowest 
number of contiguous zip codes from which the hospital draws at least 
75 percent of its inpatients. As noted above, in this Phase III final 
rule, we are amending Sec.  411.357(e) to permit a hospital located in 
a rural area to determine its geographic service area using 
noncontiguous zip codes if the hospital draws fewer than 90 percent of 
its inpatients from all of the contiguous zip codes from which it draws 
inpatients. Other than as determined using our new rule for hospitals 
located in rural areas, the geographic area served by the hospital must 
be comprised of contiguous zip codes. We are clarifying that 
``contiguous zip codes'' does not mean only zip codes that are 
contiguous to the zip code in which the hospital is located. It is our 
intention that ``contiguous zip codes'' means zip codes that are next 
to (or contiguous to) each other. A hospital should look at its 
inpatient data to determine where patients live and then calculate the 
lowest number of zip codes that touch at least one other zip code in 
which the inpatients reside. Our specific responses are as follows.
    (1) We do not expect that many hospitals would be in the situation 
described by the commenter. However, to the extent that this situation 
exists, the hospital would be prohibited from relying on the 
recruitment exception because, under the Phase II definition of 
``geographic area served by the hospital,'' the contiguous zip codes 
from which the hospital draws inpatients would not meet either the ``at 
least 75 percent of inpatients'' test (applicable to all hospitals) or, 
under this Phase III final rule, the ``at least 90 percent of 
inpatients'' test (the optional test for hospitals located in rural 
areas). In order to avoid this result, we are modifying Sec.  
411.357(e) to deem a hospital's geographic service area as comprising 
all of the contiguous zip codes from which the hospital's inpatients 
are drawn when the hospital draws fewer than 75 percent of its 
inpatients from those contiguous zip codes (or 90 percent in the case 
of the new optional test for hospitals located in rural areas). Using 
the commenter's example, the hospital would be permitted to recruit 
into the zip codes from which it draws the 69 percent of its 
inpatients.
    (2) Provided that the ``hole'' zip code is surrounded by contiguous 
zip codes as described by the commenter, if no people reside in the 
``hole'' zip code, the hospital may recruit a physician to establish a 
practice into the ``hole'' zip code. For example, a ``hole'' zip code 
might be one assigned to a large office building or commercial 
district. We have modified the regulation accordingly.
    (3) If multiple configurations containing the same number of zip 
codes permit the hospital to meet the applicable percent of inpatients 
threshold (that is, 75 percent for all hospitals or 90 percent for 
hospitals located in rural areas), the hospital is free to use any of 
the configurations.
    (4) A hospital may use any configuration that satisfies the lowest 
number of zip codes/applicable percent of inpatients test on the date 
it enters into the recruitment arrangement (that is, the date on which 
all parties have signed the written recruitment agreement). In some 
cases, this may result in the use of a different

[[Page 51051]]

geographic service area for different recruitment arrangements.
    (5) The determination of the geographic area served by a hospital 
is applied at the hospital level rather than at the hospital system 
level. Therefore, the service area is hospital-specific, not system-
specific.
    Comment: One commenter asked whether, for purposes of Sec.  
411.357(e)(3), a ``residency'' includes all training, including post-
residency fellowships.
    Response: For purposes of Sec.  411.357(e)(3), a residency includes 
all training, including post-residency fellowships.
    Comment: Section 411.357(e)(3) specifies that the relocation 
requirement does not apply to residents and physicians who have been in 
practice 1 year or less, provided that the resident or physician 
establishes his practice in the geographic area served by the hospital. 
One commenter requested that we expand this provision to include other 
physicians who do not have a private medical practice, such as 
physicians on active military duty who are ending their military 
careers; physicians who live in, but have never practiced medicine in, 
the geographic area served by the hospital; and physicians who are 
employed by the Department of Veterans Affairs, Native American 
Hospital System, or a staff model HMO. According to the commenter, such 
physicians do not have an established medical practice that is capable 
of being relocated because virtually none of their patients could be 
treated by the recruited physician (or another physician) in the 
recruited physician's new medical practice and virtually none of the 
patients could become patients of the recruiting hospital.
    Response: The recruitment exception in Sec.  411.357(e) excepts 
certain remuneration that is intended to induce a physician ``to 
relocate his or her medical practice'' to the geographic area served by 
the hospital. In Phase II, we stated that residents and physicians who 
have been in practice 1 year or less would not be considered to have an 
established medical practice to relocate and that recruitment 
arrangements involving such physicians could qualify for the 
recruitment exception regardless of whether or not the physician 
actually moves his or her practice location, provided that all other 
conditions of the exception are satisfied (69 FR 16094-16095). We agree 
that some of the physicians identified by the commenter have practices 
that are incapable of being relocated due to unique restrictions that 
effectively prevent the recruited physician's patients from receiving 
medical care furnished by either the recruiting hospital or the 
recruited physician's new medical practice. Thus, we are expanding 
Sec.  411.357(e)(3) to provide that, as long as the recruited physician 
establishes his or her medical practice in the geographic area served 
by the hospital, the relocation requirement will not apply if, for at 
least 2 years immediately prior to the recruitment arrangement, the 
recruited physician was employed on a full-time basis by one of the 
following--
     A Federal or State bureau of prisons or similar entity 
(operating correctional facilities) to serve exclusively a prison 
population;
     The Department of Defense or Department of Veterans 
Affairs to serve active or veteran military personnel and their 
families; or
     Facilities of the Indian Health Service to serve patients 
who receive medical care exclusively through the Indian Health Service.
    Also, the physician must not have maintained an independent private 
practice in addition to his or her full-time employment with one of the 
above entities. We believe that the 2-year employment restriction is 
necessary to prevent program abuse. Because physicians often see 
patients less than once a year, we believe that an experienced 
physician may have an established medical practice that is capable of 
being relocated even when the physician has not practiced in that 
location for a period of time. Thus, for example, we believe that the 
exception's relocation requirement should apply in the case of a 
physician who left private practice in the hospital's geographic 
service area to become a full-time employee of the Indian Health 
Service for 1 year only.
    In addition, to accommodate those rare instances in which a 
hospital should be permitted to provide recruitment assistance to a 
physician whose practice cannot be relocated for reasons other than 
those stated above, we are modifying the exception to provide that the 
relocation requirement will not apply if the Secretary has deemed in an 
advisory opinion issued under section 1877(g)(6) of the Act that the 
physician does not have an established medical practice that serves or 
could serve a significant number of patients who are or could become 
patients of the recruiting hospital.
    Comment: One commenter asked for clarification with respect to the 
signatories to the recruitment contract. The commenter was concerned 
that Sec.  411.357(e)(4)(i), which requires that the recruitment 
agreement be signed also by the party to whom the payments are directly 
made, could be interpreted to require that the hospital, the physician 
practice, and the recruited physician all had to sign one document. The 
commenter asserted that this would be unnecessary and would add 
unnecessarily to the transaction costs. The commenter suggested that we 
require a written agreement between the hospital and either: (1) The 
recruit; or (2) the physician practice to which the payments will be 
made. The commenter suggested, alternatively, that it should be 
acceptable to limit the contracting parties to the hospital and the 
physician practice receiving the recruitment assistance and require the 
recruited physician to sign a one-page acknowledgement agreeing to be 
bound by the terms and conditions set forth in the recruitment 
agreement signed by the hospital and the physician practice.
    Response: The exception requires a written agreement signed by all 
parties, including the recruiting hospital, the recruited physician, 
and the physician practice that the physician will be joining, if any. 
Nothing in the regulations precludes execution of the agreement in 
counterparts. This requirement is necessary to safeguard against 
program and patient abuse, and we are not persuaded that it creates any 
undue burden.
    Comment: Two commenters asked whether a hospital could require a 
group practice that was receiving recruitment assistance to guarantee 
repayment of any monies advanced to the group on behalf of the 
recruited physician if the physician did not fulfill his or her 
community service requirement.
    Response: Nothing in this rule precludes a hospital from requiring 
a physician practice to repay any monies advanced to the group on 
behalf of the recruited physician if the physician does not fulfill his 
or her community service requirement. However, if requiring the 
physician practice to guarantee repayment on behalf of the recruited 
physician is used to shield the recruited physician from any real 
liability for failure to fulfill his or her community service 
obligation under a recruitment agreement, the parties would be at 
significant risk of noncompliance with the fraud and abuse laws, 
particularly if the recruiting hospital failed to collect amounts owed 
by the physician practice making the guarantee. Any such arrangement 
should be carefully scrutinized under the fraud and abuse laws 
(including the physician self-referral law and the anti-kickback 
statute) for other implications, such as problematic relationships

[[Page 51052]]

between the group practice and the recruited physician or additional, 
unexcepted remuneration from the hospital to the group practice or the 
recruited physician.
    Section 411.357(e)(4) excepts remuneration provided by a hospital 
to a physician: (1) Indirectly through payments to a physician 
practice; or (2) directly to a physician who joins a physician 
practice. To the extent that a physician practice guarantees the 
obligations of the recruited physician, and indemnifies the recruited 
physician against repayment of those obligations, the indemnification 
would create a remunerative relationship between the physician practice 
and the recruited physician (and potentially between the physician 
practice and the hospital) that could implicate the fraud and abuse 
laws, including the physician self-referral law and the anti-kickback 
statute.
    Comment: A number of commenters requested clarification regarding 
the applicability of Sec.  411.357(e)(4)(ii) to situations in which a 
group practice, through which a hospital makes indirect recruitment 
payments to a recruited physician, employs the recruited physician. The 
commenters requested clarification that the group practice could deduct 
from the amount passed through to the physician in salary, the group 
practice's actual costs attributable to recruiting the physician. 
Examples of such costs include headhunter fees, travel expenses and 
moving expenses associated with the recruitment, and employee benefits, 
taxes and professional fees attributable to hiring the recruited 
physician. The commenters pointed out that Sec.  411.357(e)(4)(iii) 
specifically permitted such adjustments in the case of an income 
guarantee.
    Response: Under Sec.  411.357(e)(4)(iii), the costs allocated by a 
group practice that employs the recruited physician under an income 
guarantee may include the group's actual additional incremental costs 
attributable to the recruited physician. Depending on the 
circumstances, these costs may include those noted by the commenters. 
This provision was included in Sec.  411.357(e)(4)(iii) in Phase II (69 
FR 16096-16097).
    Comment: A commenter requested clarification regarding the types of 
expenses that qualify as recruiting expenses. The commenter suggested 
that the following should qualify as covered expenses: Headhunter fees; 
air fare, hotel, meals, and other costs associated with visits by the 
recruited physician and his or her family to the relevant geographic 
area; moving expenses; telephone calls; and the cost of tail 
malpractice insurance covering the physician's prior practice. Another 
commenter asked whether a hospital could pay a physician or a group 
practice for time spent recruiting a physician into the hospital's 
service area, and whether our answer depends on if the recruited 
physician joined the recruiting physician's or group's practice or an 
unrelated medical practice.
    Response: We understand the first commenter to be asking about the 
language in Sec.  411.357(e)(4)(ii) that refers to ``actual costs 
incurred by the * * * physician practice in recruiting the new 
physician * * *.'' This language describes only costs incurred in the 
recruiting of the physician and does not include costs incurred after 
the physician is recruited and has joined the group. Depending on the 
circumstances, these costs incurred in recruiting could include the 
actual costs of headhunter fees; air fare, hotel, meals, and other 
costs associated with visits by the recruited physician and his or her 
family to the relevant geographic area; moving expenses; telephone 
calls; and tail malpractice insurance covering the physician's prior 
practice.
    With respect to the second commenter's questions, if a hospital 
pays a physician or group for time spent recruiting a physician, as 
opposed to the expenses discussed above, such compensation would have 
to meet all of the requirements of a compensation exception (other than 
the recruitment exception). It would not matter whether the recruited 
physician actually joined the compensated physician's practice.
    Comment: Several commenters requested clarification regarding what 
types of income guarantees trigger the application of Sec.  
411.357(e)(4)(iii). Several commenters claimed that revenue guarantees 
are not considered income guarantees.
    Response: Any income guarantee, whether gross income, net income, 
revenues, or some variation, involves a potential cost to the guarantor 
hospital and a benefit to the recipient physician. Any such guarantee 
triggers the application of Sec.  411.357(e)(4)(iii). We have modified 
the provision to clarify that Sec.  411.357(e)(4)(iii) applies to any 
type of income guarantee.
    Comment: Many commenters objected to the condition in Sec.  
411.357(e)(4)(iii) that a group practice cannot allocate more than its 
actual, additional incremental costs attributable to the recruited 
physician under an income guarantee. According to the commenters, the 
limitation will prevent groups from recruiting new physicians using 
hospital funding, and is unreasonable. The commenters requested that we 
revise the regulation to permit other reasonable methods of allocating 
overhead costs, such as pro rata or per capita. The commenters noted 
that Sec.  411.352 permits group practices to use such allocation 
methods for distributing certain group practice revenues. A number of 
commenters stated that the rule was particularly unfair when the new 
physician was merely replacing a deceased, retiring, or relocating 
group physician, because there was no real benefit to the remaining 
physicians from a replacement physician who merely ``takes over'' the 
overhead costs of the deceased, retired, or relocated physician.
    Response: We agree that, in the limited situation in which the 
recruited physician is replacing a deceased, retiring, or relocating 
physician in an underserved area, a physician practice may, for 
purposes of an income guarantee, allocate to the recruited physician a 
per capita allocation of the practice's aggregate overhead and other 
expenses, not to exceed 20 percent of the practice's aggregate costs. 
In the alternative, the practice may allocate the actual additional 
incremental costs attributable to the recruited physician as provided 
for in Phase II (69 FR 16096-16097). This additional flexibility should 
assist hospitals that seek to replace needed physicians in their 
communities. In all other cases, the group may allocate to the 
recruited physician only the actual additional incremental expenses 
attributable to the recruited physician.
    Contrary to the commenter, we perceive no unfairness. Physician 
practices that use their own funds to recruit physicians to join them 
are free to use any cost allocation method when compensating the 
recruited physicians (subject to any conditions necessary to satisfy 
the requirements of an applicable physician self-referral exception, 
such as the exception for bona fide employment relationships or the in-
office ancillary services exception). In the case of a hospital-
subsidized income guarantee, a restriction on the allocation of costs 
becomes necessary to prevent physician practices from inappropriately 
shifting overhead costs to the hospital to which the physician practice 
refers. If a hospital were to subsidize costs that are not genuinely 
attributable to the recruited physician, the hospital would confer 
remuneration on the physician practice for which no exception would 
apply and which could reflect referrals. This would pose a substantial 
risk of program abuse under

[[Page 51053]]

the physician self-referral law, as well as under the anti-kickback 
statute. We believe that permitting broader overhead allocation in the 
limited way described above will provide appropriate assistance in 
underserved areas, where a deceased, retired, or relocated physician 
might create a deficit in available care for patients, without the risk 
of increased program or patient abuse. We are modifying the regulation 
in Sec.  411.357(e)(4)(iii) accordingly.
    Comment: One commenter asked whether the income guarantee 
requirements in Sec.  411.357(e)(4)(iii) with respect to ``actual 
additional incremental costs'' apply to a recruited physician who 
leases space and equipment from and is co-located with (rather than a 
member of or a physician in) a group practice.
    Response: The requirements of Sec.  411.357(e)(4)(iii) apply only 
in the case of income guarantees provided by a hospital when a 
physician joins a physician practice. For purposes of the recruitment 
exception, a physician has not ``joined'' a physician practice unless 
he or she has become a ``physician in the group practice'' or a 
``member of the group'' (or the equivalent, in the case of a physician 
who joins a practice that is not a ``group practice'' as defined at 
Sec.  411.352). In the case of a physician who joins a physician 
practice, except as provided in new Sec.  411.357(e)(4)(iii), the 
physician practice may not allocate costs under the income guarantee 
that exceed the actual additional incremental costs attributable to the 
recruited physician. In the case of a physician who merely co-locates 
with a physician practice (for example, by leasing office space from a 
group practice), none of the provisions of Sec.  411.357(e)(4) would 
apply. Rather, the arrangement must satisfy the requirements of the 
recruitment exception without reference to Sec.  411.357(e)(4), or 
satisfy the requirements of another exception. The recruitment 
exception would not protect any remuneration provided by the hospital 
to the physician practice indirectly through payments made to the 
recruited physician. For example, the exception would not protect an 
arrangement in which a recruited physician uses funds from a hospital 
(including amounts pursuant to an income guarantee) to pay inflated 
rental payments to a group practice. Nor, for example, would it protect 
any arrangement in which a hospital uses a recruitment arrangement with 
a recruited physician who co-locates with a physician practice to 
provide remuneration indirectly to the physician practice (for example, 
by arranging for the recruited physician to co-locate with, but not 
join, the existing physician practice and to pay that practice inflated 
amounts for rent or services). We are aware of no circumstances in 
which it would be appropriate for a physician practice to be a party to 
an income guarantee made by a hospital to a recruited physician who is 
not joining the practice.
    We caution that the physician practice and the physician may not 
improperly shift costs to the hospital making the income guarantee. We 
note that any lease or contract between the recruited physician and the 
physician practice would create a financial relationship that would 
require an exception, such as the exception for the rental of office 
space in Sec.  411.357(a), if the recruited physician refers DHS to the 
physician practice. Moreover, such lease would potentially create an 
indirect compensation arrangement between the hospital and the 
physician practice's physicians who refer DHS to the hospital (the 
chain links the hospital to the recruited physician (via the income 
guarantee) to the physician practice (via the lease) to the referring 
physicians (via ownership or employment)). Such arrangement would need 
to satisfy the requirements of the indirect compensation arrangements 
exception in Sec.  411.357(p), and should also be closely scrutinized 
under the anti-kickback statute.
    Comment: One commenter asked for confirmation that Sec.  
411.357(e)(4)(iv) requires that the physician practice keep records of 
its actual costs and the amount passed through to the recruited 
physician, and that a physician practice's failure to keep the records 
would not, by itself, subject the hospital to sanction.
    Response: Section 411.357(e)(4)(iv) requires that records of costs 
be maintained for at least 5 years and made available to the Secretary 
upon request. Because the recruiting hospital is the DHS entity seeking 
payment from Medicare in the scenario presented, it is the hospital's 
responsibility to maintain the necessary records. The commenter is 
correct that the physician practice's failure to keep records would not 
subject the hospital to sanction under the physician self-referral 
provisions. However, the hospital's failure to keep full, complete and 
accurate records of the actual costs it has subsidized and the amounts 
passed through to the physician it has recruited would preclude 
protection under the physician recruitment exception. Hospitals should 
take appropriate steps to ensure that their funds, intended for the 
benefit of recruited physicians, are appropriately handled by the 
physician practices that receive them.
    Comment: We received many comments concerning the requirement in 
Sec.  411.357(e)(4)(vi) that a physician practice may not impose 
additional practice restrictions on the recruited physician other than 
conditions related to quality of care. Commenters (including hospital 
associations) that addressed the issue of the allowability of non-
compete agreements were uniformly opposed to prohibitions on them. They 
also stated that the restriction limited the utility of the exception 
and was contrary to State laws permitting such restrictions. Several 
commenters suggested that Sec.  411.357(e)(4)(vi) be revised to 
prohibit only restrictions that prohibit the physician from practicing 
in the hospital's geographic service area. The commenters asserted that 
non-compete agreements are a standard business practice between 
physician groups and physicians. They stated that, without the ability 
to enter into non-compete agreements, physician practices would be less 
likely to take on new physicians and, as a result, hospitals may be 
unable to attract new physicians, and certain health care needs of the 
surrounding communities could go unmet. Other commenters questioned 
whether the following were permitted--
     Restrictions on moonlighting;
     Prohibitions on soliciting patients and/or employees of 
the physician practice;
     Requiring that the recruited physician treat Medicaid and 
indigent patients;
     Requiring that a recruited physician not use confidential 
or proprietary information of the physician practice;
     Requiring the recruited physician to repay losses of his 
or her practice that are absorbed by the physician practice in excess 
of any hospital recruitment payments; and
     Requiring the recruited physician to pay a predetermined 
amount of reasonable damages (that is, liquidated damages) if the 
physician leaves the physician practice and remains in the community.
    Response: We indicated in Phase II that we considered a non-compete 
clause to be a practice restriction and not a condition related to 
quality of care (69 FR 16096-16097). Although we did not list other 
examples of such practice restrictions, we intended to include only 
such restrictions placed on the recruited physician by a physician 
practice that would have a substantial effect on the recruited 
physician's ability to remain and practice medicine

[[Page 51054]]

in the hospital's geographic service area after leaving the physician 
practice or group practice. We do not consider the restrictions, 
prohibitions, and requirements that are specifically mentioned in the 
bulleted points above as falling into the category of having a 
substantial effect on the recruited physician's ability to remain in 
the hospital's geographic service area. (We note that we may consider a 
liquidated damages clause requiring a significant or unreasonable 
payment by the physician leaving the physician practice to have a 
substantial effect on the recruited physician's ability to remain in 
the recruiting hospital's geographic service area.) Our purpose in 
prohibiting practice restrictions such as non-compete clauses was to 
avoid frustrating the purpose of the exception. That is, we intended to 
discourage physician practices that recruit physicians using hospital 
funding from making it difficult for a recruited physician to remain in 
the community and fulfill his or her commitments under the recruitment 
agreement with the hospital. Allowing a physician to remain in the 
community not only furthers the health care needs of the community, but 
also obviates the need for the hospital to enter into a new recruitment 
agreement to replace the physician.
    Upon review of the comments, however, we are persuaded that 
categorically prohibiting physician practices from imposing non-compete 
provisions may have the unintended effect of making it more difficult 
for hospitals to recruit physicians. We are concerned that physician 
practices and individual physicians may be unable or reluctant to hire 
additional physicians, regardless of the receipt of financial 
assistance from hospitals, unless they are able to impose a limited, 
reasonable non-compete clause. Therefore, we are amending Sec.  
411.357(e)(4)(vi) to state that physicians and physician practices, may 
not impose on the recruited physician any practice restrictions that 
unreasonably restrict the recruited physician's ability to practice 
medicine in the geographic area served by the hospital. Although we are 
not per se conditioning payment for DHS on compliance with State and 
local laws regarding non-compete agreements, we believe that any 
practice restrictions or conditions that do not comply with applicable 
State and local law run a significant risk of being considered 
unreasonable. (Nothing in Sec.  411.357(e)(4)(vi) should be construed, 
however, as prohibiting a hospital that provides financial assistance 
to the hiring physician practice from entering into an agreement with 
the practice that prohibits the hiring physician practice from imposing 
a non-compete agreement or other practice restriction.)
    Comment: Several commenters asked whether money paid to a group 
practice under a physician recruitment arrangement constitutes indirect 
compensation within the meaning of Sec.  411.354(c)(2). Other 
commenters asked why physician recruitment arrangements could not 
qualify for the fair market value exception in Sec.  411.357(l).
    Response: With respect to the first comment, as discussed in Phase 
II (69 FR 16097), the provisions of Sec.  411.357(e)(4) related to 
pass-through hospital recruitment payments establish an exception 
applicable to the compensation arrangement created between the hospital 
and the recruited physician (and to the compensation arrangement 
between the hospital and the existing physician practice) (69 FR 
16097). With respect to the second comment, physician recruitment 
arrangements cannot qualify for the fair market value compensation 
exception for the reasons explained in Phase II (69 FR 16096). Our 
position with respect to the application of the fair market value 
compensation exception to recruitment arrangements has not changed.
    Comment: A commenter requested that we amend the physician 
recruitment exception to provide that the requirements in Sec.  
411.357(e)(4) do not apply in the case of remuneration involving the 
recruitment of a faculty physician to a nonprofit faculty practice plan 
affiliated with the hospital. The commenter stated that the Phase II 
preamble was clear that physician recruitment activities conducted in 
compliance with the academic medical centers exception do not need to 
comply with the physician recruitment exception. The commenter also 
stated, however, that an academic medical center may choose not to 
structure its compensation arrangements to fit within the academic 
medical centers exception, either because the indirect compensation 
rules apply or because another exception or exceptions are available 
for the compensation arrangements. The commenter theorized that our 
concerns with hospital payments for the recruitment of a physician who 
joins an existing physician practice arise from the potential 
incidental benefit that such arrangements may confer on the existing 
physician practice and its owner-physicians (who may have existing 
referral relationships with the hospital). However, the commenter 
asserted that, where a nonprofit hospital provides remuneration to 
recruit a needed faculty physician to an affiliated nonprofit faculty 
practice plan, it is unlikely that any improper incidental benefit 
would be conferred on any physician group.
    Response: To the extent that a hospital, including one affiliated 
with an academic medical center, wishes to provide remuneration to a 
physician for recruitment purposes, the arrangement, depending on the 
facts and circumstances, may be structured to satisfy one or more 
exceptions, such as the exception for bona fide employment 
relationships in Sec.  411.357(c), the academic medical centers 
exception in Sec.  411.355(e), or the physician recruitment exception 
in Sec.  411.357(e). Where the only exception potentially applicable is 
the physician recruitment exception (because some remuneration would be 
paid to another physician or to a physician practice), the arrangement 
must satisfy all of the requirements of Sec.  411.357(e)(4). We are not 
persuaded that any additional protection under the physician self-
referral statute for a nonprofit hospital's recruitment of faculty 
physicians is necessary or appropriate. We believe that the potential 
for program and patient abuse in the form of anti-competitive behavior 
or over-utilization exists whether the DHS entity is a for-profit or 
nonprofit entity.

F. Isolated Transactions

    Section 1877(e)(6) of the Act provides that an isolated 
transaction, such as a one-time sale of property or a medical practice, 
is not considered to be a compensation arrangement for purposes of the 
prohibition on physician referrals if the following conditions are 
met--
     The amount of remuneration for the transaction is 
consistent with fair market value and is not determined, directly or 
indirectly, in a manner that takes into account the volume or value of 
referrals;
     The remuneration is provided in accordance with an 
agreement that would be commercially reasonable even if no referrals 
were made to the entity; and
     The transaction meets any other requirements that the 
Secretary may impose by regulation as needed to protect against program 
or patient abuse.
    Phase II incorporated the provisions of section 1877(e)(6) of the 
Act into our regulations in Sec.  411.357(f), with a requirement that 
there be no additional transactions between the parties for 6 months 
after the isolated transaction, except for transactions that are 
specifically permitted under another

[[Page 51055]]

exception (69 FR 16098). Phase II set forth definitions of 
``transaction'' and ``isolated transaction'' at Sec.  411.351. Phase II 
provided that installment payments could qualify as isolated 
transactions, as long as the total aggregate payment is: (1) set before 
the first payment is made; and (2) does not take into account, directly 
or indirectly, referrals or other business generated by the referring 
physician (69 FR 16098). Additionally, the payments must be immediately 
negotiable or guaranteed by a third party, secured by a negotiable 
promissory note, or subject to a similar mechanism to ensure payment 
even in the event of default by the purchaser or obligated party. Phase 
II also clarified that post-closing adjustments that are commercially 
reasonable and not dependent on referrals or other business generated 
by the referring physician will be permitted if made within 6-months of 
the date of a purchase or sale transaction (69 FR 16098). We are making 
no changes to the isolated transactions exception in this Phase III 
final rule.
    Comment: Two commenters raised questions regarding the requirement 
in the definition of isolated transaction at Sec.  411.351 that the 
payments be immediately negotiable or secured by a negotiable 
promissory note, among other options. According to one commenter, a 
promissory note is immediately negotiable if the note so states, 
although as a practical matter, there may not be a market for the note. 
The other commenter claimed that promissory notes are typically 
immediately negotiable only in the event of default, and that requiring 
immediate negotiability is inconsistent with installment payments. One 
of the commenters also pointed out that a promissory note does not 
necessarily secure the underlying debt; rather, it can serve as 
security for a different obligation. Both commenters sought 
clarification of the ``immediately negotiable'' note requirement.
    Response: We have carefully considered the commenters' questions 
and assertions. The critical element with respect to installment 
payments is that a mechanism is in place to ensure payment (even in the 
event of default by the purchaser or obligated party). The regulation 
provides for several options to accomplish this: (1) Immediately 
negotiable payments or payments that are guaranteed by a third party; 
(2) payments that are secured by a negotiable promissory note; or (3) 
payments that are subject to a mechanism similar to (1) and (2) that 
ensures payment in the event of default. The regulation at Sec.  
411.351 does not require that a promissory note be immediately 
negotiable. Installment payments need only be secured by a negotiable 
promissory note if that is the mechanism chosen by the parties to 
ensure payment in the event of default. The parties are free to choose 
one of the other options to satisfy the requirements for installment 
loans in isolated transactions. Whether a promissory note is negotiable 
is governed by the State's version of the Uniform Commercial Code or 
other applicable State law.
    Comment: One commenter asked for clarification concerning separate 
transactions involving related parties, such as a hospital's purchase 
of a group practice and the purchase of an office building that is 
owned by some of the group practice physicians through a separate 
limited liability company. The commenter believed that such 
transactions are not unusual but would not appear to qualify for the 
exception.
    Response: The commenter's example appears to describe two isolated 
transactions between different parties that would each need to satisfy 
the requirements of the isolated transactions exception: a transaction 
between the hospital and the group practice, and a transaction between 
the hospital and the limited liability company. These arrangements 
could qualify for the exception, provided that they are structured with 
separate payments for each transaction and all other conditions of the 
exception are satisfied.
    Comment: Two commenters asked for clarification regarding post-
closing adjustments. One commenter stated that the 6-month limit on 
post-closing adjustments is too brief. The commenter asserted that, as 
a practical matter, it would encourage recalcitrant parties to ``hold 
out'' to increase their bargaining leverage. The commenter interpreted 
the exception as not precluding post-closing adjustments after 6 
months, but precluding only other isolated transactions. The commenter 
suggested that the commercial reasonableness test provided sufficient 
protections. The commenter also requested clarification that an 
adjustment based on a breach of a warranty will not be considered a 
post-closing adjustment. The second commenter asked that post-closing 
adjustments be permitted for 24 months. According to the commenter, 
many purchase and sale agreements provide for warranties, 
representations, and indemnities to continue in effect for at least one 
complete audit cycle (that is, 1 fiscal year plus additional months, as 
needed, to complete the audit) to enable the buyer's auditors to fully 
examine financial statements.
    Response: The exception for isolated transactions permits 
commercially reasonable post-closing adjustments within the first 6 
months following an isolated transaction, provided that the adjustments 
do not take into account (directly or indirectly) the volume or value 
of referrals or other business generated by the referring physician(s). 
After 6 months, any post-closing adjustment would be treated as a 
separate, additional transaction that would need to satisfy the 
requirements of an exception. Claims based on breach of warranty are 
not considered post-closing adjustments or new transactions; rather, 
they are considered part of the original transaction and, therefore, 
may occur at any time without jeopardizing compliance with the 
exception in Sec.  411.357(f).
    Comment: Several commenters were concerned with the interplay 
between the definition of ``ownership,'' which includes, for example, a 
security interest in property sold to an entity furnishing DHS, and the 
definition of the term ``isolated transaction'' at Sec.  411.351, which 
permits installment payments only if the instruments are secured or 
guaranteed by a third party. According to the commenter, as a practical 
matter, the result is that a hospital has few options if it wants to 
purchase a physician's equipment or practice using installment 
payments. Another commenter asked whether a guarantee from an entity 
furnishing DHS made to a physician would create an ownership interest 
in the entity. The commenters sought clarification as to how the 
exception would apply to these transactions.
    Response: Hospitals and physicians can use other arrangements and 
methods (that is, other than installment payments made from the 
hospital to the physician) to secure legal obligations arising from 
transactions between them. However, we note that, as discussed in 
section VI.A, we do not consider a security interest in equipment sold 
by a physician to a hospital and financed through a loan from the 
physician to the hospital to be an ownership interest in the hospital 
or a portion of the hospital. Where a physician extends a loan to an 
entity and is granted a security interest by the entity in the 
equipment sold by the physician to the entity, the arrangement creates 
a compensation arrangement (subject to a contrary provision in the 
security instrument or agreement of the parties). In response to the 
second comment, a guarantee does not create an ownership interest in 
the entity providing the guarantee.

[[Page 51056]]

G. Remuneration Unrelated to Designated Health Services

    Under section 1877(e)(4) of the Act, remuneration provided by a 
hospital to a physician that does not relate to the furnishing of DHS 
does not constitute a prohibited compensation arrangement. The 
exception does not apply to remuneration from a hospital to a member of 
a physician's immediate family, nor does it apply to remuneration from 
entities other than hospitals.
    Under Phase II, the exception is available only if the remuneration 
is wholly unrelated to the provision of DHS (69 FR 16093). Phase II 
provided that, for purposes of the exception, any item, service, or 
cost that could be allocated in whole or in part to Medicare or 
Medicaid under applicable cost reporting principles is considered to be 
related directly or indirectly to the provision of DHS. In addition, 
remuneration is considered related to DHS for purposes of this 
exception if it is furnished, directly or indirectly, explicitly or 
implicitly, in a selective, targeted, preferential, or conditional 
manner to medical staff or other physicians in a position to make or 
influence referrals. The exception does not apply to any other 
remuneration that is related in any manner to the provision of DHS. 
This Phase III final rule makes no changes to Phase II.
    Comment: Numerous commenters, including several hospital trade 
associations, strongly objected to Sec.  411.357(g) as set forth in 
Phase II. According to the commenters, the regulation is inconsistent 
with the statutory language and congressional intent. Some of the 
commenters argued that the Congress intended that hospitals could 
provide any amount of remuneration to physicians provided that it was 
not directly related to the provision of DHS services. The commenters 
uniformly urged us to reconsider the position we took in Phase II in 
this regard.
    Response: As we discussed in Phase II, Sec.  411.357(g) is 
consistent with the statutory scheme and congressional intent (69 FR 
16093-16094). We do not believe that the Congress intended that a 
hospital could provide any remuneration it chooses to physicians 
provided that the amount of remuneration is not directly related to the 
provision of DHS services. Bona fide compensation relationships related 
in any way to the furnishing of DHS should be structured to fit in 
another exception.
    Comment: Two commenters asked us to provide additional examples of 
arrangements that would qualify under the exception in Sec.  
411.357(g). Another commenter asked for clarification regarding what 
would constitute an improper targeted, preferential, or selective 
process for distributing a benefit. The commenter asked, for example, 
if a hospital could waive the entry fee for its charity golf tournament 
for the entire medical staff and still qualify for the exception.
    Response: The determination of whether an arrangement is unrelated 
to the furnishing of DHS will require a detailed review of the facts 
and circumstances surrounding the arrangement. The examples provided in 
Phase II are suitably illustrative (69 FR 16093-16094). Parties seeking 
guidance on particular transactions may submit a request for an 
advisory opinion. Waiving an entry fee would be a targeted benefit if 
applied to the medical staff and not to all other participants. 
However, the arrangement between the hospital and a particular 
physician could fit into the exception in Sec.  411.357(k) if the value 
of the total nonmonetary compensation to the physician during a 
calendar year is not greater than $300 (as adjusted by the CPI-U).
    Comment: One commenter requested confirmation that, where there are 
no explicit cost reporting guidelines or requirements with respect to 
the allowability of an item, it is sufficient to apply a good faith 
reading of general Medicare cost principles.
    Response: We understand the commenter's concern to be situations in 
which a hospital does not know and could not reasonably be expected to 
know whether a particular item, service, or cost could be allocated in 
whole or part to Medicare or Medicaid under cost reporting principles, 
as required by Sec.  411.357(g)(1). In such a situation, we would not 
consider the item, service, or cost to relate to the furnishing of DHS 
under Sec.  411.357(g)(1). However, it is not sufficient to satisfy 
Sec.  411.357(g)(1) alone in order to qualify for protection under the 
exception. Sections 411.357(g)(2) and (g)(3) set forth additional 
grounds for determining that remuneration relates to the furnishing of 
DHS. Specifically, remuneration also relates to the furnishing of DHS 
if either: (1) It is furnished directly or indirectly, explicitly or 
implicitly, in a selective, targeted, preferential, or conditional 
manner to medical staff or other persons in a position to make or 
influence referrals; or (2) otherwise takes into account the volume or 
value of referrals or other business generated by the referring 
physician.
    Comment: One commenter expressed concern that the exception in 
Sec.  411.357(g) was narrowed so much under Phase II that it does not 
allow hospitals to provide assistance with malpractice insurance 
premiums.
    Response: As discussed below in section IX.R, assistance with 
malpractice insurance premiums may be structured to satisfy the 
requirements of other exceptions, such as the fair market value 
compensation exception (Sec.  411.357(l)), the exception for bona fide 
employment relationships (Sec.  411.357(c)), the exception for personal 
service arrangements (Sec.  411.357(d)), or the exception for 
obstetrical malpractice insurance subsidies (Sec.  411.357(r)). We note 
that the January 1998 proposed rule clearly stated that this exception 
would not protect malpractice insurance premium subsidies (63 FR 1702).

H. Group Practice Arrangements With a Hospital

    Section 1877(e)(7) of the Act provides that an arrangement between 
a hospital and a group practice under which DHS are furnished by the 
group practice but are billed by the hospital does not constitute a 
compensation arrangement for purposes of the prohibition on referrals 
if certain conditions are met. The August 1995 final rule incorporated 
the provisions of section 1877(e)(7) of the Act into our regulations in 
Sec.  411.357(h) (60 FR 41920, 41975). In the January 1998 proposed 
rule, we proposed revising Sec.  411.357(h) to make several minor 
changes and to apply the provision to all DHS, not just clinical 
laboratory services (63 FR 1669-1670, 1702-1703). The changes included 
clarifying that the exception protects only arrangements that have 
continued in effect, without interruption, since December 19, 1989; 
interpreting the regulatory language to allow changes to the 
arrangement over time with respect to the services covered by the 
arrangement or the physicians providing those services; and clarifying 
that at least 75 percent of the DHS covered under the arrangement must 
be furnished to patients of the hospital by the group practice under 
the arrangement (63 FR 1702-1703).
    Phase II adopted Sec.  411.357(h) as proposed (69 FR 16099). We 
received no comments on this exception and are making no changes in 
this Phase III final rule.

I. Payments by a Physician

    Section 1877(e)(8) of the Act creates an exception for certain 
payments that a physician makes to a laboratory in exchange for 
clinical laboratory services

[[Page 51057]]

or to an entity as compensation for other items or services that are 
furnished at a price that is consistent with fair market value.
    Phase II implemented section 1877(e)(8) of the Act in Sec.  
411.357(i) by making two clarifications (69 FR 16099). The first made 
the exception applicable to payments by a physician's immediate family 
members, as well as to payments by a physician. The second clarified 
that the exception does not apply to items or services for which there 
is another potentially applicable exception in Sec.  411.355 through 
Sec.  411.357. This Phase III final rule makes no change to this 
exception. However, we are amending the exception for fair market value 
compensation in Sec.  411.357(l) to provide that that exception covers 
compensation from a physician, provided that all other conditions of 
the exception are satisfied. We note that the fair market value 
compensation exception does not protect office space lease 
arrangements; arrangements for the rental of office space must satisfy 
the requirements of the exception in Sec.  411.357(a).
    Comment: Two commenters objected to the provision in Sec.  
411.357(i)(2) that the exception applies only to items and services 
that are not specifically excepted by another exception in Sec.  
411.355 through Sec.  411.357. According to the commenters, the 
restriction leaves many legitimate purchases of items or services by a 
physician from a DHS entity without an available exception. The first 
commenter gave the example of the lease of space on a non-exclusive 
basis to a physician. The commenters also noted that the statement in 
Phase II that the fair market value compensation exception was 
available is incorrect because that exception only protects payments to 
a physician from a DHS entity (69 FR 16099). The second commenter 
suggested that we either delete language in Sec.  411.357(i) that 
indicates that the fair market value compensation exception is 
available, or that we allow the payments by a physician exception in 
Sec.  411.357(i) to be generally available (rather than available only 
when another potential exception does not apply), except with respect 
to space rental arrangements.
    Response: We continue to believe, as we stated in Phase II, that 
our policy of not allowing items and services addressed by another 
exception to be covered in this exception is consistent with the 
overall statutory scheme and purpose, and is necessary to prevent the 
exception from negating the statute (69 FR 16099). To that end, we are 
amending the text of the exception for fair market value compensation 
in Sec.  411.357(l) to permit application of that exception to 
arrangements involving fair market value compensation to physicians 
from DHS entities, as well as to arrangements involving fair market 
value compensation to DHS entities from physicians. We believe that 
this approach is consistent with the statutory scheme and intent.
    The expansion of the applicability of the fair market value 
compensation exception to compensation paid to DHS entities by 
physicians will require parties to use the exception in Sec.  
411.357(l), rather than the exception in Sec.  411.357(i), when 
payments by a physician to a hospital are, for example, for equipment 
leases of less than 1 year. Upon further consideration, we believe that 
the required application of the fair market value compensation 
exception, which contains conditions not found in the less transparent 
exception for payments by a physician to a hospital, further reduces 
the risk of program abuse. As discussed below in section IX.L, we have 
amended the text of the exception for fair market value compensation in 
Sec.  411.357(l) to exclude arrangements for the rental of office 
space. The only exception applicable to arrangements for the rental of 
office space is Sec.  411.357(a).

J. Charitable Donations by a Physician

    Using our authority under section 1877(b)(4) of the Act, in Phase 
II, we established an exception in Sec.  411.357(j) for bona fide 
charitable donations made by a physician (or his or her immediate 
family member) to an entity furnishing DHS. To qualify for the 
exception, donations must be made to an organization exempt from 
taxation under the Internal Revenue Code (or to an exempt supporting 
organization, such as a hospital foundation). The exception provided 
that the donation may not be solicited or made in any manner that 
reflects the volume or value of referrals or other business generated 
between the parties. As with all regulatory exceptions promulgated 
under section 1877(b)(4) of the Act, a protected arrangement must not 
violate the anti-kickback statute or billing or claims submission 
rules. This Phase III final rule clarifies that the donation may not be 
solicited or offered in any manner that reflects the volume or value of 
referrals.
    Comment: A hospital association objected to the requirement in 
Sec.  411.357(j)(2) that the donation cannot be made in a manner that 
takes into account referrals or other business generated between the 
physician and the entity furnishing DHS. According to the commenter, a 
hospital cannot control how the donor makes the payment. The commenter 
asked that the exception be conditioned only upon the manner in which 
the charitable donations are solicited, rather than the manner in which 
they are both solicited and made.
    Response: We disagree that only the manner of the solicitation 
should be relevant for this exception. We agree, however, that the 
phrase ``nor made, in any manner'' might be interpreted as implying 
that, irrespective of whether the entity had knowledge of an improper 
purpose of the donation, the donation is outside the protection of the 
exception simply if the physician intended that the donation was in 
exchange for future or past referrals or other business generated 
between the parties. Accordingly, we have amended Sec.  411.357(j) to 
provide that the entity may not solicit the donation, nor may the 
physician offer the donation, in any manner that takes into account the 
volume or value of referrals or other business generated between the 
physician and the entity.
    Comment: Two commenters asked for further guidance regarding 
acceptable fundraising efforts directed at medical staff. One of the 
commenters emphasized that such efforts are very important to 
hospitals.
    Response: We recognize the importance of fundraising to nonprofit 
health care entities and the crucial role often played by medical staff 
in fundraising. The regulation is sufficiently clear that it permits 
solicitations of the medical staff provided that neither the 
solicitation nor the offer of a contribution from the physician takes 
into account the volume or value of referrals or other business 
generated between the physician and the hospital.
    Comment: Two commenters asserted that the purpose of the law is to 
regulate payments to physicians from entities furnishing DHS, not 
contributions from the physicians to the entities. One of the 
commenters suggested that we define remuneration to exclude charitable 
donations from physicians.
    Response: We disagree with the commenters. All financial 
relationships between a DHS entity and a physician who refers Medicare 
patients to the entity for DHS must comply with the physician self-
referral provisions. Contributions from a physician to a hospital are 
remuneration and must comply with an exception. Moreover, some 
ostensible charitable donations have been abusive. The current 
regulation adequately protects legitimate fundraising while imposing 
minimal restrictions.

[[Page 51058]]

K. Nonmonetary Compensation

    In Phase I, using our authority under section 1877(b)(4) of the 
Act, we established a new regulatory exception to protect nonmonetary 
compensation provided to physicians up to $300 per year. Phase II 
provided that nonmonetary compensation that does not exceed $300 per 
year does not create a compensation arrangement if--
     The compensation is not determined in any manner that 
takes into account the volume or value of referrals or other business 
generated by the referring physician;
     The compensation is not solicited by the physician or the 
physician's practice; and
     The compensation arrangement does not violate the anti-
kickback statute or other Federal or State law.
In addition, Phase II provided that the limit on the nonmonetary 
compensation would be adjusted for inflation to the nearest whole 
dollar effective January 1 of each calendar year using the increase in 
the Consumer Price Index-Urban All Items (CPI-U) for the 12-month 
period that ends the previous September 30. The nonmonetary 
compensation limit increased to $308 for CY-2005, $322 for CY-2006, and 
$329 for CY-2007. We display the increase in the CPI-U and these new 
limits on the physician self-referral Web site at http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
    This Phase III final rule makes two substantive changes to Sec.  
411.357(k): (1) The revised exception allows physicians to repay 
certain excess nonmonetary compensation within the same calendar year 
to preserve compliance with the exception; and (2) the revised 
exception allows entities, without regard to the dollar limitation in 
Sec.  411.357(k)(1), to provide one medical staff appreciation function 
(such as a holiday party) for the entire medical staff per year. We are 
also clarifying that the aggregate limit in Sec.  411.357(k)(1) is to 
be calculated on a calendar year basis.
    Comment: Several commenters asked for clarification regarding the 
treatment under Sec.  411.357(k) of specific activities. Two commenters 
believed that meals and reimbursement to physicians on a DHS entity's 
board should not count against the monetary limit, provided that the 
compensation is consistent with that provided to other non-physician 
board members. Other commenters asked that meals or other remuneration 
given to staff members for activities in connection with hospital 
business should not be subject to the limit. Examples provided by 
commenters included off-site meetings of the medical staff due to space 
constraints, assistance in recruiting, hospital leadership meetings, 
and other business meetings.
    Response: We previously addressed the issues raised by these 
commenters in Phase II (69 FR 16113-16114). There, we said that, 
``[w]hether a remunerative arrangement between specific parties would 
fit in an exception would depend on the particular facts and 
circumstances. For example, some dinners and meetings might fit in the 
exception for nonmonetary compensation [in] Sec.  411.357(k) or the 
exception for fair market value compensation [in] Sec.  411.357(l); 
others would not. Nothing in the statute precludes modest meals in 
connection with services provided by or to Boards of Trustees, Boards 
of Directors, or hospital administrators, and many of these activities 
can easily fit in an exception'' (69 FR 16114). We also noted that our 
regulations do not address every possible relationship between 
physicians and DHS entities of the type addressed by the commenter, nor 
could they. In some cases, relationships clearly will not involve a 
transfer of remuneration and thus will not trigger section 1877 of the 
Act. In others, an activity might involve the transfer of remuneration, 
and there may be no readily apparent exception. We expect that 
questions of the kind posed by the commenter will arise with some 
frequency. Parties may submit advisory opinion requests about specific 
arrangements according to Sec.  411.370 (69 FR 16114).
    Comment: One commenter sought clarification as to whether the 
dollar limit on nonmonetary compensation applied to the legal entity 
providing the compensation (such as a parent health system) or to the 
DHS entity. The commenter noted that some large systems could be hurt 
if the agency imposed aggregate limits, and suggested that the limit 
should be on each DHS provider.
    Response: The limit applies to each DHS entity, and not to a parent 
health system. Remuneration provided by a parent health system to a 
referring physician could create an indirect compensation arrangement 
between the referring physician and the entity furnishing the DHS (for 
example, if the referring physician has a compensation relationship 
with the parent health system, which has an ownership interest in the 
DHS entity).
    Comment: Two commenters asked that the cap be raised. One suggested 
$500 and the other $600.
    Response: We believe that the limit ($329 in CY-2007) is 
appropriate. As explained above and in Phase II, we have indexed the 
amount so that it will increase to account for inflation (69 FR 16112).
    Comment: One commenter stated that inadvertently exceeding the 
yearly dollar limit on nonmonetary compensation could lead to 
disastrous and uncertain results. The commenter asserted that the harsh 
result should be mitigated by permitting the excessive payment to be 
cured by the physician's repayment of the excess. The commenter stated 
that errors can occur through, among other things, erroneously valuing 
a benefit, not properly accounting for a benefit, or not being aware of 
a family relationship between a physician and another person (including 
another physician). Another commenter asserted that, by their nature, 
gifts of nonmonetary compensation are very difficult to account for in 
traditional accounting systems. Tracking of such benefits is usually a 
manual process, based on the submission of reports from department 
heads and other members of hospital management. In addition, once the 
hospital becomes aware of a benefit provided to physicians, it is 
sometimes faced with difficult questions of how to value the benefit 
and allocate it among the physicians.
    Response: Hospitals and other DHS entities that wish to use the 
exception for nonmonetary compensation should take steps to ensure the 
implementation of effective compliance systems, including appropriate 
tracking and valuation mechanisms. DHS entities should not provide 
benefits to physicians about which the entities are unaware or for 
which they are unable to account. However, we are persuaded to mitigate 
the potentially serious consequences of exceeding the nonmonetary 
compensation limits where the violation is inadvertent and the value of 
the overage is limited. Therefore, we are adding new subparagraph (3) 
to Sec.  411.357(k) to provide some protection against inadvertent 
violations. Under this new provision, nonmonetary compensation will be 
deemed to be within the limit set forth in Sec.  411.357(k)(1) if the 
entity has inadvertently exceeded the limit by no more than 50 percent 
during a calendar year and the physician repays the excess compensation 
within the earlier of: (1) The end of the calendar year in which the 
excess nonmonetary compensation was received; or (2) 180 days from the 
date the excess nonmonetary compensation was received. For example, if 
an entity gave nonmonetary

[[Page 51059]]

compensation with a value of $250 to a physician on April 15 and then 
inadvertently made another gift, this time valued at $200, to the 
physician on August 15, the total nonmonetary compensation to the 
physician is $450, which is less than 150 percent of the amount allowed 
($329 x 150 percent = $493.50). If the physician repays the excess of 
$121 ($450 - $329 = $121) by December 31, the entity continues to 
satisfy the requirements of the exception. An entity will not be 
allowed to use this new provision more than once every 3 calendar years 
with respect to the same physician. With respect to DHS referrals made 
by a physician after his or her receipt of excess nonmonetary 
compensation, any billing or claims submission by the entity for such 
referrals will not violate the prohibition in section 1877(a)(1)(B) of 
the Act, provided that the deeming provision set forth in Sec.  
411.357(k)(3) and the remaining conditions of the nonmonetary 
compensation exception are satisfied. Once a DHS entity becomes aware 
that it has provided to a physician excess nonmonetary compensation 
that could qualify for the deeming provision, it would be prudent for 
the DHS entity to delay any billing and claims submission for the 
physician's DHS referrals until after the physician has returned the 
nonmonetary compensation in accordance with Sec.  411.357(k)(3).
    Comment: One commenter stated that its physician relations 
department had routinely arranged occasional small services for 
physicians as tokens of appreciation. Events included free haircuts, 
manicures, massages, golf tournaments, and tickets to plays and 
sporting events. The commenter requested clarification concerning 
whether the cap on nonmonetary compensation applied to the hospital's 
cost of the item or the fair market value of the item to the physician. 
The commenter suggested that the exception exclude one-time annual 
events provided that the event is open to the entire medical staff or a 
specialty, the fair market value of the event is less than $200 per 
attendee, and that there are no more than three such events per year. 
In addition, the commenter believed that hospitals should be permitted 
to give any staff member a token of appreciation annually if the fair 
market value does not exceed $100 and the provision of the gift is not 
tied to referrals or other business generated between the parties.
    Response: We believe that the limit on nonmonetary compensation per 
calendar year period is sufficient to provide for tokens of 
appreciation. We note that we do not agree that all of the items listed 
by the commenter are ``small.'' The cap under the nonmonetary 
compensation exception applies to the fair market value of the item, 
which is the amount the physician would have paid if he or she had 
purchased the item or service in a fair market value transaction. 
However, we believe that allowing one annual, local social event for 
the entire medical staff would not create a risk of program or patient 
abuse. (This is in addition to the nonmonetary compensation permitted 
under Sec.  411.357(k).) Accordingly, we are modifying the exception in 
Sec.  411.357(k) to permit hospitals and other entities with formal 
medical staffs to provide one local medical staff appreciation event 
per year open generally to all medical staff (that is, all physicians 
and other medical practitioners who order hospital services for 
patients). The entity's cost per medical staff member for such event 
will not be counted against the limit set forth in Sec.  411.357(k)(1) 
(as adjusted under Sec.  411.357(k)(2)). However, any gifts or 
gratuities provided in connection with the medical staff appreciation 
event (such as door prizes) would be subject to the limit in Sec.  
411.357(k)(1) (as adjusted under Sec.  411.357(k)(2)).

L. Fair Market Value Compensation

    In Phase I, we finalized an exception for fair market value 
compensation arrangements that was originally proposed in the January 
1998 proposed rule (66 FR 917-919). The exception, which was 
promulgated using our authority under section 1877(b)(4) of the Act, 
protects compensation from a DHS entity to a physician, an immediate 
family member of a physician, or a group of physicians for the 
provision of items or services by the physician or group to the DHS 
entity, provided that, generally--
     The arrangement is set out in a writing that is signed by 
the parties and describes the items or services;
     The writing sets out the timeframe for the arrangement, 
subject to some restrictions;
     The writing specifies the compensation, which must be set 
in advance, consistent with fair market value, and not determined in a 
manner that takes into account the volume or value of any referrals or 
other business generated by the referring physician;
     The arrangement is commercially reasonable and furthers 
the legitimate business purposes of the parties; and
     The arrangement does not violate the anti-kickback statute 
or involve the counseling or promotion of any business arrangement that 
violates Federal or State law. Phase II made no substantive changes to 
Sec.  411.357(l). This Phase III final rule makes one substantive and 
one clarifying change to Sec.  411.357(l). Specifically, and as 
discussed at section IX.I, we are amending the exception to provide 
that it may apply to compensation provided to a physician from an 
entity and to compensation provided to an entity from a physician. We 
are also clarifying that the exception is not applicable to leases for 
office space; rather, such lease arrangements must comply with Sec.  
411.357(a).
    Comment: One commenter objected to our position that physician 
recruitment is not a service to the hospital and, therefore, cannot 
qualify under Sec.  411.357(l), the fair market value compensation 
exception.
    Response: We disagree with the commenter for the reasons stated in 
Phase II (69 FR 16096). There, we said that ``the physician's 
relocation is not properly viewed as a benefit to the hospital, except 
as a potential source of DHS referrals--a consideration that is 
antithetical to the premise of the statute.'' Money spent on 
recruitment of physicians who will not be employed by the hospital 
offering the recruitment incentives is essentially a contribution made 
for the benefit of the community and not a payment for services 
provided to the hospital. Therefore, recruitment incentives offered by 
hospitals must be structured to satisfy the requirements of the 
recruitment exception or another exception, such as the exception for 
bona fide employment relationships or obstetrical malpractice insurance 
subsidies.
    Comment: One commenter objected to our position that a lease of 
office space cannot qualify for the fair market value compensation 
exception in Sec.  411.357(l) because it is not an ``item.'' The 
commenter noted that elsewhere in Phase II, we stated that a space 
lease is an item or service when a physician is the lessee (69 FR 
16111).
    Response: In Phase II, we explained that we could not expand the 
exception to be as comprehensive as the commenters advocated without 
posing a risk of fraud or abuse (69 FR 16111-16112). We do not believe 
that the lease of office space is an ``item or service.'' Moreover, 
because space leases have been subject to abuse, we believe that the 
use of the fair market value compensation exception for space leases 
may pose a risk of program or patient abuse. Therefore, a space lease 
must qualify under the exception for the rental of office space in 
Sec.  411.357(a), which contains more restrictive conditions. We have 
modified the

[[Page 51060]]

regulatory text in Sec.  411.357(l) accordingly.
    Comment: The same commenter asked us to provide bright-line 
guidance as to what is fair market value. The commenter recommended 
that there be a rebuttable presumption that a transaction is fair 
market value.
    Response: The statute and regulations provide a definition of fair 
market value for purposes of section 1877 of the Act. The parties to a 
transaction or an arrangement are in the best position to ensure that 
the remuneration is at fair market value and to document it 
contemporaneously. If questioned by the government, the burden would be 
on the parties to explain how the transaction meets the fair market 
value compensation exception requirements. We are not adopting the 
suggestion that a transaction be presumed to be fair market value.

M. Medical Staff Incidental Benefits

    In Phase I, we established a new exception in Sec.  411.357(m) for 
medical staff incidental benefits (66 FR 920-922). This exception is 
limited to benefits, such as parking, cafeteria meals, and lab coats, 
that are customarily provided by a hospital to members of its medical 
staff and that are incidental to services being provided by the medical 
staff at the hospital.
    In Phase II, we clarified that the exception is not intended to 
cover the provision of tangential, off-site benefits, such as 
restaurant dinners or theater tickets, which must comply with the 
exception for nonmonetary compensation in Sec.  411.357(k) (69 FR 
16112-16113). We also made other clarifications in Sec.  411.357(m)(1) 
and (m)(2), and stated in Sec.  411.357(m)(8) that certain 
institutional entities (such as long-term care facilities), federally 
qualified health centers, and other health care clinics, that have bona 
fide medical staffs are permitted to provide incidental benefits to 
those staffs on the same terms and conditions that apply to hospitals 
under the exception (69 FR 16112-16114). Phase II also provided that 
the $25 limit on the value of each medical staff incidental benefit 
would be adjusted in the same manner as the limit on nonmonetary 
compensation in Sec.  411.357(k). The limit for each medical staff 
incidental benefit for purposes of Sec.  411.357(m) increased to $26 
for CY 2005, $27 for CY 2006, and $28 for CY 2007.
    We are making no substantive changes to this exception in this 
Phase III final rule.
    Comment: One commenter requested the elimination of the ``on 
campus'' requirement in Sec.  411.357(m). According to the commenter, 
the limitation is not necessary because the exception already requires 
the physician to be on rounds or otherwise engaged in services or 
activities that benefit the hospital or its patients. Alternatively, 
the commenter suggested that we define campus as a hospital and all 
facilities owned or operated by the hospital.
    Response: We disagree with the commenter. The ``on campus'' 
limitation is integral to the exception and an important safeguard 
against program and patient abuse. A hospital's campus includes all 
facilities operated by a hospital except for facilities that have been 
leased for non-hospital purposes and are not used exclusively by the 
hospital.
    Comment: One commenter requested clarification as to whether a 
hospital may provide a physician with a device that is used to access 
patients who are at home or at work or personnel who are in locations 
other than the hospital campus.
    Response: A hospital may not provide a device used to access 
patients who are at home or at work or personnel who are in locations 
other than the hospital campus under this exception. A hospital can 
provide a physician with a device that is used to access patients and 
personnel on the hospital's campus, even if the physician is not on the 
campus. In Phase II, we indicated that the exception (as revised in 
that rulemaking) covers dedicated pagers or two-way radios used to 
facilitate instant communication with physicians in emergency or other 
urgent patient care situations when they are away from the hospital 
campus (69 FR 16113). A physician may use the dedicated pager or two-
way radio: (1) to contact the physician's patients (who are hospital 
patients) only when the patients are on the hospital's campus; or (2) 
to contact personnel only when the personnel are on the hospital 
campus. We note that some arrangements involving health information 
technology used for patients or personnel who are not on the hospital 
campus may qualify under the exception in Sec.  411.357(u) for 
community-wide health information systems or the exceptions in Sec.  
411.357(v) and (w) for arrangements involving the provision of 
electronic prescribing technology and electronic health records 
technology, respectively.
    Comment: One commenter noted that, whereas Sec.  411.357(m) 
specifically provides that mere identification of medical staff on a 
hospital website or in hospital advertising is covered by the 
exception, the preamble to Phase II states that advertising or 
promoting a physician's private practice would not satisfy the 
requirements of the exception (69 FR 16113). The commenter asserted 
that it is unclear whether hospital physician referral services would 
be considered advertising or promotion of the physician. The commenter 
requested clarification that a hospital's physician referral service 
could qualify for the exception in Sec.  411.357(m).
    Response: A hospital's physician referral service may be considered 
a medical staff incidental benefit and qualify for the exception if all 
of the requirements of Sec.  411.357(m) are satisfied. Whether a 
hospital's physician referral service would constitute advertising or 
promotion of a physician or his or her private practice would depend on 
the nature of the particular referral service; however, many typical 
referral services constitute advertising or promotional activity. We 
note that hospital referral services sometimes involve payments by 
physicians to the hospital that operates the referral service. These 
payments, which are often assessed based on the costs of operating the 
referral service, would need to satisfy the requirements of an 
exception. Moreover, these payments also potentially implicate the 
anti-kickback statute. The payments could be structured to satisfy the 
exception in Sec.  411.357(q) for referral services, which protects 
remuneration that satisfies all of the conditions of the safe harbor 
for referral services in Sec.  1001.952(f).

N. Risk-Sharing Arrangements

    In Phase I, we created a new exception for remuneration made 
pursuant to a bona fide ``risk-sharing arrangement,'' out of concern 
about the impact of the January 1998 proposed rule on commercial and 
employer-provided managed care arrangements (66 FR 912). The risk-
sharing arrangements exception in Sec.  411.357(n) applies to 
compensation (including, but not limited to, withholds, bonuses, and 
risk pools) between a managed care organization or an independent 
physician association and a physician (either directly or indirectly 
through a subcontractor) for services provided to enrollees of a health 
plan, provided that the arrangement does not violate the anti-kickback 
statute or any laws or regulations governing billing or claims 
submission. In Phase II, we responded to several comments on the new 
risk-sharing arrangements exception in Sec.  411.357(n) but made no 
changes to the exception (69 FR 16114). We received no comments on this 
exception and are making no changes to Sec.  411.357(n) in this Phase 
III final rule.

[[Page 51061]]

O. Compliance Training

    In the Phase I rulemaking, we exercised our authority under section 
1877(b)(4) of the Act to create an exception for compliance training 
provided by a hospital to physicians who practice in the hospital's 
local community or service area (66 FR 915, 921). In Phase II, we 
modified the exception to include compliance training provided to a 
physician or a physician's office staff by any DHS entity and 
explicitly included training addressing the requirements of any 
Federal, State or local law governing the activities of the party 
receiving the training (69 FR 16114-16115). The Phase II exception 
excludes any programs for which continuing medical education (CME) 
credit is available.
    This Phase III final rule amends Sec.  411.357(o) to permit 
compliance training programs that involve CME credit, provided that 
compliance training predominates.
    Comment: Several commenters objected that, under Phase II, Sec.  
411.357(o) does not protect any compliance training that also qualifies 
for CME credit. According to the commenters, provided that the 
compliance training program qualifies under the exception, it should 
not matter whether a physician receives CME credit.
    Response: We agree that, if a program offers CME credit for 
compliance training, such compliance training should nonetheless be 
able to satisfy the requirements of Sec.  411.357(o). However, we are 
concerned that the exception not be used to protect CME programs that 
are only incidentally about or related to compliance training. For the 
reasons set forth in Phase I and Phase II, we are not prepared to 
except generally from the physician self-referral law CME programs 
funded by DHS entities. Programs offering CME credit, when provided to 
a referring physician, have substantial value to the physician, who is 
required to obtain such CME credit for State licensure purposes. We are 
also not prepared to except CME programs merely because they contain a 
compliance training component. Instead, we are revising the exception 
in Sec.  411.357(o) to cover all training programs of which compliance 
training is the primary purpose, including any genuine compliance 
training program that happens to qualify for CME credit. The revised 
exception does not protect traditional CME content under the guise of 
``compliance training.'' The exception may not be used for other 
programs that are not compliance training programs, regardless of 
whether such programs may also provide CME.
    Comment: A commenter requested clarification that internet-based 
compliance training can qualify as local training. The commenter also 
noted that many small- and medium-sized communities lack the resources 
to provide specialized compliance training and should be permitted to 
provide reimbursement for a physician's reasonable out-of-pocket 
expenses to obtain training outside of the local community.
    Response: Section 411.357(o) protects compliance training provided 
by an entity to a physician (or to the physician's immediate family 
member or office staff) who practices in the entity's local community 
or service area, provided that the training is held in the local 
community or service area. With respect to on-line compliance training, 
if the physician (or the physician's immediate family member or office 
staff) accesses the on-line training while in a location that is in the 
entity's local community or service area, the compliance training would 
qualify for the exception in Sec.  411.357(o), provided that all other 
requirements of the exception are satisfied. We disagree that an entity 
should be permitted to reimburse out-of-pocket expenses (such as travel 
expenses) for physicians to obtain training outside of the entity's 
local community or service area. We are not persuaded that permitting 
payment of such expenses does not create a risk of program or patient 
abuse.

P. Indirect Compensation Arrangements

    In Phase I, we established a new exception for indirect 
compensation arrangements using our authority under section 1877(b)(4) 
of the Act (66 FR 865). Indirect compensation arrangements qualify for 
the exception if the following conditions are satisfied:
     The compensation received by the referring physician (or 
immediate family member) from the person or entity in the chain of 
financial relationships with which the referring physician (or 
immediate family member) has the direct financial relationship is fair 
market value for the items or services provided under the arrangement 
and does not take into account the volume or value of referrals or 
other business generated by the referring physician for the entity 
furnishing the DHS;
     The compensation arrangement between the person or entity 
in the chain with which the referring physician (or immediate family 
member) has the direct financial relationship is set out in writing, 
signed by the parties, and specifies the items or services covered by 
the arrangement (in the case of a bona fide employment relationship, 
the arrangement need not be set out in a written contract, but it must 
be for identifiable services and be commercially reasonable even if no 
referrals are made to the employer); and
     The compensation arrangement does not violate the anti-
kickback statute or any laws or regulations governing billing or claims 
submission. (66 FR 867.)
    Phase II made no substantive changes to the indirect compensation 
arrangements exception. This Phase III final rule similarly makes no 
changes to the exception.
    We received a number of comments regarding Sec.  411.357(p), the 
indirect compensation arrangements exception. Some commenters 
questioned how the indirect compensation arrangements exception applies 
in circumstances involving a compensation arrangement between a DHS 
entity and a group practice that employs or contracts with referring 
physicians. As discussed in section VI.B, we have revised Sec.  
411.354(c), which specifically addresses direct and indirect 
compensation arrangements between DHS entities and physicians. Under 
the revised rule, the relationship between the physician and his or her 
physician organization (as defined in this Phase III final rule at 
Sec.  411.351) is disregarded and the physician ``stands in the shoes'' 
of his or her physician organization. The effect of this new provision 
is that many arrangements that would have constituted indirect 
compensation arrangements if analyzed under Phase I and Phase II are 
now deemed to be direct compensation arrangements, and the indirect 
compensation arrangements exception cannot be used. Moreover, under 
this Phase III final rule, many arrangements that may not have met the 
definition of an ``indirect compensation arrangement'' under the Phase 
I and Phase II analysis will constitute direct compensation 
arrangements that must satisfy the requirements of an exception in 
order for the physician to make DHS referrals to the entity furnishing 
DHS. As discussed above in section VI, the ``stand in the shoes'' 
provisions in Sec.  411.354(c) are applicable as of the effective date 
of this Phase III final rule. However, arrangements that satisfied the 
Phase II definition of ``indirect compensation arrangement'' and the 
requirements of Sec.  411.357(p) as of the publication date of this 
final rule need not be amended during the original or current renewal 
term of the arrangement to comply with the Phase III final regulations.

[[Page 51062]]

    Comment: One commenter stated that the indirect compensation 
arrangements exception was difficult to apply because the DHS entity 
had no ready ability to monitor or assess the basis of payment being 
made by the intervening entity to the physician. The commenter 
suggested that we expand the exception by adding an alternative whereby 
the arrangement would be protected if: (1) The direct payment made by 
the DHS entity to the intervening entity complies with an exception; 
(2) the physician provides a written representation that his or her 
compensation from the intervening entity is not based on referrals; and 
(3) the DHS entity has no actual knowledge of the falsity of the 
representation. Another commenter stated that the exception was unfair 
to hospitals and other DHS entities because compliance turns on the 
physician's compensation arrangement with the intervening entity, and 
hospitals have no control over those compensation arrangements.
    Response: We believe that the new ``stand in the shoes'' provision 
will substantially address the commenters' concerns. Under that 
provision, many arrangements will use direct compensation arrangements 
exceptions (for example, personal service arrangements, fair market 
value compensation, office space rental, or equipment rental) rather 
than the indirect compensation arrangements exception in Sec.  
411.357(p). We perceive no unfairness to DHS entities, because the 
definition of an ``indirect compensation arrangement'' includes a 
knowledge element.
    Comment: Several commenters requested confirmation that, if there 
exists an indirect compensation arrangement involving a hospital and a 
physician in the group practice and the arrangement qualifies for the 
indirect compensation arrangements exception, the direct compensation 
arrangement between the hospital and the group practice would not also 
have to satisfy the requirements of a direct compensation arrangements 
exception, such as those for the rental of office space or personal 
service arrangements. The commenters noted that the indirect 
compensation arrangements exception was considerably more flexible 
because, for example, the arrangement could be amended at any time.
    Other commenters wanted clarification that, in an identical 
situation (that is, a chain of financial relationships involving a 
hospital and a group practice and the group practice's physicians), 
referrals by the physicians to the hospital would be protected, 
provided that the financial relationship between the hospital and the 
group practice complied with one of the direct compensation 
arrangements exceptions. One commenter requested confirmation that, 
whenever a direct or indirect compensation arrangements exception is 
applicable, the parties would be protected from the referral 
prohibition provided that they complied with any one of the potentially 
applicable exceptions.
    Response: As noted above, the new ``stand in the shoes'' provision 
should address many of these commenters' concerns. Under this final 
rule, physicians ``stand in the shoes'' of physician organizations, 
including group practices. This means that, in the case of a chain of 
financial relationships involving a hospital, a group practice, and the 
group practice's physicians, the physicians ``stand in the shoes'' of 
their group and the financial relationship at issue is the direct 
relationship between the hospital and the group practice. The direct 
relationship could satisfy the requirements of any applicable direct 
compensation arrangements exception. The indirect compensation 
arrangements exception would not apply.
    Where, after applying the ``stand in the shoes'' provision, an 
arrangement still meets the definition of an indirect compensation 
arrangement in Sec.  411.354(c)(2) (for example, a chain of financial 
relationships involving a hospital, a leasing company, and a 
physician), the only available exception is the indirect compensation 
arrangements exception. As we explained in Phase I and Phase II, 
indirect compensation arrangements cannot fit in any of the direct 
compensation arrangements exceptions; the only available exception for 
an arrangement that meets the definition of an ``indirect compensation 
arrangement'' is the indirect compensation arrangements exception (66 
FR 866-867, 69 FR 16060-16061). To satisfy the requirements of the 
indirect compensation arrangements exception, it is not necessary for 
each link in the chain of financial relationships to also satisfy the 
requirements of a separate exception. Consistent with the statutory 
scheme, the only financial relationship that triggers liability under 
section 1877 of the Act is the financial relationship between the DHS 
entity and the referring physician. (66 FR 864.)
    Comment: Two commenters asked for confirmation that a contract 
based on a percentage of collections can satisfy the requirement in the 
indirect compensation arrangements exception that the compensation be 
fair market value and not determined in any manner that takes into 
account the volume or value of referrals or other business generated by 
the referring physician for the DHS entity. The commenter gave the 
example of a hospital contracting for outpatient radiology with a joint 
venture owned by the hospital and physicians, and basing payment on a 
percentage of collections. This commenter stated that, because the 
hospital is billing and collecting payment for the services, it is the 
entity furnishing DHS for purposes of the physician self-referral law. 
This commenter noted that, in Phase II, we acknowledged that the 
position we took in Phase I on percentage compensation arrangements was 
overly restrictive and that we amended Sec.  411.354(d)(1) to permit 
percentage compensation arrangements under certain conditions (69 FR 
16068). The commenter stated that, if the percentage compensation 
arrangement is at fair market value and is not inflated to compensate 
for the generation of business, the parties should be entitled to rely 
on the indirect compensation arrangements exception for the transaction 
described.
    Response: The discussion in Phase II regarding percentage 
compensation arrangements and the modification to Sec.  411.354(d)(1) 
pertained to the ``set in advance'' requirement that is contained in 
certain exceptions, but not in the indirect compensation arrangements 
exception. The joint venture relationship between the hospital and the 
physicians creates an indirect compensation arrangement between the 
hospital and the physicians that must satisfy the requirements of an 
exception. A percentage contract as described by the commenter will 
cause the arrangement to fall outside the indirect compensation 
arrangements exception if the return to the physician from the 
radiology joint venture takes into account in any manner the 
physician's referrals to the hospital (whether or not these referrals 
involve services provided by the joint venture). Moreover, a second 
indirect compensation arrangement exists between the hospital and the 
physicians, created by virtue of the ownership interest that does not 
meet an ownership exception (which, thus, creates a compensation 
arrangement), in the chain of relationships that runs: hospital--
radiology venture--physicians. This arrangement would also need to 
satisfy the requirements of the indirect compensation arrangements 
exception. With respect to the second indirect compensation 
arrangement, the inquiry would be whether the compensation

[[Page 51063]]

under the percentage contract between the hospital and the radiology 
venture (the compensation arrangement nearest the referring physician) 
is fair market value not taking into account in any manner the volume 
or value of referrals or other business generated by the referring 
physician. We note that the indirect compensation arrangements 
exception requires that the compensation ``received'' by the referring 
physician (or immediate family member) is fair market value for 
services and items provided. A compensation arrangement based on a 
percentage of collections may not, depending on how the actual 
collections progress, result in fair market value received by the 
referring physician (or immediate family member).
    Comment: Two commenters requested clarification regarding the 
potential application of the indirect compensation arrangements 
exception to medical foundations. One of the commenters noted that, 
whereas the agency had suggested that the personal service arrangements 
exception was available, most medical foundations contract with a 
physician group, thereby creating an indirect financial relationship 
between the foundation and the physicians. The commenter asked whether 
a group: (1) That received a percentage of collections from the 
foundation; (2) in which the physicians were both employees and 
shareholders; and (3) that compensated physicians based on RVUs and 
quality measures, would qualify under the indirect compensation 
arrangements exception.
    Response: The new stand in the shoes provision should address the 
commenters' concerns. Physicians will stand in the shoes of their group 
practices. Thus, in the example given by the commenter, the arrangement 
between the medical foundation (as DHS entity) and the referring 
physicians would be treated as a direct compensation arrangement 
(rather than an indirect compensation arrangement) and the personal 
service arrangements exception would apply, provided that all 
conditions of the exception are satisfied. In section VI.C, we 
addressed the treatment of percentage compensation in exceptions, such 
as the personal service arrangements exception, that include the ``set 
in advance'' requirement. (If, by way of example, the hospital were to 
contract with a medical foundation for services provided to the 
hospital by the physician group with which the foundation contracts, 
the arrangement created between the hospital and the group physicians 
would be an indirect compensation arrangement that would need to 
satisfy the requirements of the indirect compensation arrangements 
exception. The physicians would stand in the shoes of their group 
practice, but not in the shoes of the foundation.)
    Comment: One commenter asked whether a DHS entity that 
intentionally restructures an unprotected direct compensation 
arrangement to form a protected indirect compensation arrangement is 
engaging in a prohibited circumvention scheme under section 1877(g)(4) 
of the Act. The commenter described a situation in which a hospital 
elects to contract with an intervening entity for the medical director 
services of a physician rather than contract with the physician 
directly.
    Response: Under the physician self-referral law, all financial 
relationships between DHS entities and referring physicians must be 
structured to satisfy the requirements of an exception. Restructuring 
an arrangement that does not meet a direct compensation arrangements 
exception so that it complies with the indirect compensation 
arrangements exception is not per se prohibited. Whether the 
restructuring of an arrangement constitutes a prohibited circumvention 
scheme under section 1877(g)(4) of the Act would depend on the specific 
facts and circumstances. The commenter has not clearly identified a set 
of specific circumstances sufficient for us to judge whether a 
circumvention scheme exists.

Q. Referral Services

    In the Phase I rulemaking, we solicited comments on creating 
exceptions to the physician self-referral prohibition for arrangements 
that fit squarely in an anti-kickback statute ``safe harbor'' in Sec.  
1001.952 (66 FR 863). In Phase II, we created two new compensation 
exceptions for arrangements that fit in the anti-kickback safe harbors 
for referral services (Sec.  411.357(q)) and obstetrical malpractice 
insurance subsidies (Sec.  411.357(r)) (69 FR 16115). We received no 
comments on Sec.  411.357(q) and this Phase III final rule makes no 
changes to the exception in Sec.  411.355(q) for referral services.

R. Obstetrical Malpractice Insurance Subsidies

    As discussed above in section IX.Q, we created a new exception in 
Phase II for compensation arrangements that fit in the anti-kickback 
safe harbor for obstetrical malpractice insurance subsidies (Sec.  
411.357(r)) (69 FR 16115). This Phase III final rule makes no changes 
to the exception in Sec.  411.357(r).
    Comment: One commenter suggested that we permit the fair market 
value compensation exception in Sec.  411.357(l) to be used for 
additional malpractice insurance assistance for medical staff.
    Response: We see no reason why the fair market value compensation 
exception in Sec.  411.357(l) cannot be used to offer medical staff 
assistance with malpractice insurance, provided that the value of the 
assistance is fair market value for services actually provided by the 
staff and the other requirements of the exception are satisfied.
    Comment: Several commenters complained that the exception for 
malpractice insurance subsidies is too narrow and the limitation to 
health professional shortage areas (HPSAs) should be expanded to 
include all specialties and hospitals. One commenter urged us to revise 
the exception to include non-HPSA areas where at least 50 percent of 
the deliveries come from patients who reside in a HPSA. The commenters 
urged us to consult with the OIG and to develop a broader exception. 
Another commenter suggested that hospitals should be permitted to 
provide assistance if there is a community need.
    Response: The exception in Sec.  411.357(r) is one of several 
exceptions that allow DHS entities to provide assistance with 
malpractice insurance. Other exceptions that permit DHS entities to 
provide such assistance are the fair market value compensation 
exception (as discussed above in response to the previous comment) in 
Sec.  411.357(l), the exception for bona fide employment relationships 
in Sec.  411.357(c), and the exception for personal service 
arrangements in Sec.  411.357(d) (provided that the value of the 
assistance is commensurate with the value of actual services furnished 
to the hospital by the physician). These exceptions allow any DHS 
entity to provide assistance with malpractice insurance, without regard 
to the specialty of the physician or the area in which the physician 
practices. The exception in Sec.  411.357(r), on the other hand, is 
intended to mirror the anti-kickback safe harbor for malpractice 
insurance in Sec.  1001.952(o). The OIG has not issued any guidance of 
general application that is broader than this exception and safe 
harbor. Finally, apart from the availability of other exceptions, we do 
not believe that it is advisable to relax the criteria of Sec.  
411.357(r) where a ``community need'' is present, because ``community 
need'' is too ambiguous a standard and does not, by itself, eliminate 
the potential for program or patient abuse. We note that, in the CY 
2008 Physician Fee Schedule notice of

[[Page 51064]]

proposed rulemaking, we proposed to amend the exception in Sec.  
411.357(r) to remove the incorporation of the safe harbor for 
malpractice insurance in Sec.  1001.952(o) and to include more flexible 
criteria.
    Comment: One commenter asserted that we did not have the authority 
to create exceptions that were limited to specific geographic areas, 
for example, limiting the malpractice insurance subsidies exception to 
physician practices in HPSAs.
    Response: Section 1877(b)(4) of the Act allows us to create 
additional exceptions to the general prohibition on physician self-
referral where doing so would not result in a risk of program or 
patient abuse. It does not require us, where we exercise such 
authority, to make the additional exceptions available to all types of 
entities and physicians, or make them applicable in all areas. The 
Congress and CMS have long recognized the special needs and character 
of rural, urban, and underserved areas. Malpractice insurance 
availability in HPSAs poses specific concerns not present in other 
areas and supports a targeted exception.

S. Professional Courtesy

    In Phase II, we established a new compensation arrangements 
exception (Sec.  411.357(s)) for professional courtesy provided to a 
physician or his or her immediate family members (69 FR 16116). We 
defined ``professional courtesy'' at Sec.  411.351 as the provision of 
free or discounted health care items or services to a physician or his 
or her immediate family members or office staff. To qualify for the new 
exception, the arrangement must meet the following conditions (69 FR 
16116)--
     The professional courtesy is offered to all physicians on 
the entitys bona fide medical staff or in the entitys local community 
without regard to the volume or value of referrals or other business 
generated between the parties;
     The health care items and services provided are of a type 
routinely provided by the entity;
     The entity's professional courtesy policy is set out in 
writing and approved in advance by the governing body of the health 
care entity;
     The professional courtesy is not offered to any physician 
(or immediate family member) who is a Federal health care program 
beneficiary, unless there has been a good faith showing of financial 
need;
     If the professional courtesy involves any complete or 
partial waiver of any coinsurance obligation, the insurer is informed 
in writing of the reduction so that the insurer is aware of the 
arrangement; and
     The professional courtesy arrangement does not violate the 
anti-kickback statute or any billing or claims submission laws or 
regulations.
    This Phase III final rule makes one substantive change to Sec.  
411.357(s), deleting the requirement that an entity notify an insurer 
when the professional courtesy involves the whole or partial reduction 
of any coinsurance obligation. We have also modified the exception to 
make clear our intent that Sec.  411.357(s) applies only to hospitals 
and other providers with formal medical staffs.
    Comment: A commenter noted that one of the conditions of the 
exception is that the arrangement does not violate the anti-kickback 
statute. The commenter questioned whether, given the 1994 OIG Special 
Fraud Alert, clinical laboratories would be prohibited from offering 
professional courtesy, notwithstanding that the actual language of 
Sec.  411.357(s) does not exclude any specific type of entity or 
services and, therefore, appears applicable to clinical laboratory 
services. The commenter stated that, unlike the situation in which one 
physician extends professional courtesy to another physician, when a 
laboratory offers professional courtesy to a physician, it does not 
expect the same in return, a fact that makes kickback issues more 
significant. The commenter suggested that we clarify that the 1994 OIG 
Special Fraud Alert continues to be applicable to the provision of 
professional courtesy by all laboratories, including hospital outreach 
laboratories. The commenter also stated that, to the extent that the 
exception permits a hospital to offer professional courtesy only to 
physicians on its medical staff, instead of to all physicians in its 
local community or service area, the exception creates an inducement 
for referrals to the hospital.
    Response: Nothing in these regulations affects in any respect the 
application of the OIG's guidance regarding the anti-kickback statute. 
We conclude from the comment that some clarification may be helpful 
with respect to the scope of the exception. The exception was 
promulgated in response to comments requesting an exception for 
providers that offer certain professional courtesy to physicians and 
their family members. We are clarifying the regulatory language to 
state specifically that the professional courtesy exception applies 
only to DHS entities with formal medical staffs. The exception does not 
apply to suppliers, such as laboratories or DME companies. The 
traditional reasons for professional courtesy provided by entities with 
medical staffs do not pertain to suppliers and such ``courtesy'' 
offered by suppliers would pose a risk of program abuse.
    We believe that the exception contains sufficient safeguards to 
protect against abuse. In particular, we note that:
     Professional courtesy must be extended to all members of 
the bona fide medical staff (or in such entity's local community or 
service area) without regard to the volume or value of referrals (thus 
prohibiting expensive courtesy for high-referring physicians and only 
less costly courtesy for low-referring physicians);
     The entity's professional courtesy policy must be set out 
in writing and approved in advance by the entity's governing body; and
     The arrangement must not violate the anti-kickback 
statute.
    Based on a comment received in response to Phase II, we are 
concerned that the current Sec.  411.357(s)(3) may be misinterpreted as 
meaning that the requirements of the exception apply only if an entity, 
in fact, has a written policy regarding professional courtesy (that is, 
if an entity's policy is not reduced to writing, the entity need not 
comply with the requirements of the exception at all). Therefore, we 
are amending Sec.  411.357(s)(3) to clarify that, as a prerequisite to 
extending professional courtesy, the entity must have a written policy 
that is approved by the entity's governing body.
    Comment: Two commenters objected to limits placed on physicians 
extending professional courtesy. One commenter requested that we revise 
the regulation so as not to prohibit the longstanding practice of 
professional courtesy, including physician-to-physician professional 
courtesy. Another commenter approved of the exception generally, but 
objected to the restriction requiring the courtesy to be extended 
either to the entire medical staff or to all physicians in the 
community. This commenter requested that a hospital be able to extend 
the courtesy on the same terms as medical staff incidental benefits; 
that is, for example, to members of the medical staff practicing in the 
same specialty rather than to the entire medical staff.
    Response: With respect to the first comment, physician-to-physician 
professional courtesy is unlikely to need a separate exception, unless 
the recipient physician is a source of DHS referrals to the physician 
(or physician practice) extending the courtesy. We believe the more 
typical situation would involve a group practice offering professional 
courtesy to its physicians

[[Page 51065]]

and their families. The in-office ancillary services exception would be 
available in such situations. Moreover, for purposes of the 
professional courtesy exception, we consider a group or other physician 
practice to be an entity with a formal medical staff that could use the 
exception, if all of the requirements of the exception were satisfied.
    Second, we do not agree that a hospital, or other entity with a 
formal medical staff, should be allowed under the exception to extend 
professional courtesy only to certain members of its medical staff. The 
selective provision of professional courtesy to a physician gives rise 
to an inference that the recipient of the courtesy may have been chosen 
in a manner that took into account the volume or value of referrals 
from the recipient (or his or her family member or employer-physician) 
to the physician providing the professional courtesy or other business 
generated between the parties.
    Comment: One commenter sought clarification as to the applicability 
of the exception to DHS entities that did not have medical staffs.
    Response: The exception would not apply to such entities, for the 
reasons noted above. We are clarifying the regulatory text in Sec.  
411.357(s).
    Comment: One commenter asked for clarification as to which Federal 
health care programs are referred to in Sec.  411.357(s)(4) and how to 
document financial need.
    Response: For purposes of the exception, the Federal health care 
programs are all Federal health care programs as defined at section 
1128B(e) of the Act (69 FR 16115-16116). The determination and 
documentation of financial need should be reasonable, consistent, and 
contemporaneous.
    Comment: Two commenters objected to the requirement that a hospital 
notify the insurer if any coinsurance obligation is waived in whole or 
in part. According to the commenters, the requirement is unreasonable 
and serves no purpose. The commenters requested that the condition be 
deleted.
    Response: We agree that, in order to eliminate the risk of program 
or patient abuse, our standard under section 1877(b)(4) of the Act, we 
do not have to require a hospital or other DHS entity to notify a 
private insurer if it intends to waive in whole, or in part, any 
coinsurance obligation of the insurer's beneficiary. We are deleting 
the notification provision. Nonetheless, we believe that it would be a 
prudent practice for DHS entities to provide such notification; in 
fact, insurers may require such notification.

T. Retention Payments in Underserved Areas

    In Phase II, in accordance with our authority under section 
1877(b)(4) of the Act, we created a new exception for retention 
payments made to a physician by a hospital or federally qualified 
health center located in a HPSA (regardless of whether the HPSA is 
specifically designated for the physician's particular specialty) (69 
FR 16097). In order to qualify for the exception under Phase II, the 
following conditions must be met--
     The physician must have a bona fide firm, written 
recruitment offer from a hospital or federally qualified health center 
that is not related to the hospital or the federally qualified health 
center making the payment, and the offer specifies the remuneration 
being offered;
     The offer must require the physician to move the location 
of his or her practice at least 25 miles and outside of the geographic 
area served by the hospital or federally qualified health center making 
the retention payment;
     The retention payment must be limited to the lower of: (1) 
The amount obtained by subtracting the physician's current income from 
physician and related services from the income the physician would 
receive from comparable physician and related services in the bona fide 
recruitment offer (provided that the respective incomes are determined 
using a reasonable and consistent methodology and that they are 
calculated uniformly over no more than a 24-month period); or (2) the 
reasonable costs the hospital or federally qualified health center 
would otherwise have to expend to recruit a new physician to the 
geographic area served by the hospital or federally qualified health 
center in order to join the medical staff of the hospital or federally 
qualified health center to replace the retained physician;
     Any retention payment must be subject to the same 
obligations and restrictions, if any, on repayment or forgiveness of 
indebtedness as the bona fide recruitment offer;
     The amount and terms of the retention payment may not be 
altered during the term of the arrangement in any manner that takes 
into account the volume or value of referrals or other business 
generated by the physician;
     The requirements of Sec.  411.357(e)(1)(i)-(iv), relating 
to physician recruitment arrangements, must be satisfied; and
     The arrangement must not violate the anti-kickback statute 
or any Federal or State law or regulation governing billing or claims 
submission.
    The exception in Sec.  411.357(t) requires that retention payments 
be made directly from the hospital or federally qualified health center 
to the retained physician. A hospital or federally qualified health 
center may not enter into a retention payment arrangement with a 
physician more frequently than once every 5 years. Also, Phase II 
provided for approval of retention payments to physicians practicing in 
other underserved areas (or to physicians serving underserved patient 
populations), as determined on a case by case basis through an advisory 
opinion.
    As discussed below, we are modifying Sec.  411.357(t) in several 
respects, including expanding the exception by permitting (under 
certain circumstances) retention payments in the absence of a written 
recruitment offer, by adding flexibility for retention payments to 
physicians who serve underserved areas and populations, and by allowing 
rural health clinics to make retention payments. In addition, retention 
payments may be made on the basis of a written offer of employment as 
well as a bona fide firm, written recruitment offer.
    Comment: A commenter that is the only hospital providing labor and 
delivery services for its county and the 100,000 people who reside in 
its service area requested modifications to the exception. The 
commenter believed that the exception should not be limited to 
retention payments in HPSAs or other underserved areas. According to 
the commenter, in 2003, the five obstetricians who were delivering 
babies at the hospital received an offer from an academic medical 
center located 30 miles away. Under the terms of the offer, the 
academic medical center would have provided through its captive 
insurance company malpractice insurance that was much less expensive 
than the insurance the obstetricians then carried. The commenter stated 
that the academic medical center required that the obstetricians 
perform their deliveries in a community hospital in a neighboring 
county with which the academic medical center was affiliated. The 
commenter wrote that its attorneys advised the hospital that the 
physician self-referral regulations prohibited it from countering the 
academic medical center's offer because the commenter's hospital is not 
located in a HPSA. The commenter proposed two alternative modifications 
to the retention exception: (1) Permit tax-exempt organizations to make 
retention payments if the payments would not constitute an improper 
private benefit or an excess benefit transaction under

[[Page 51066]]

applicable IRS principles; or (2) replace the HPSA requirement in both 
the retention exception and the obstetrical malpractice insurance 
subsidies exception with a super-majority board approval requirement.
    Response: We intend for the retention payments exception to be 
limited to those areas in which there is a demonstrated shortage of 
physicians, and where special efforts are often necessary to attract 
and maintain physicians. As noted below, we are expanding the exception 
to permit retention payments where the physician's current medical 
practice is in a rural area or HPSA, or where at least 75 percent of 
the physician's patients either reside in a medically underserved area 
or are members of a medically underserved population.
    With respect to the suggested modifications to the exception, we 
believe that they are too broad and subject to abuse. Compliance with 
the IRS excess benefit and private benefit rules, or securing a super-
majority vote of the governing board, does not ensure that the 
physician is needed or cannot easily be replaced. Neither proposed 
modification necessarily would prevent retention payments from being 
abused to reward high referring physicians.
    Comment: A number of commenters requested that we eliminate the 
requirement in Sec.  411.357(t)(1)(iii) of a written offer. According 
to the commenters, many offers are not in writing until agreement is 
imminent, at which point it is too late for the hospital to retain the 
physician. Other commenters believed that the requirement for a written 
offer encourages physicians both to solicit offers, and to engage in 
insincere negotiations with others. One commenter believed that an 
entity should be able to offer retention payments provided it has a 
good faith belief that a physician may be recruited by another entity.
    Response: We are revising Sec.  411.357(t) to permit a hospital, 
rural health clinic, or federally qualified health center to offer 
assistance to a physician who does not have a bona fide written offer 
of recruitment or employment if the physician certifies in writing to 
the hospital, rural health clinic, or federally qualified health center 
that, among other things, he or she has a bona fide opportunity for 
future employment by a hospital, academic medical center, or physician 
organization that would require relocation of his or her medical 
practice at least 25 miles to a location outside of the geographic area 
served by the hospital, rural health clinic, or federally qualified 
health center. Revised Sec.  411.357(t) also requires the physician to 
certify in writing: details regarding the steps taken by the physician 
to effectuate the employment opportunity; details of the physician's 
employment opportunity, including the identity and location of the 
physician's future employer and/or employment location, and the 
physician's anticipated income and benefits (or a range for income and 
benefits); that the future employer is not related to the hospital, 
rural health clinic, or federally qualified health center making the 
payment; the date on which the physician anticipates relocating his or 
her medical practice; and information sufficient for the hospital, 
rural health clinic, or federally qualified health center to verify the 
information included in the written certification. The hospital, rural 
health clinic, or federally qualified health center must take 
reasonable steps to verify the information in the certification.
    In circumstances in which the retained physician provides a written 
certification to the hospital (or rural health clinic or federally 
qualified health center) rather than a bona fide written offer of 
recruitment or employment, the retention payment may not exceed the 
lower of the following: (1) an amount equal to 25 percent of the 
physician's current annual income (averaged over the previous 24 
months) using a reasonable and consistent methodology that is 
calculated uniformly; or (2) the reasonable costs the hospital would 
otherwise have to expend to recruit a new physician to the geographic 
area served by the hospital in order to join the medical staff of the 
hospital to replace the retained physician. Where the physician has a 
written offer, the hospital may match the written offer, as provided in 
Sec.  411.357(t)(1). (We note that the exception for retention payments 
applies to federally qualified health centers and rural health clinics 
in the same manner as it applies to hospitals.)
    Comment: Several commenters asked that we broaden the exception to 
allow facilities in any medically underserved area to offer retention 
payments. Two commenters asked for clarification regarding whether the 
entity paying the retention payment must be located in an area of 
demonstrated need or whether the physician's patients must live in the 
area of demonstrated need. The commenters stated that the latter should 
be the test. For example, a hospital should be permitted to offer 
retention payments to keep a physician in an outreach area that is 
underserved. Another commenter urged that the exception be made 
available to rural health clinics.
    Response: We agree generally with the comments and are expanding 
the exception in Sec.  411.357(t) to permit retention payments that 
otherwise satisfy all of the conditions of the exception when: (1) the 
physician's current medical practice is located in a rural area, a 
HPSA, or an area of demonstrated need as determined by the Secretary in 
an advisory opinion issued under section 1877(g)(6) of the Act; or (2) 
at least 75 percent of the physician's patients either reside in a 
medically underserved area or are members of a medically underserved 
population. The location of the hospital in a HPSA is no longer a 
requirement of the exception. A retention payment may be made to a 
physician whose current medical practice is located in a HPSA, 
regardless of whether the HPSA has been designated for physicians in 
the retained physician's specialty. Further, we are also permitting 
retention payments to be made by rural health clinics under the same 
terms and conditions that apply to hospitals and federally qualified 
health centers. The purpose of this exception is to retain the 
physician's practice in a rural or underserved area.
    Comment: Two commenters questioned why the exception requires a 
retention payment to be contingent on an offer from a hospital. 
According to the commenters, any offer of employment, including an 
offer from a group practice, should be sufficient.
    Response: We agree and have modified the regulatory text in Sec.  
411.357(t)(1) to allow retention payments if a physician has a written 
offer from a hospital, academic medical center, or physician 
organization (as defined in this Phase III final rule at Sec.  411.351) 
that is not related to the hospital, rural health clinic, or federally 
qualified health center making the retention payment. We have included 
a similar provision in new Sec.  411.357(t)(2) related to the 
certification of an employment opportunity for which no written offer 
has been received.
    Comment: In light of the prohibition against entering into a 
retention payment arrangement with the same physician more frequently 
than once every 5 years, several commenters objected to the provision 
requiring that retention payments be limited to the difference between 
the compensation set forth in the recruitment offer and the physician's 
current annual income averaged over a 24-month period. According to the 
commenters, the net effect is to make the retention payment offer non-
competitive. Another

[[Page 51067]]

commenter asked whether an offer that is for a smaller amount than the 
difference over a 24-month period would qualify for the exception.
    Response: We are not persuaded to revise the regulation to permit 
the hospital, rural health clinic, or federally qualified health center 
to make a retention payment that would match the physician's 
compensation specified in the recruitment offer (or offer of 
employment), irrespective of the period of the recruitment offer. Under 
our present rule, we allow entities to make a retention payment that 
takes into account the difference between what the physician earns in 
his or her current position and what the physician would earn if he or 
she accepted the recruitment offer, for a period of up to 24 months. 
For example, if a physician's monthly total compensation package in his 
or her current position is $13,000, and he or she has a bona fide 
written recruitment offer that would, over the next 36 months, provide 
the physician with total monthly compensation of $15,000, we would 
allow an entity to make a retention payment of up to $48,000 (24 months 
(the maximum number of months permitted) x $2000). We believe that 
allowing a retention payment that takes into account the difference 
between what the physician earns in his or her current position and 
what the physician would earn if he or she accepted the recruitment 
offer (or offer of employment) may create a potential for abuse if that 
payment is calculated over a period greater than 24 months. An entity 
is always free to offer a lesser amount. For clarity, we have amended 
the language in Sec.  411.357(t)(1)(iv) that stated the retention 
payment ``is limited to the lower of'' to ``does not exceed the lower 
of.''
    Comment: A hospital trade association objected to the provisions 
limiting the total retention payment to an existing physician to the 
costs of recruiting a new physician. The commenter believed that the 
restriction would require hospitals to limit their retention offers to 
the costs of a newly practicing physician. The commenter contended that 
hospitals should be permitted to take into account the physician's 
experience, training, and length of service in the area. Other 
commenters asked for confirmation that, in determining the costs of a 
replacement, a hospital could include all costs, both direct and 
indirect.
    Response: We did not intend to limit the amount of a retention 
payment to the amount that it would cost to recruit a newly practicing 
physician in the same specialty to the same geographic area. Hospitals, 
rural health clinics, and federally qualified health centers may take 
into account experience, training, and length of service in the area. 
Both direct and indirect costs of a replacement can be included, 
provided that they are actual costs.
    Comment: Two commenters asked whether a hospital could make 
retention payments to a group practice, rather than to the physician 
directly. One of these commenters noted that the physician recruitment 
exception in Sec.  411.357(e) permits remuneration to be paid to the 
group on behalf of the physician.
    Response: We do not believe that it is appropriate for the payment 
to be made to the group practice because the hospital, rural health 
clinic, or federally qualified health center should not be subsidizing 
expenses of the group practice through the retention payment. The 
purpose of the retention payment exception is to allow hospitals, rural 
health clinics, and federally qualified health centers to retain the 
physician receiving the retention payment in the facility's service 
area. We note that a written or other offer of employment by a local 
group practice with whom the physician is affiliated would not qualify 
for this exception. We note further that the commenter misunderstands 
the recruitment exception, which does not protect remuneration provided 
to a group practice. It protects remuneration provided directly or 
indirectly to a recruited physician, some part of which may pass 
through a group practice subject to specific conditions.
    Comment: Several commenters complained that the exception did not 
permit hospitals to provide malpractice insurance assistance to 
physicians on their medical staffs facing exorbitant increases in their 
premiums.
    Response: As noted in section IX.R of this preamble (in response to 
a comment on the exception for obstetrical malpractice insurance 
subsidies), there are several exceptions available to entities that 
wish to provide assistance with malpractice insurance. Moreover, we do 
not believe it is accurate to say that the retention payment exception 
does not permit assistance for malpractice insurance premiums. 
Remuneration in the form of a retention payment paid by an entity to a 
physician may be applied by the physician to malpractice insurance 
premiums.
    Comment: One commenter questioned whether an arrangement that fully 
complies with the retention payments exception in Sec.  411.357(t) at 
the time that it is entered into will be considered out of compliance 
if the HPSA designation is lost before the arrangement expires. 
Specifically, the commenter wanted to know whether a retention payment 
arrangement would be out of compliance after all payments have been 
made, but the physician remains under a community service obligation at 
the time of the HPSA redesignation.
    Response: We have amended Sec.  411.357(t)(3) to permit the payment 
of a retention payment to a physician whose current medical practice is 
in a rural area or a HPSA, or to a physician when 75 percent of his or 
her patients reside in a medically underserved area or are members of a 
medically underserved population. It is likely that a retention payment 
made by a hospital to a physician whose practice location was within an 
area that formerly was designated as a HPSA would satisfy one of the 
new, more flexible requirements in Sec.  411.357(t)(3). Retention 
payments may be made only if the arrangement meets the conditions of 
the amended exception; however, a retention agreement may remain in 
compliance despite a continuing community service obligation (provided 
no additional retention payments are made) even if the HPSA designation 
was changed. We note that, under Phase II, the entire geographic area 
served by the hospital need not be located in a HPSA.
    Comment: One commenter asked for clarification of the term 
``relocation requirement'' in the Phase II regulation text in Sec.  
411.357(t)(2). According to the commenter, it is unclear from this 
provision as to whether the Secretary has the authority to waive the 
requirement that the physician receive a bona fide written offer from a 
facility to which the physician intends to relocate, or whether the 
Secretary has the authority to waive the requirement that the bona fide 
written offer would require the physician to relocate his practice at 
least 25 miles from its present location and outside the geographic 
area served by the entity that would make the retention payment, or 
both.
    Response: The term ``relocation requirement'' refers to the 
requirement that the bona fide written offer requires the physician to 
relocate his or her practice at least 25 miles from its present 
location to a location outside the geographic area served by the 
hospital that would make the retention payment.
    Comment: One commenter stated that the advisory opinion alternative 
in the exception in Sec.  411.357(t)(2) is unworkable because the 
process takes too long and has an uncertain result. The commenter 
asserted that a physician would not delay his or her

[[Page 51068]]

decision to relocate his or her practice pending the receipt of a 
favorable advisory opinion. Moreover, according to the commenter, the 
availability of an advisory opinion has limited utility because only 
the relocation requirement in Sec.  411.357(t)(1) may be waived by the 
Secretary. The commenter suggested that CMS should be given more 
latitude through the advisory opinion process to approve retention 
payment agreements.
    Response: The advisory opinion process is the vehicle for CMS to 
use in determining whether the relocation requirement in this exception 
will be waived for a particular retention payment arrangement. We 
believe that the modifications to Sec.  411.357(t) may alleviate many 
of the commenter's concerns regarding a hospital's ability to offer a 
retention payment to a physician in a manner timely enough to affect 
the physician's decision to relocate out of the hospital's geographic 
service area. With respect to the commenter's suggestion that CMS be 
given more latitude to approve retention payment agreements, we are not 
convinced that additional changes to this exception would pose no risk 
of program abuse.

U. Community-Wide Health Information System

    In Phase II, using our authority under section 1877(b)(4) of the 
Act, we created a new exception for community-wide health information 
systems (69 FR 16113). If certain conditions are met, Sec.  411.357(u) 
permits compensation in the form of items or services of information 
technology provided by an entity to a physician that allow access to, 
and sharing of, electronic health care records and any complementary 
drug information systems, general health information, medical alerts, 
and related information for patients served by community providers and 
practitioners, in order to enhance the community's overall health. We 
are making no changes to this exception.
    Comment: We received 13 comments regarding the community-wide 
health information system exception, all of which supported the new 
exception in Sec.  411.357(u). Several commenters recommended further 
clarification of the definition of a ``community'' and of ``community-
wide health information system.'' Several commenters recommended that 
hospitals be allowed to provide to physicians items and services needed 
for non-clinical functions. Commenters also raised questions about 
patient access and whether physicians may be charged to use a system. 
Several commenters suggested that hospitals be able to provide access 
to health information to physicians only, rather than all residents of 
the community. Two commenters urged that ``maximum flexibility'' be 
allowed. A few commenters recommended that interoperability should be 
encouraged.
    Response: Subsequent to the receipt of the public comments, on 
October 11, 2005, we published a notice of proposed rulemaking creating 
an exception for electronic prescribing technology as required by 
section 101 of the MMA (70 FR 59182). In addition, in that same notice, 
using our authority under section 1877(b)(4) of the Act, we proposed an 
exception for electronic health records software and information 
technology and training services. After taking into account public 
comments, on August 8, 2006, we published a final rule promulgating 
these two exceptions (71 FR 45140). The exception for electronic 
prescribing items and services appears in Sec.  411.357(v) and the 
exception for electronic health records software and information 
technology and training services appears in Sec.  411.357(w). We are 
republishing both exceptions with nonsubstantive technical changes in 
this Phase III final rule. In addition to requiring compliance with 
criteria designed to safeguard against program and patient abuse, both 
exceptions provide that neither the donor nor any person on the donor's 
behalf may take any action to limit or restrict the use, compatibility 
or interoperability of the items or services. The electronic health 
records exception in Sec.  411.357(w) requires interoperability at the 
time the remuneration is provided to the physician. Neither exception 
requires community-wide application.
    At this time, we are not making any changes to, or issuing any 
further guidance concerning, the community-wide health information 
systems exception while we observe how the new exceptions for 
electronic prescribing and electronic health records technology in 
Sec.  411.357 (v) and (w), respectively, are received. We are 
continuing to consider the issues that commenters raised and, if 
appropriate, we will issue clarifications and changes in a future 
rulemaking.

X. Reporting Requirements--Sec.  411.361

    Section 1877(f) of the Act sets forth certain reporting 
requirements for all entities providing covered items or services for 
which payment may be made under Medicare. The required information must 
be provided in a form, manner, and at such times that the Secretary 
specifies. Section 1877(g)(5) of the Act provides that any person who 
is required, but fails, to meet one of these reporting requirements is 
subject to a civil money penalty of not more than $10,000 for each day 
for which reporting is required to have been made.
    Section 411.361 of our regulations, as modified in Phase II, states 
that the information that we may require to be furnished can include 
the following--
    (1) The name and Unique Physician Identification Number (UPIN) of 
each physician who has a financial relationship with the entity;
    (2) The name and UPIN of each physician with an immediate family 
member (as defined at Sec.  411.351) who has a financial relationship 
with the entity;
    (3) The covered items and services provided by the entity; and
    (4) With respect to each physician identified under (1) and (2), 
the nature of the financial relationship (including the extent and/or 
value of the ownership or investment interest or the compensation 
arrangement).
    In Phase II, we--
     Specifically excluded from the definition of ``reportable 
financial relationships'' ownership or investment interests in 
publicly-traded securities and mutual funds if such interests satisfy 
the requirements of the exceptions in Sec.  411.356(a) or (b), 
respectively. This exclusion from the definition of reportable 
financial relationships for publicly-traded securities and mutual funds 
is limited to shareholder information; contractual arrangements 
concerning these ownership or investment interests are reportable 
financial relationships.
     Modified Sec.  411.361(c)(4) to specify that the 
information required to be reported is only that information that the 
entity knows or should know in the course of prudently conducting 
business, including, but not limited to, records that the entity is 
already required to retain to comply with IRS and Securities and 
Exchange Commission rules and other rules under the Medicare and 
Medicaid programs.
    We are making no substantive changes to Sec.  411.361 in this Phase 
III final rule. However, we are revising Sec.  411.361(c) to account 
for the transition from the UPIN to the National Provider Identifier 
(NPI).
    Comment: One commenter sought clarification of our statement in 
Phase II that, to the extent we are obligated under the Freedom of 
Information Act (FOIA), 5 U.S.C. 552, to disclose records we have 
received pursuant to the physician self-referral reporting 
requirements, we cannot maintain the records as confidential (69 FR 
17934). The commenter believes that most such records will be exempt 
from disclosure under Exemption 4 of the FOIA, 5

[[Page 51069]]

U.S.C. 552(b)(4), as they will involve confidential business 
information.
    Response: The commenter is correct that Exemption 4 of the FOIA 
protects confidential business information from required disclosure. 
Moreover, the Trade Secrets Act, 18 U.S.C. 1905, prohibits Federal 
agencies from disclosing confidential business information, absent a 
law or regulation permitting such disclosure. We agree that much of the 
information that we may receive pursuant to our reporting requirements 
under the physician self-referral regulations will be exempt from 
disclosure under the FOIA and prohibited from disclosure by the Trade 
Secrets Act. However, when we receive a FOIA request for information 
reported to us, we must evaluate whether the particular information is 
exempt or prohibited from disclosure. (Generally, information that is 
exempt from disclosure under the FOIA is also prohibited from 
disclosure by the Trade Secrets Act.) We cannot state categorically, 
however, that all information that we receive will be confidential 
business information within the meaning of the FOIA and the Trade 
Secrets Act.
    Comment: A commenter suggested that we exclude from the definition 
of ``reportable financial relationship'' compensation arrangements that 
qualify under any of the following exceptions: Medical staff incidental 
benefits (Sec.  411.357(m)); nonmonetary compensation (Sec.  
411.357(k)); professional courtesy (Sec.  411.357(s)); or referral 
services (Sec.  411.357(q)). According to the commenter, treating these 
compensation arrangements as ``reportable financial relationships'' 
would require a hospital to furnish the required information for 
virtually all physicians on its medical staff (and perhaps for others 
as well), which would create an unnecessary burden for the hospital. 
Another commenter asserted that an entity's obligation under our 
reporting requirements is staggering because of the breadth of the 
physician self-referral statute. According to this commenter, the most 
acute burdens relate to the requirement in Sec.  411.361(c)(2) to 
maintain records of financial relationships with family members of 
physicians. The commenter further asserted that most DHS entities do 
not have a means to catalog all such financial relationships, as they 
have no reason to create records of transactions that are at fair 
market value. The commenter suggested that various types of financial 
relationships involving immediate family members of physicians (such as 
charitable donations by family members or fair market value lease 
arrangements) be excepted from the reporting requirements. A third 
commenter also expressed concern that the inclusion of financial 
relationships with immediate family members of physicians imposed a 
substantial burden on DHS entities. This commenter suggested that if 
basic information, such as the UPIN of each physician who has a 
reportable financial arrangement with the entity, the covered items or 
services provided by the entity, and the nature of the financial 
arrangement for each such physician is provided, CMS could verify that 
exceptions are met and it would not be necessary in many cases for the 
entity to report information pertaining to immediate family members who 
have financial relationships with the DHS entities. Where such 
information is needed from the immediate family members of physicians, 
the commenter asserted that 30 days is an unreasonable amount of time 
in which to provide the information, and suggested that extensions of 
at least 90 days should be available.
    Response: We decline to adopt the commenters' suggestions for the 
reasons stated in Phase II (69 FR 17934). There, we stated that we are 
concerned that an entity could decide that one or more of its financial 
relationships falls within an exception, fail to retain data concerning 
those financial relationships, and thereby prevent the government from 
reviewing the arrangements to determine if they qualify for an 
exception. In particular, we disagree that, where the financial 
relationship that triggers the physician self-referral statute is 
between an immediate family member of a physician and the DHS entity, 
it is not necessary for the entity to maintain information concerning 
the financial relationship and to report it upon our direction to do 
so. We fail to see how reporting information pertaining only to 
physicians who have financial relationships provides us with assurance 
that financial relationships concerning immediate family members meet 
one or more of the exceptions.
    Section 411.361(e) provides that entities must be given at least 30 
days to provide the required information. Where we agree that the 
nature or scope of the request for information is such that the 
information cannot reasonably be furnished within 30 days, we will 
extend the time for supplying the information.
    Comment: A commenter requested that we create an exception to the 
reporting requirements for the situation in which a DHS entity seeks to 
obtain the required information but was denied access to it, such as 
where a physician has a reportable financial relationship solely by 
virtue of the hospital's financial arrangement with an immediate family 
member.
    Response: We fail to see the basis for the commenter's concern. An 
entity that has a financial relationship with a physician or an 
immediate family member of the physician should have its own records of 
the details of such relationship.

XI. Miscellaneous (Other)

A. Specialty Hospital Moratorium

    Section 507(a) of the MMA amended the hospital and rural provider 
ownership exceptions to the physician self-referral prohibition. 
Section 507 of the MMA specified that, for the 18-month period 
beginning on December 8, 2003 and ending on June 7, 2005, physician 
ownership and investment interests in ``specialty hospitals'' would not 
qualify for the whole hospital exception. Section 507 of the MMA 
further specified that, for the same 18-month period, the exception for 
physician ownership or investment interests in rural providers would 
not apply in the case of specialty hospitals located in rural areas. 
For purposes of section 507 of the MMA only, a ``specialty hospital'' 
was defined as a hospital in one of the 50 States or the District of 
Columbia that is primarily or exclusively engaged in the care and 
treatment of one of the following: (1) Patients with a cardiac 
condition; (2) patients with an orthopedic condition; (3) patients 
receiving a surgical procedure; or (4) patients receiving any other 
specialized category of services that the Secretary designates as being 
inconsistent with the purpose of permitting physician ownership and 
investment interests in a hospital. The term ``specialty hospital'' did 
not include any hospital determined by the Secretary to be in operation 
or ``under development'' as of November 18, 2003, and ``for which the 
number of physician investors at any time on or after such date is no 
greater than the number of such investors as of such date.''
    Phase II modified the hospital ownership exception to reflect the 
MMA moratorium provisions. We received several comments on Phase II 
regarding the implementation of the 18-month moratorium on referrals of 
Medicare patients to specialty hospitals by physician investors.
    Comment: One commenter suggested that, during the 18-month 
moratorium, any entity applying to receive a Medicare provider 
agreement as a hospital should be required to submit, as part of the 
application process, the

[[Page 51070]]

information required under Sec.  411.361(c)(1) through (c)(4).
    Response: The commenter's suggestion is moot as the moratorium 
ended on June 7, 2005. However, as we noted in the Secretary's August 
8, 2006 final Report to Congress on specialty hospitals, which was 
required by section 5006 of the DRA, we are exploring changes to the 
enrollment form for hospitals (the CMS-855A) to capture information 
regarding whether an applicant hospital is, or is projected to be, a 
specialty hospital.
    Comment: A commenter noted that Phase II defined a specialty 
hospital as a hospital that is primarily or exclusively engaged in the 
care and treatment of patients with a cardiac condition, patients with 
an orthopedic condition, or patients receiving a surgical procedure, 
but that no clear guidance exists as to what ``primarily engaged in'' 
means.
    Response: For purposes of implementing the 18-month moratorium 
imposed by section 507 of the MMA, we considered a hospital to be 
``primarily engaged'' in the care and treatment of cardiac, orthopedic, 
or surgical patients if 45 percent of the hospital's Medicare cases 
were (or were projected to be) in Major Diagnostic Category (MDC) 5, 
Diseases and Disorders of the Circulatory System (cardiac), MDC 8, 
Diseases and Disorders of the Musculoskeletal System and Connective 
Tissue (orthopedic), or were surgical in nature (surgical). As noted in 
response to the previous comment, we are exploring changes to the CMS-
855A to enable us better to determine whether an applicant hospital is 
a specialty hospital. We may define ``primarily engaged'' for that 
purpose.
    Comment: A commenter noted that, in Phase II, we defined specialty 
hospital for purposes of the 18-month moratorium to exclude a hospital 
for which the number of physician investors at any time on or after 
November 18, 2003 is no greater than the number of investors as of such 
date. The commenter stated that this requirement unfairly restricted 
any group practice that had invested in a specialty hospital prior to 
November 18, 2003 from increasing the number of its physician owners. 
It suggested that we interpret section 507 of the MMA to mean that 
there is no increase in physician investors, notwithstanding an 
increase in the number of physician equity owners in a group practice, 
if the group practice owned its interest in the specialty hospital 
prior to November 18, 2003 and the group was not formed for the purpose 
of investing in the hospital.
    Response: For purposes of implementing the 18-month moratorium, we 
considered there to be an increase in the number of physician investors 
in a specialty hospital if a group practice that had an investment 
interest in a specialty hospital increased the number of physician 
equity owners in the group at any time on or after November 18, 2003 
(and there was no corresponding decrease in the specialty hospital's 
investors). The suggested interpretation by the commenter does not 
comport with the plain language of section 507 of the MMA.

B. Physician Certification Requirements for Home Health Services--Sec.  
424.22

    Section 903 of the Omnibus Reconciliation Act of 1980 amended 
sections 1814(a) and 1835(a) of the Act to require the Secretary to 
issue regulations prohibiting a physician from certifying the need for 
home health services, or establishing and reviewing home health plans 
of treatment if the physician had a ``significant ownership interest 
in, or a significant financial or contractual relationship with, a home 
health agency.'' In October 1982, we published a rule (47 FR 47388) 
interpreting the prohibition to apply to physicians having, among other 
things: (1) a direct or indirect ownership interest of 5 percent or 
more in a home health agency; or (2) direct or indirect business 
transactions with the home health agency that totaled more than $25,000 
or 5 percent of the agency's operating expenses, whichever was less. 
The 1982 regulatory provision, which was ultimately codified in Sec.  
424.22(d), was superseded by the physician self-referral prohibition 
when the prohibition became applicable in 1995 to physician referrals 
for home health services.
    In Phase I, we amended the home health certification requirement in 
Sec.  424.22(d) to provide that a physician may not certify the need 
for home health services or establish or review a plan of treatment if 
his or her ``financial relationship'' (as defined in the physician 
self-referral regulations) with the home health agency did not satisfy 
the requirements of an exception under the physician self-referral law. 
In Phase II, we republished Sec.  424.22(d) without change, and we 
received no comments on this provision. This Phase III final rule makes 
no substantive change to Sec.  424.22(d), although we are revising the 
provision to reference more explicitly the regulatory exceptions.

XII. Provisions of the Final Rule

    A summary of the major changes to the regulations in this Phase III 
final rule are discussed below. No major regulatory changes were made 
to Sec.  411.352 (Group Practices), Sec.  411.353 (Prohibition on 
Certain Referrals by Physicians and Limitations on Billing), or Sec.  
411.356 (Exceptions to the Referral Prohibition Related to Ownership or 
Investment Interests). However, certain provisions of these sections 
were clarified in this preamble.
    Three definitions are added at Sec.  411.351 (``downstream 
contractor,'' ``physician organization,'' and ``rural area''). Also, in 
the definition of ``fair market value,'' we are not retaining the safe 
harbor regarding hourly payments for a physician's personal services.
    Section 411.354 defines ``financial relationships'' for purposes of 
the physician self-referral law. A new provision was added in Sec.  
411.354(b)(3)(v) which specifies that an ownership interest in an 
entity [the whole hospital or a subdivision (that is, portion) of the 
hospital] does not include a security interest taken by a physician in 
equipment sold to the entity and financed with a loan by the physician 
to the entity. However, the security interest is a compensation 
arrangement.
    A new ``stand in the shoes'' provision was added to Sec.  
411.354(c)(2) under which a physician is deemed to ``stand in the 
shoes'' of his or her physician organization (defined at Sec.  411.351 
as a ``physician (including a professional corporation of which the 
physician is the sole owner), a physician practice, or a group practice 
that complies with the requirements of Sec.  411.352.'' A physician who 
stands in the shoes of his or her physician organization is deemed to 
have the same compensation arrangements with the DHS entity that the 
physician organization has with the DHS entity. As a result, many 
compensation arrangements that were analyzed under Phase II as indirect 
compensation arrangements are now analyzed as direct compensation 
arrangements that must comply with an applicable exception for direct 
compensation arrangements.
    The Phase III changes to the general exceptions in Sec.  411.355 
for both ownership/investment interests and compensation arrangements 
are concentrated in the exceptions for academic medical centers and 
intra-family rural referrals in Sec.  411.355(e) and (j), respectively. 
With respect to the academic medical centers exception, we clarified 
that the total compensation from each academic medical center component 
to a faculty physician must be set in advance and not determined in a 
manner that takes into account the volume or value of the physician's

[[Page 51071]]

referrals or other business generated by the referring physician within 
the academic medical center. In addition, when determining whether the 
majority of physicians on the medical staff of a hospital affiliated 
with an academic medical center consists of faculty members, the 
affiliated hospital must include or exclude all individual physicians 
holding the same class of privileges at the affiliated hospital.
    We amended the exception for intra-family rural referrals to 
include an alternative test to determine whether a physician may refer 
a patient to an immediate family member for DHS. Specifically, if, in 
light of the patient's condition, no other person or entity is 
available to furnish the DHS in a timely manner within 45 minutes 
transportation time from the patient's home, a physician is not 
prohibited from making a referral for the DHS to an immediate family 
member or to an entity with which the immediate family member has a 
financial relationship, provided that all other conditions of the 
exception are satisfied. The Phase II 25-mile test remains an option 
for complying with the exception.
    Section 411.357 sets out the exceptions for various compensation 
arrangements. The revisions to the exceptions for physician recruitment 
in Sec.  411.357(e) and retention payments in underserved areas in 
Sec.  411.357(t) are significant.
    The physician recruitment exception protects certain remuneration 
that is provided by a hospital to a physician as an inducement for the 
physician to relocate his or her medical practice into the ``geographic 
area served by the hospital,'' which we defined in Phase II as the 
lowest number of contiguous zip codes from which the hospital draws at 
least 75 percent of its inpatients. Under the revised definition of 
``geographic area served by the hospital,'' a hospital that draws fewer 
than 75 percent of its inpatients from all of the contiguous zip codes 
from which it draws inpatients may recruit a physician into the 
geographic area composed of all of the contiguous zip codes from which 
it draws its inpatients, provided that all other requirements of the 
exception are satisfied. In addition, the revised definition sets forth 
a special optional rule for rural hospitals under which a rural 
hospital may determine its geographic service area using the lowest 
number of contiguous zip codes from which the hospital draws at least 
90 percent of its inpatients or, if the hospital draws fewer than 90 
percent of its inpatients from all of the contiguous zip codes from 
which it draws inpatients, its service area may include certain 
noncontiguous zip codes. A rural hospital may also recruit physicians 
to an area outside the geographic area served by the hospital if the 
Secretary has determined in an advisory opinion that the area into 
which the physician is to be recruited has a demonstrated need for the 
recruited physician, provided that all other requirements of the 
exception are satisfied.
    In the case of an income guarantee provided by a hospital to a 
physician who relocates his or her practice into a rural area or HPSA 
and joins a physician practice to replace a physician who retired, 
died, or relocated (from the service area) during the previous 12-month 
period, the costs allocated by the physician practice to the recruited 
physician may be either: (1) the actual additional incremental costs 
attributable to the recruited physician; or (2) the lower of a per 
capita allocation or 20 percent of the practice's aggregate costs.
    This Phase III final rule also clarifies that a physician must move 
his or her medical practice from a location outside of the geographic 
area served by the hospital to a location within the geographic area 
served by the hospital. In addition, we have revised the exception to 
provide that the relocation requirement will not apply to a physician 
who: (1) for at least 2 years immediately preceding the recruitment 
arrangement, was employed on a full-time basis by a Federal or State 
bureau of prisons (or similar entity operating correctional 
facilities), the Department of Defense or Veterans Affairs, or 
facilities of the Indian Health Service, provided that he or she had no 
private medical practice during the same time period; or (2) the 
Secretary has determined in an advisory opinion not to have an 
established medical practice that serves a significant number of 
patients who are or could become patients of the recruiting hospital. 
In the case of recruitment assistance provided by a hospital to a 
physician who joins a physician practice, we have revised the exception 
to prohibit the physician practice from imposing on the recruited 
physician any practice restrictions that unreasonably restrict the 
recruited physician's ability to practice medicine in the geographic 
area served by the hospital. Finally, the exception in Sec.  411.357(e) 
is now applicable to a rural health clinic in the same manner as it 
applies to a hospital (or federally qualified health center).
    We have expanded the exception in Sec.  411.357(t) for retention 
payments in underserved areas to permit a hospital to make a payment to 
retain a physician on its medical staff even if the physician does not 
have a bona fide firm, written recruitment offer, provided that the 
physician certifies in writing that, among other things, he or she has 
a bona fide opportunity for future employment that would require the 
physician to move his or her medical practice at least 25 miles to a 
location outside the geographic area served by the hospital, and 
certain other conditions are satisfied. We have also expanded the 
retention payments exception to permit retention payments in the case 
of a physician with a bona fide firm, written offer of employment from, 
or a bona fide opportunity for future employment with, an academic 
medical center or physician organization. Also, we have expanded the 
exception to permit a hospital to make a retention payment to a 
physician whose current medical practice is not located in a HPSA. 
Under the revised exception, a retention payment may be made to a 
physician whose current medical practice is located in a rural area or 
an area with demonstrated need for the physician, as determined by the 
Secretary in an advisory opinion.
    Changes to the remaining exceptions found in Sec.  411.357 
include--
     Under the personal service arrangements exception in Sec.  
411.357(d), allowing a ``holdover'' personal service arrangement on 
terms similar to those in the exceptions for the rental of office space 
and equipment;
     Under the nonmonetary compensation exception in Sec.  
411.357(k), in certain circumstances, upon repayment of nonmonetary 
compensation in excess of the applicable limit, deeming the nonmonetary 
compensation to be within the limit, and allowing an entity with a 
formal medical staff to hold one local medical staff appreciation event 
per year;
     Under the exception for charitable donations by a 
physician in Sec.  411.357(j), clarifying that the donation may neither 
be solicited nor offered in any manner that takes into account the 
volume or value of referrals or other business generated between the 
physician and the entity;
     Under the professional courtesy exception in Sec.  
411.357(s), eliminating the requirement that the entity offering the 
professional courtesy inform the insurer in writing of the reduction of 
any coinsurance obligation on the part of the recipient of the 
professional courtesy, and clarifying that the exception is applicable 
only to entities that have formal medical staffs;
     Under the fair market value compensation exception in 
Sec.  411.357(l),

[[Page 51072]]

clarifying that the exception is applicable to both compensation 
provided to a physician from an entity and compensation provided to an 
entity from a physician; and,
     Under the compliance training exception in Sec.  
411.357(o), permitting the provision of training programs for which CME 
is available, provided that the primary purpose of the program is 
compliance training.

XIII. Technical Corrections

1. Web site Change

    Because the address of the physician self-referral Web site has 
changed, we are correcting the references to our Web site in the 
definition of ``List of CPT/HCPCS Codes'' at Sec.  411.351, the 
``nonmonetary compensation'' exception in Sec.  411.357(k), and the 
``medical staff incidental benefits'' exception in Sec.  411.357(m).
[REG TEXT--Change]

2. Typographical Error

    We are correcting typographical and other errors that appeared in 
Phase II. For example, we are removing a typographical error 
(``sbull'') in Sec.  411.355(a)(2). In addition, we are correcting 
Sec.  411.357(m)(1) to state that medical staff incidental benefits 
must be ``offered'' to all members of the medical staff. In Phase II, 
we intended to change ``offered'' to ``provided'' only in Sec.  
411.357(m)(2), but the change was inadvertently made to paragraph 
(m)(1) as well.

3. CMS Manuals

    Because CMS has begun re-numbering and posting its manuals on the 
Internet, we are correcting the citations to the manuals in Sec.  
411.351 (the definitions of entity, locum tenens physician, parenteral 
and enteral nutrients, equipments and supplies, and physician in the 
group practice).

4. Nonmonetary Compensation

    We are revising the section heading of Sec.  411.357(k) to remove 
the reference to ``up to $300.'' This change will make the section 
heading consistent with the provisions of Sec.  411.357(k).

5. Simplification of Regulatory Text

    We made several non-substantive grammatical and editorial revisions 
to the regulatory text. For example, we revised the introductory 
language in Sec.  411.355(g) concerning EPO and other dialysis related 
drugs to make it easier to read. We also substituted ``nonmonetary'' 
for ``non-monetary'' throughout the regulations. A similar change is 
being made to Sec.  424.22 to simplify language concerning home health 
services. We have simplified references in the recruitment exception to 
a recruited physician joining a ``physician or physician practice.'' 
Because ``joining a physician'' is necessarily synonymous with 
``joining a physician practice,'' we have simplified the regulation 
text so that it now refers only to ``joining a physician practice.''

6. Statutory References

    Under the definition of ``Does not violate the anti-kickback 
statute'' at Sec.  411.351, the statutory references to the anti-
kickback statute have been corrected from sections 1128(a)(7) and 
1128a(b)(7) of the Act to sections 1128A(a)(7) and 1128(b)(7) of the 
Act, respectively.

7. References to the Reassignment Rules

    In the definition of ``physician in the group practice,'' we 
updated the reference to the reassignment rules from Sec.  424.80(b)(3) 
to Sec.  424.80(b)(2). We also updated the reference to the 
reassignment rules in the in-office ancillary services exception in 
Sec.  411.355(b)(3)(v) from Sec.  424.80(b)(6) to Sec.  424.80(b)(5).

8. National Provider Identifier

    We revised the Reporting Requirements provision in Sec.  411.361(c) 
to account for the transition from the Unique Physician Identification 
Number (UPIN) to the National Provider Identifier (NPI) by inserting 
the following phrase: ``and/or the national provider identifier 
(NPI).'' Specific references to the NPI are found in Sec.  
411.361(c)(1) and (c)(2).

9. Advisory Opinions

    We are revising Sec.  411.370(a) to remove the sunset provision 
that had formerly applied to our authority to issue advisory opinions 
because section 543 of the Medicare, Medicaid, and SCHIP Benefits and 
Improvement Protection Act of 2000, Pub. L. 106-554, extended the time 
period indefinitely for our authority to issue advisory opinions.

XIV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues--
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we previously solicited public comment on each of these 
issues for the following sections of the regulation that contain 
information collection requirements.

Group Practice (Sec.  411.352)

    The burden associated with Sec.  411.352 was discussed in detail in 
both Phase I and Phase II (66 FR 949 and 69 FR 16118-16119, 
respectively). Section 411.352 sets out the requirements that must be 
met in order to qualify as a group practice. Section 411.352(d) 
provides that substantially all of the patient care services of the 
physicians who are members of the group must be furnished and billed 
through the group practice. The burden associated with this requirement 
is the time and effort necessary to collect, document, and maintain the 
information outlined in Sec.  411.352(d). We believe that the 
documentation requirements in this section are usual and customary 
business practices. The burden associated with this requirement, 
therefore, is not subject to the PRA as stated in 5 CFR 1320.3(b)(2) 
because the time, effort, and financial resources necessary to comply 
with a collection of information that would be incurred by persons in 
the normal course of their activities are considered to be usual and 
customary business practices and are not subject to the PRA. In 
addition, the burden is not subject to the PRA under 5 CFR 1320.4(a) to 
the extent that the information is collected during the conduct of a 
criminal or civil action, or during the conduct of an administrative 
action, investigation or audit.
    Section 411.352(i) addresses the special rule for productivity 
bonuses and profit shares. The burden associated with the requirements 
in this section is the time and effort associated with collecting and 
maintaining the information listed under Sec.  411.352(i)(2) and 
(i)(3). The burden associated with the recordkeeping requirements in 
Sec.  411.352(i) is not subject to the PRA, as stated in 5 CFR 
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5 
CFR 1320.4(a) to the extent

[[Page 51073]]

that the information is collected during the conduct of a criminal or 
civil action, or during the conduct of an administrative action, 
investigation or audit.

Financial Relationship, Compensation, and Ownership or Investment 
Interest (Sec.  411.354)

    Both Phase I (66 FR 949) and Phase II (69 FR 16119) contain 
detailed discussions of the information collection requirements in 
Sec.  411.354. Section 411.354(d)(4) permits a physician's compensation 
from a bona fide employer or under a managed care or other contract to 
be conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier if, among other things, the requirement to 
make referrals is set forth in a written agreement signed by the 
parties. Specifically, the burden associated with this requirement in 
Sec.  411.354(d)(4)(iv)(A) is the time and effort necessary to set 
forth the required referrals provision in a written agreement signed by 
both parties. The burden associated with this requirement is not 
subject to the PRA as stated in 5 CFR 1320.3(b)(2). In addition, the 
burden is not subject to the PRA under 5 CFR 1320.4(a) to the extent 
that the information is collected during the conduct of a criminal or 
civil action, or during the conduct of an administrative action, 
investigation or audit.

General Exceptions to the Referral Prohibition Related to Both 
Ownership/Investment and Compensation (Sec.  411.355)

    The burden associated with Sec.  411.355 was discussed in detail in 
both Phase I (66 FR 949) and Phase II (69 FR 16119). Section 411.355(e) 
addresses the exception for services provided by an academic medical 
center. Essentially, Sec.  411.355(e)(1)(iii)(B) states that the 
relationship of the components of the academic medical center must be 
set forth in written agreement(s) or other written document(s) that 
have been adopted by the governing body of each component. If the 
academic medical center is one legal entity, this requirement will be 
satisfied if transfers of funds between components of the academic 
medical center are reflected in the routine financial reports covering 
the components. The burden associated with these requirements is not 
subject to the PRA, as stated in 5 CFR 1320.3(b)(2). In addition, the 
burden is not subject to the PRA under 5 CFR 1320.4(a) to the extent 
that the information is collected during the conduct of a criminal or 
civil action, or during the conduct of an administrative action, 
investigation or audit.

Exceptions to the Referral Prohibition Related to Compensation 
Arrangements (Sec.  411.357)

    Section 411.357(a) addresses the rental of office space. Under 
Sec.  411.357(a)(1), the rental or lease agreement associated with 
payments for the use of office space made by a lessee to a lessor must 
be set out in writing, signed by the parties, and specify the premises 
covered. The burden associated with these requirements is the time and 
effort necessary to draft, sign, and maintain the written agreement. 
The burden associated with this requirement is not subject to the PRA 
as stated in 5 CFR 1320.3(b)(2). In addition, the burden is not subject 
to the PRA under 5 CFR 1320.4(a) to the extent that the information is 
collected during the conduct of a criminal or civil action, or during 
the conduct of an administrative action, investigation or audit.
    Section 411.357(b) requires that the payments made by a lessee to a 
lessor for the use of equipment meet certain conditions. Specifically, 
Sec.  411.357(b)(1) requires that a rental or lease agreement be set 
out in writing, signed by the parties, and specify the equipment 
covered by the agreement. The burden associated with this requirement 
is the time and effort associated with drafting, signing, and 
maintaining the written agreement. The burden associated with this 
requirement is not subject to the PRA as stated in 5 CFR 1320.3(b)(2). 
In addition, the burden is not subject to the PRA under 5 CFR 1320.4(a) 
to the extent that the information is collected during the conduct of a 
criminal or civil action, or during the conduct of an administrative 
action, investigation or audit.
    Section 411.357(d) addresses personal service arrangements. Section 
411.357(d)(1)(i) requires that each personal service arrangement be set 
out in writing, signed by the parties, and specify the services covered 
by the arrangement. In addition, Sec.  411.357(d)(1)(ii) requires that 
the written agreement cover all of the services to be furnished by the 
physician or his or her immediate family member, or both. This 
requirement is satisfied if all separate arrangements with the 
physician and his or her immediate family member incorporate each other 
by reference or cross-reference a master list of contracts. The burden 
associated with both Sec.  411.357(d)(1)(i) and (ii) is not subject to 
the PRA as stated under 5 CFR 1320.3(b)(2). In addition, the burden is 
not subject to the PRA under 5 CFR 1320.4(a) to the extent that the 
information is collected during the conduct of a criminal or civil 
action, or during the conduct of an administrative action, 
investigation or audit.
    Section 411.357(e) addresses physician recruitment. Specifically, 
Sec.  411.357(e)(1)(i) requires that all arrangements for remuneration 
provided by a hospital to recruit a physician that is intended to 
induce the physician to relocate his or her medical practice to the 
geographic area served by the hospital in order to become a member of 
the hospital's medical staff must be set out in writing and signed by 
both parties. In addition, Sec.  411.357(e)(4)(i) provides that, in the 
case of certain recruitment arrangements in which the recruited 
physician joins a physician practice, the written agreement must be 
signed by the hospital, the recruited physician, and the physician 
practice. The burden associated with these requirements is the time and 
effort associated with drafting, signing, and maintaining the written 
agreement. The burden associated with this requirement is not subject 
to the PRA as stated under 5 CFR 1320.3(b)(2). In addition, the burden 
is not subject to the PRA under 5 CFR 1320.4(a) to the extent that the 
information is collected during the conduct of a criminal or civil 
action, or during the conduct of an administrative action, 
investigation or audit.
    Section 411.357(e)(4)(iv) imposes a recordkeeping requirement. 
Records of the actual costs and the passed through amounts must be 
maintained for a period of at least 5 years and made available to the 
Secretary upon request. The burden associated with this requirement is 
the time and effort associated with maintaining the required 
documentation. The burden associated with this collection is not 
subject to the PRA as it meets the requirements set forth in 5 CFR 
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5 
CFR 1320.4(a) to the extent that the information is collected during 
the conduct of a criminal or civil action, or during the conduct of an 
administrative action, investigation or audit.
    Section 411.357(l)(1) requires that all arrangements pertaining to 
fair market value compensation be set forth in writing. In addition, 
the written agreement must be signed by the parties and must cover 
identifiable items or services that are the subject of the arrangement. 
The burden associated with this requirement is the time and effort 
necessary to draft, sign, and maintain the written agreement. The 
burden associated with these

[[Page 51074]]

requirements is not subject to the PRA as it meets the requirements set 
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to 
the PRA under 5 CFR 1320.4(a) to the extent that the information is 
collected during the conduct of a criminal or civil action, or during 
the conduct of an administrative action, investigation or audit.
    Section 411.357(p) sets forth an exception for indirect 
compensation arrangements. The exception requires the arrangement to be 
set out in a writing that is signed by the parties and specifies the 
services covered by the arrangement. The burden associated with this 
requirement is the time and effort necessary to draft, sign, and 
maintain the written agreement. The burden associated with these 
requirements is not subject to the PRA as it meets the requirements set 
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to 
the PRA under 5 CFR 1320.4(a) to the extent that the information is 
collected during the conduct of a criminal or civil action, or during 
the conduct of an administrative action, investigation or audit.
    Section 411.357(q) sets forth an exception for remuneration that 
meets all of the conditions set forth in the voluntary anti-kickback 
safe harbor at Sec.  1001.952(f). Under Sec.  1001.952(f), the referral 
service must make certain standard disclosures to each person seeking a 
referral and must maintain a written record certifying each disclosure. 
The burden associated with this requirement is the time and effort 
necessary to draft, sign, and maintain the disclosures. The burden 
associated with these requirements is not subject to the PRA as it 
meets the requirements set forth in 5 CFR 1320.3(b)(2). In addition, 
the burden is not subject to the PRA under 5 CFR 1320.4(a) to the 
extent that the information is collected during the conduct of a 
criminal or civil action, or during the conduct of an administrative 
action, investigation or audit.
    Section 411.357(r) sets forth an exception for obstetrical 
malpractice insurance subsidies that satisfy all of the conditions set 
forth in the voluntary anti-kickback safe harbor at Sec.  1001.952(o). 
Under Sec.  1001.952(o)(1), such subsidies must be made in accordance 
with a written agreement. The burden associated with this requirement 
is the time and effort necessary to draft, sign, and maintain the 
agreement. Under Sec.  1001.952(o)(2), the physician receiving the 
subsidy must certify that for the initial coverage period, he or she 
has a reasonable basis for believing that at least 75 percent of his or 
her obstetrical patients will either reside in a HPSA or medically 
underserved area, or be part of a medically underserved population, and 
the physician must make a similar certification for subsequent coverage 
periods. The burden associated with the requirement for a written 
agreement is not subject to the PRA as it meets the requirements set 
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to 
the PRA under 5 CFR 1320.4(a) to the extent that the information is 
collected during the conduct of a criminal or civil action, or during 
the conduct of an administrative action, investigation or audit. The 
burden associated with the physician certification requirement is 
considered to be a usual and customary business practice and, as set 
forth in 5 CFR 1320.3(b)(2), is not subject to the PRA. In addition, 
the burden is not subject to the PRA under 5 CFR 1320.4(a) to the 
extent that information is collected during conduct of a criminal or 
civil action, or during the conduct of an administrative action, 
investigation or audit.
    Section 411.357(s) addresses professional courtesy. Specifically, 
Sec.  411.357(s)(3) requires that an entity have a written policy 
approved by the entity's governing body in order to extend professional 
courtesy. The burden associated with this requirement is the time and 
effort associated with drafting and maintaining the written policy. The 
burden associated with this requirement is not subject to the PRA as 
stated under 5 CFR 1320.3(b)(2). In addition, the burden is not subject 
to the PRA under 5 CFR 1320.4(a) to the extent that the information is 
collected during the conduct of a criminal or civil action, or during 
the conduct of an administrative action, investigation or audit.
    Section 411.357(t), under this Phase III final rule, protects 
payments made by a hospital to a physician on its medical staff to 
retain the physician's medical practice in an underserved area if 
certain conditions are satisfied. The exception requires, among other 
things, that the physician: (1) have a bona fide firm written 
recruitment offer (or offer of employment) from an unrelated hospital 
(which includes a rural health clinic or federally qualified health 
center), academic medical center, or physician organization that 
specifies, among other things, the remuneration being offered; or (2) 
provide a written certification of a verifiable employment opportunity. 
Both options require documentation that the new employment would 
require the physician to move the location of his or her medical 
practice at least 25 miles and outside of the geographic area served by 
the hospital, rural health clinic, or federally qualified health center 
making the retention payment. The burden associated with this 
requirement is considered to be a usual and customary business practice 
and, as set forth in 5 CFR 1320.3(b)(2), is not subject to the PRA. In 
addition, the burden is not subject to the PRA under 5 CFR 1320.4(a) to 
the extent that the information is collected during the conduct of a 
criminal or civil action, or during the conduct of an administrative 
action, investigation or audit.
    Section 411.357(v) sets forth an exception for certain arrangements 
involving the donation of nonmonetary remuneration consisting of 
electronic prescribing items and services necessary and used solely to 
receive and transmit electronic prescription information. Section 
411.357(v)(7) requires that such arrangements be set forth in a written 
agreement that is signed by all parties, specifies the items or 
services being provided and the donor's cost of the items and services, 
and covers all of the electronic prescribing items and services to be 
provided by the donor. This requirement is met if all separate 
agreements between the donor and 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 burden associated with these 
requirements is the time and effort associated with drafting, signing, 
and maintaining the necessary documentation. The burden associated with 
these requirements is not subject to the PRA as stated under 5 CFR 
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5 
CFR 1320.4(a) to the extent that the information is collected during 
the conduct of a criminal or civil action, or during the conduct of an 
administrative action, investigation or audit.
    Section 411.357(w) addresses certain arrangements involving the 
donation of nonmonetary remuneration consisting of electronic health 
records software and information technology and training services 
necessary and used predominantly to create, maintain, transmit, or 
receive electronic health records. Specifically, Sec.  411.357(w)(7) 
requires that the arrangement be set forth in a written agreement that 
is signed by the parties and that specifies the items and services 
being provided, the donor's cost of the items, and the amount of the 
physician's contribution. The agreement must cover all of the 
electronic health records items and services to be provided by the 
donor. The burden associated with these

[[Page 51075]]

requirements is the time and effort associated with drafting, signing, 
and maintaining the necessary documentation. The burden associated with 
these requirements is not subject to the PRA as stated under 5 CFR 
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5 
CFR 1320.4(a) to the extent that the information is collected during 
the conduct of a criminal or civil action, or during the conduct of an 
administrative action, investigation or audit.

Reporting Requirements (Sec.  411.361)

    The burden associated with this section was discussed in detail in 
Phase II (69 FR 16054). The burden associated with the requirements in 
this section is not subject to the PRA as stated under both 5 CFR 
1320.3(b)(2) and 5 CFR 1320.4(a). However, this section does contain 
requirements that are not exempt from the PRA. As stated in Phase II, 
we quantified the burden associated with the reporting requirements in 
Sec.  411.361(c) through (e) (69 FR 16119-16121). While these 
requirements are subject to the PRA, they are currently approved under 
OMB control number 0938-0846, with an expiration date of November 30, 
2007.
    We have submitted a copy of this final rule to OMB for its review 
of the aforementioned information collection requirements.

XV. Regulatory Impact Statement

A. Overall Impact

    We have examined the impact of Phase III of this rulemaking 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), and Executive 
Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    While we cannot specify in advance the aggregate economic impact of 
this rule, we do not believe that the impact will approach $100 million 
or more annually. This Phase III final rule does not unsettle existing 
financial relationships or create further restrictions on financial 
relationships between physicians and health care facilities. Indeed, 
physicians and DHS entities have been complying with the requirements 
set forth in the physician self-referral prohibition for many years, 
specifically in regard to clinical laboratory services since 1992 and 
to referrals for all other DHS since 1995.
    Under Phase I, the physician self-referral prohibition was 
interpreted narrowly while the exceptions were interpreted broadly. 
Phase I also established additional regulatory exceptions for 
legitimate arrangements that would otherwise violate the prohibition. 
Phase I covered the following--
     Sections 1877(a) and 1877(b) of the Act (the general 
prohibition and the exceptions applicable to both ownership and 
compensation arrangements);
     The statutory definitions at section 1877(h) of the Act;
     Certain additional regulatory definitions; and
     New regulatory exceptions promulgated using the 
Secretary's authority under section 1877(b)(4) of the Act for certain 
arrangements involving the following--
     Academic medical centers;
     Implants furnished by an ambulatory surgery center;
     EPO and certain dialysis-related outpatient prescription 
drugs;
     Preventive screening tests, immunizations, and vaccines;
     Eyeglasses and contact lenses after cataract surgery;
     Nonmonetary compensation up to $300;
     Fair market value compensation;
     Medical staff incidental benefits;
     Risk-sharing arrangements;
     Compliance training; and
     Indirect compensation arrangements.
    Phase II was issued as an interim final rule with comment period on 
March 26, 2004. Under Phase II, we clarified certain regulatory 
definitions, broadened certain established exceptions, and created 
additional regulatory exceptions. Phase II also addressed the public 
comments provided on the Phase I regulations. Phase II covered the 
following--
     All provisions of section 1877 of the Act (namely, the 
exceptions for ownership and investment interests and the exceptions 
for various compensation arrangements);
     Additional regulatory definitions; and
     Additional new regulatory exceptions promulgated using the 
Secretary's authority under section 1877(b)(4) of the Act for certain 
arrangements involving the following--
     Temporary noncompliance with an applicable exception;
     Intra-family rural referrals;
     Charitable donations by a physician;
     Referral services;
     Obstetrical malpractice insurance subsidies;
     Professional courtesy;
     Retention payments in underserved areas; and
     Community-wide health information systems.
    This Phase III final rule primarily clarifies aspects of Phase I 
and Phase II based on public comments and, again, like Phase I and 
Phase II, increases the flexibility of the rule's application by 
expanding the breadth of the exceptions while continuing to protect 
against program and patient abuse. Phase III covers all of the 
provisions in section 1877 of the Act except those related to advisory 
opinions and civil monetary penalties. Among other things, this Phase 
III final rule--
     Eliminates the proposed safe harbor within the fair market 
value definition for physician compensation;
     Adds three new regulatory definitions;
     Considers a physician to ``stand in the shoes'' of a 
physician organization of which he or she is a member;
     Adds an alternative 45-minute transportation time test to 
the intra-family rural referrals exception;
     Adds a holdover provision in the exception for personal 
service arrangements on terms similar to those in the space and 
equipment lease contexts;
     Expands the geographic area into which a rural hospital 
may recruit a physician;
     With respect to a physician who is recruited to join 
another physician or practice in a rural area or HPSA to replace 
another physician who retired, died, or relocated within the previous 
12-month period, permits the allocation of costs by the physician or 
practice to the recruited physician not to exceed either (A) the actual 
additional incremental costs attributable to the recruited physician, 
or (B) the lower of a per capita allocation or 20 percent of the 
practice's aggregate costs;
     Allows practice restrictions that do not unreasonably 
restrict the recruited physician from practicing in the geographic area 
served by the hospital;
     Expands the nonmonetary compensation exception to allow 
entities to avoid what would otherwise be noncompliance with the 
exception in

[[Page 51076]]

certain circumstances, and to allow an entity with a formal medical 
staff to provide one local medical staff appreciation event per year; 
and
     Adds a written certification option as an alternative to 
the requirement for a bona fide written offer under the exception for 
retention payments in underserved areas.
    This Phase III final rule generally does not require existing 
financial relationships to be restructured; it merely further clarifies 
the language of Phase I and Phase II, and provides additional 
flexibility under the regulatory exceptions to enable parties to adjust 
noncompliant arrangements. Wherever possible, this Phase III final rule 
attempts to accommodate legitimate financial relationships while 
reducing the regulatory burden and continuing to protect against 
program and patient abuse. For these reasons, we conclude that this is 
not a major rule with an economically significant effect of $100 
million in any 1 year.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. Currently, there are 
approximately 1.1 million physicians, other health care practitioners, 
and medical suppliers that receive Medicare payment (http://www.cms.hhs.gov/CapMarketUpdates/Downloads/2006CMSstat.pdf).
    For purposes of the RFA, according to the latest numbers from the 
Small Business Administration's North American Industrial 
Classification System, approximately 100 percent of offices of 
physicians in the United States are considered small businesses 
according to the Small Business Administration's size standards with 
total revenues of $9 million or less and are considered small entities. 
Individuals and States are not included in the definition of a small 
entity. We determined that this Phase III final rule does not have a 
significant impact on small businesses because it does not increase 
regulatory burden, but rather reduces it. As noted above, this Phase 
III final rule generally does not require existing financial 
relationships to be restructured; it provides clarifications of the 
provisions found in Phase I and Phase II and provides additional 
flexibility under the regulatory exceptions to enable parties to adjust 
noncompliant arrangements. Overall, this Phase III final rule is very 
accommodating to legitimate financial relationships while reducing the 
regulatory burden and continuing to protect against program and patient 
abuse.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. The impact of this rule 
on small rural hospitals is minimal. In fact, several provisions of the 
rule benefit small rural hospitals by giving them more flexibility to 
maintain operations and remain competitive in an increasingly global 
health care market.
    Several provisions of this Phase III final rule benefit rural 
hospitals and rural health clinics. For example, the rule modifies the 
physician recruitment exception with respect to a hospital located in a 
rural area by expanding the geographic area into which a rural hospital 
may recruit a physician. Under the revised exception, a rural hospital 
may recruit a physician into an area composed of the lowest number of 
contiguous zip codes (and in some circumstances, noncontiguous zip 
codes) from which the hospital draws at least 90 percent of its 
inpatients. In addition, we have modified the recruitment exception to 
permit a hospital to offer a more generous income guarantee to a 
physician who is recruited into a rural area or HPSA to replace a 
physician who retired, relocated, or died within the previous 12 
months. The exception for physician recruitment is also expanded to 
include rural health clinics. Small rural hospitals also benefit under 
this rule from the significant expansion of their ability to offer 
retention payments to physicians. In summary, this Phase III final rule 
does not have a substantial negative impact on the operations of a 
substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. That threshold 
level is currently approximately $120 million. As discussed above, the 
revisions made to the Phase I and Phase II rules by this Phase III 
final rule will have an insignificant financial impact. As such, there 
are no anticipated expenditures under this rule that would result in 
expenditures to State, local or tribal governments, in the aggregate, 
or to the private sector, that would rise above the $120 million 
threshold.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We do not anticipate that this Phase III final rule will 
have a substantial effect on State or local governments, nor do we 
believe that this final rule preempts State law or draws Federalism 
issues into question.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act because, for the reasons identified above, we have 
determined, and we certify, that this Phase III final rule will not 
have a significant economic impact on a substantial number of small 
entities or a significant impact on the operations of a substantial 
number of small rural hospitals. For the benefit of the public, we 
discuss below the anticipated effects of the rule and the alternative 
regulatory options we considered.

B. Anticipated Effects

    This Phase III final rule primarily affects physicians and health 
care entities that furnish certain items and services (``designated 
health services'') to Medicare beneficiaries. We believe that this 
Phase III final rule addresses many of the industry's primary concerns 
with the existing regulatory scheme, is consistent with the statute's 
goals and directives, and protects beneficiaries of Federal health care 
programs. In particular, we have attempted to preserve the core 
statutory prohibition while providing sufficient flexibility to 
minimize the impact of the rule on many common business arrangements. 
For the reasons stated above, we do not anticipate that this rule will 
have a significant economic impact on a substantial number of small 
entities. Nevertheless, we wish to inform the public of what we regard 
as the major effects of this rulemaking. We discuss below some of the 
possible economic effects upon physicians and DHS entities. We also 
briefly discuss the effects of the rules on the Medicare and Medicaid 
programs as well as Medicare beneficiaries.
1. Effects on Physicians
    A physician can have a financial relationship with an entity either 
through an ownership or investment

[[Page 51077]]

interest in the entity, or through a compensation arrangement with the 
entity. Financial relationships include both direct and indirect 
ownership and investment interests and direct and indirect compensation 
arrangements. A physician who has (or whose immediate family member 
has) a financial relationship with an entity that does not qualify for 
an exception is prohibited under section 1877 of the Act from referring 
Medicare patients to that entity for the provision of DHS. The primary 
statutory sanctions for violating the physician self-referral 
prohibition are nonpayment of claims for DHS furnished as the result of 
a prohibited referral and the corresponding obligation to refund any 
amounts collected on those claims. These sanctions target the entities 
that furnish DHS, including physician group practices. Referring 
physicians may be sanctioned with the imposition of civil monetary 
penalties (CMPs) only for knowing violations of the statutory 
prohibition. Nevertheless, although referring physicians are not the 
primary targets of the sanctions for violating the statute, their 
financial relationships with DHS entities must comply with the statute 
and implementing regulations. Accordingly, this Phase III final rule 
may affect a physician's or group practice's decision to enter into a 
particular financial relationship and the manner in which the 
arrangement is structured.
    We have made every effort in Phase I, Phase II, and Phase III of 
this rulemaking to address the concerns of physicians and physician 
group practices while remaining faithful to the statute. We discuss 
below the major provisions of this rule that affect physicians.
    Two major changes under this Phase III final rule directly affect 
physicians. In Phase II, we clarified that a referring physician may be 
treated as ``standing in the shoes'' of his or her wholly-owned PC and 
we solicited comments on whether to permit a physician to ``stand in 
the shoes'' of a group practice of which he or she is a member. In this 
final rule, we are adopting a broader ``stand in the shoes'' provision 
than the provision proposed in Phase II. Essentially, a physician is 
deemed to stand in the shoes of his or her ``physician organization,'' 
which is defined to include a physician practice or group practice as 
well as a professional corporation of which the physician is the sole 
owner. A physician who stands in the shoes of a physician organization 
is deemed to have the same compensation arrangements (with the same 
parties and on the same terms) as the physician organization. For 
physicians, this will require some compensation arrangements to comply 
with an exception for direct compensation arrangements, rather than the 
indirect compensation arrangements exception. In general, the new stand 
in the shoes provision will ease compliance by simplifying the analysis 
of arrangements in which a physician organization is interposed between 
the referring physician and the entity furnishing DHS.
    The second major change relates to revisions to the physician 
recruitment exception. For hospitals located in rural areas, we have 
expanded the geographic area into which they may recruit a physician. 
Under the revised exception, a rural hospital may recruit a physician 
into an area composed of the lowest number of contiguous zip codes (and 
in some circumstances, noncontiguous zip codes) from which the hospital 
draws at least 90 percent of its inpatients. In addition, we have 
modified the recruitment exception to permit a hospital to offer a more 
generous income guarantee to a physician who is recruited into a rural 
area or HPSA to replace a physician who retired, relocated, or died 
within the previous 12 months. This change will make it easier for such 
physicians and physician practices to recruit new physicians.
    This Phase III final rule also allows a physician practice to 
impose on a recruited physician practice restrictions that do not 
unreasonably restrict the ability of the recruited physician to 
practice in the geographic area served by the recruiting hospital. 
Allowing certain kinds of practice restrictions makes it more likely 
that physician practices will take on new physicians and, as a result, 
hospitals will be able to attract new physicians and satisfy what would 
otherwise be unmet health care needs of their communities.
    Beyond the adoption of the more expansive ``stand in the shoes'' 
provision, and the revisions to the physician recruitment exception, 
the effect of the remaining changes on physicians under the Phase III 
final rule are relatively minor. Some of these changes include--
     Not retaining the safe harbor within the fair market value 
definition for hourly payments to physicians;
     Clarifying that group practices can compensate members, 
employed physicians, and other physicians in the group by directly 
taking into account the volume and value of items and services that are 
provided ``incident to'' the physicians' professional services, in 
certain circumstances; and
     Expanding the exception for retention payments in 
underserved areas to permit retention payments to be made in the case 
of a physician who does not have a bona fide written offer of 
recruitment or employment, provided that the physician certifies that 
he or she has a bona fide opportunity for future employment and the 
arrangement satisfies all other conditions of the exception.
    All of these changes ease the burden and cost of complying with the 
statutory prohibition by creating or implementing clear rules in such a 
way that the parties can determine more easily and with greater 
certainty whether their financial relationships comply with an 
exception. In addition, by expanding some definitions and exceptions, a 
greater number of legitimate arrangements can comply with the statute.
2. Effects on Other Health Care Providers and Suppliers
    As we stated above, the physician self-referral rules affect 
entities that furnish DHS by preventing them from receiving payment for 
services that they furnish as a result of a physician's prohibited 
referral. Entities may also be subject to other sanctions, including 
fines and exclusion from Federal health care programs, if they 
knowingly submit a claim in violation of the prohibition. While all 
physicians and DHS entities are subject to this rule, we lack the data 
to determine the number of entities whose financial relationships with 
physicians must be terminated or revised to comply with this Phase III 
final rule. However, we believe that the number will be fewer than we 
had anticipated in the prior physician self-referral rules for two 
reasons--
     First, hospitals and other DHS entities were required to 
restructure any non-compliant financial arrangements after Phase I and 
Phase II became effective (January 4, 2002 and July 26, 2004, 
respectively); and
     Second, this Phase III final rule does not adopt any 
changes that significantly narrow existing exceptions, or which would 
require termination or substantial modification of existing 
arrangements. As with Phase I and Phase II, we have interpreted the 
prohibition narrowly and the exceptions broadly under Phase III.
    We have made every effort in Phase I, Phase II, and in Phase III of 
this rulemaking to address the concerns of health care providers and 
suppliers while remaining faithful to the statute. We discuss below the 
major provisions of this rule that affect health care providers and 
suppliers.

[[Page 51078]]

    This Phase III final rule makes two substantive changes to the 
nonmonetary compensation exception that affect health care providers 
and suppliers: (1) The revised exception allows physicians to repay 
certain excess nonmonetary compensation within the same calendar year 
in which the excess compensation was received, thereby preserving 
compliance with the exception; and (2) entities are allowed, without 
regard to the nonmonetary compensation limit, to provide one local 
medical staff appreciation event per year for the entire medical staff 
(such as a holiday party).
    The Phase III final rule also--
     Revises the exception for charitable donations by a 
physician to clarify that the donation may neither be solicited nor 
offered in any manner that takes into account the volume or value of 
referrals;
     Revises the exception for compliance training programs to 
permit entities to provide compliance training programs for which CME 
is available, provided that compliance training is the primary purpose 
of the program; and
     Allows a hospital, rural health clinic, or federally 
qualified health center to make a retention payment to a physician if 
the hospital receives a written certification from the physician, in 
lieu of documentation of a written offer, that he or she has a bona 
fide opportunity for future employment that would require the physician 
to relocate his or her medical practice at least 25 miles and outside 
of the geographic area served by the entity.
    Again, to the extent that expanded exceptions permit additional 
legitimate arrangements to comply with the law, Phase III reduces the 
potential costs of restructuring such arrangements, and the 
consequences of noncompliance may be avoided entirely.
3. Effects on the Medicare and Medicaid Programs
    Section 1877 of the Act was enacted to address over-utilization, 
anti-competitive behavior, and other program abuses that occur when 
physicians have financial relationships with certain entities to which 
they refer Medicare or Medicaid patients. Physician financial 
arrangements may have some anti-competitive effects to the extent that 
those relationships discourage other providers from entering a market 
in which patients are primarily referred to physician-owned entities or 
DHS entities that maintain generous compensation arrangements with 
physicians. Anti-competitive behavior can increase program costs if the 
DHS entities with which physicians have financial relationships are 
favored over other, more cost-efficient providers or providers that 
furnish higher quality care. Over-utilization increases program costs 
because it causes Medicare (or Medicaid) to pay for more items or 
services than are medically necessary.
    We expect this Phase III final rule to generate savings to the 
program by minimizing anti-competitive business arrangements as well as 
over-utilization or other program abuse, similar to the effects of 
Phase I and Phase II. For example, we declined to eliminate the 
requirement in many exceptions that the arrangement at issue comply 
with the anti-kickback statute. We believe this requirement is 
necessary to protect the Medicare and Medicaid programs by preventing 
individuals or entities with fraudulent intent from paying for 
referrals.
    Phase III continues to balance the risk of program and patient 
abuse with the need to support legitimate business arrangements. For 
example, we are not excluding DHS ordered by anesthesiologists pursuant 
to a consultation from the definition of a referral under Phase III, 
because we are not satisfied that this modification poses no risk of 
program or patient abuse. While we cannot gauge with certainty the 
extent of these savings to the programs at this time, this Phase III 
final rule reflects our continued efforts to prohibit arrangements that 
have the potential to increase utilization improperly or promote anti-
competitive behavior.
4. Effects on Beneficiaries
    We have sought to ensure that this rule will not adversely impact 
the medical care of Federal health care program beneficiaries. In most 
cases, this Phase III final rule should not require substantial changes 
in delivery arrangements. This Phase III final rule makes no 
significant changes that have the potential to impede patient access to 
health care facilities and services. In fact, as noted above under the 
``Effects on the Medicare and Medicaid Programs,'' we believe that this 
final rule will help minimize anti-competitive behavior that can affect 
where a beneficiary receives health care services and possibly the 
quality of the services furnished. We believe the protections included 
under this Phase III final rule will minimize the number of medically 
unnecessary tests performed on, and items or services ordered for, 
Federal health care program beneficiaries.

C. Alternatives Considered

    After reviewing the voluminous number of comments we received, we 
considered in Phase I and Phase II many alternatives to accommodate the 
practical problems that commenters raised. As noted throughout the 
Phase III preamble, we have considered alternatives raised in comments 
received on Phase II. We have modified the regulations to accommodate 
those alternatives that comport with the statutory language and intent.
    For example, we received many comments suggesting that we revise 
our restrictions on retention payments to physicians in underserved 
areas in Sec.  411.357(t). Under Phase II, this exception protected 
retention payments made only: (1) By a hospital whose geographic 
service area was located in a HPSA; and (2) to a physician with a firm, 
written recruitment offer from an unrelated hospital or federally 
qualified health center (provided that certain other conditions were 
satisfied). Some commenters requested that we broaden the exception to 
permit retention payments when the recruitment offer is made by any 
entity, including a group practice. In addition, a number of commenters 
requested that we eliminate the requirement for a written offer; they 
suggested that the exception be revised to permit a retention payment 
made on the basis of a ``good faith belief'' that the physician may be 
recruited by another entity.
    After reviewing the comments, we decided to permit retention 
payments made in the case of a bona fide written recruitment offer from 
or written offer of employment with a hospital, academic medical 
center, or physician organization (which is defined to include a 
physician or group practice). We considered broadening the exception to 
permit retention payments made in the case of a recruitment or 
employment offer from any DHS entity, but rejected that alternative as 
unnecessarily broad and potentially subject to abuse.
    In addition, after reviewing the comments, we recognized that it is 
commonplace for hospitals to become cognizant of a verbal offer 
received by a physician and that, in order to ensure that hospitals can 
compete fairly, we should permit hospitals to act based upon a written 
certification provided by the physician. We considered the ``good faith 
belief'' standard suggested by the commenters, but rejected it because 
it would be too difficult to enforce and would be subject to abuse. 
Instead, we added a new option in Sec.  411.357(t)(2) to permit 
retention payments in the

[[Page 51079]]

absence of a written offer where a physician provides a written 
certification stating that the physician has a bona fide opportunity 
for future employment with a hospital, academic medical center, or 
physician organization that would require relocation of his or her 
medical practice at least 25 miles and outside the geographic area 
served by the hospital. The physician's certification must detail the 
opportunity presented (such as income and benefits), the steps taken by 
the physician to effectuate the employment opportunity, and other 
information sufficient for the hospital to verify the offer. We believe 
that our changes to the retention payments exception strike an 
appropriate balance between the industry's need for greater flexibility 
in making retention payments and our need to protect the Medicare and 
Medicaid programs from abuse while ensuring access to care in 
underserved areas.
    Many commenters to both the Phase I and Phase II rules requested 
clarification of the definition of ``indirect compensation 
arrangement.'' In Phase II, we clarified that a referring physician may 
be treated as ``standing in the shoes'' of his or her wholly-owned PC 
when the only intervening entity between the referring physician and 
the DHS entity is his or her PC. Phase II did not make any changes with 
respect to the issue of indirect compensation arrangements that are 
created when a group practice is the only intervening entity between a 
DHS entity and the referring physician. However, we did solicit 
comments in Phase II on whether to permit a physician to ``stand in the 
shoes'' of a group practice of which he or she is a member. Since the 
publication of the Phase II interim final rule and in light of the 
comments we have received, we have concluded that it is in the best 
program integrity interests of the Medicare and Medicaid programs to 
adopt a broader ``stand in the shoes'' provision. In this Phase III 
final rule, we have modified the regulations to deem a direct 
compensation arrangement to exist when the only intervening entity 
between a referring physician and a DHS entity is a group practice or 
other physician organization. This will require some compensation 
arrangements to be analyzed for compliance with an exception for direct 
compensation arrangements, rather than the exception for indirect 
compensation arrangements exception.
    We considered defining a ``physician organization'' to include 
entities other than a physician, physician practice, or group practice, 
but we have rejected that alternative because we are concerned about 
the potential for abuse and believe that such an expansion of the 
``stand in the shoes'' doctrine would benefit from additional public 
comment.
    We considered a number of alternatives suggested by commenters 
regarding the recruitment exception. The Phase II rule modified the 
physician recruitment exception to allow hospitals to recruit 
physicians into the geographic area served by the hospital, provided 
that certain conditions are satisfied. We defined ``geographic area 
served by the hospital'' to be the area composed of the lowest number 
of contiguous zip codes from which the hospital draws at least 75 
percent of its inpatients. Several commenters objected to the 
restriction on recruiting only into the ``geographic area served by the 
hospital,'' stating that the definition of that term prevents hospitals 
from recruiting physicians into outlying parts of their service area, 
where there is likely to be greater need. Additionally, some commenters 
pointed out that the restriction hurt rural hospitals and was very 
difficult for federally qualified health centers to satisfy.
    Based on the comments we received, we revised the exception to 
permit a rural hospital to recruit a physician into an area composed of 
the lowest number of contiguous zip codes (and in some circumstances, 
noncontiguous zip codes) from which the hospital draws at least 90 
percent of its inpatients. We considered expanding the definition of 
``geographic area served by the hospital'' to permit all hospitals to 
recruit physicians into a broader geographic area, but we rejected that 
alternative on the grounds that, in many cases, such recruitment 
arrangements would not be necessary to ensure access to care and may be 
abusive.
    As these examples demonstrate, our approach in this Phase III final 
rule is to address as many of the industry's concerns as possible. As 
noted throughout this preamble, we considered a variety of suggestions 
and alternatives, selecting only those that are consistent with the 
statute's goals and directives and that will protect Federal health 
care program beneficiaries' access to services.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 411

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

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare, Reporting and recordkeeping requirements.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR Chapter IV as follows:

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

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

    Authority: Secs. 1102, 1860 D-1 through 1860D-42, 1871, and 1877 
of the Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-
152, 1395hh, and 1395nn).

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

0
2. Section 411.350 is revised to read as follows:


Sec.  411.350  Scope of subpart.

    (a) This subpart implements section 1877 of the Act, which 
generally prohibits a physician from making a referral under Medicare 
for designated health services to an entity with which the physician or 
a member of the physician's immediate family has a financial 
relationship.
    (b) This subpart does not provide for exceptions or immunity from 
civil or criminal prosecution or other sanctions applicable under any 
State laws or under Federal law other than section 1877 of the Act. For 
example, although a particular arrangement involving a physician's 
financial relationship with an entity may not prohibit the physician 
from making referrals to the entity under this subpart, the arrangement 
may nevertheless violate another provision of the Act or other laws 
administered by HHS, the Federal Trade Commission, the Securities and 
Exchange Commission, the Internal Revenue Service, or any other Federal 
or State agency.
    (c) This subpart requires, with some exceptions, that certain 
entities furnishing covered services under Medicare report information 
concerning ownership, investment, or compensation arrangements in the 
form, in the manner, and at the times specified by CMS.

[[Page 51080]]

    (d) This subpart does not alter an individual's or entity's 
obligations under--
    (1) The rules regarding reassignment of claims (Sec.  424.80);
    (2) The rules regarding purchased diagnostic tests (Sec.  414.50);
    (3) The rules regarding payment for services and supplies incident 
to a physician's professional services (Sec.  410.26); or
    (4) Any other applicable Medicare laws, rules, or regulations.

0
3. Section 411.351 is revised to read as follows--


Sec.  411.351   Definitions.

    As used in this subpart, unless the context indicates otherwise:
    Centralized building means all or part of a building, including, 
for purposes of this subpart only, a mobile vehicle, van, or trailer 
that is owned or leased on a full-time basis (that is, 24 hours per 
day, 7 days per week, for a term of not less than 6 months) by a group 
practice and that is used exclusively by the group practice. Space in a 
building or a mobile vehicle, van, or trailer that is shared by more 
than one group practice, by a group practice and one or more solo 
practitioners, or by a group practice and another provider or supplier 
(for example, a diagnostic imaging facility) is not a centralized 
building for purposes of this subpart. This provision does not preclude 
a group practice from providing services to other providers or 
suppliers (for example, purchased diagnostic tests) in the group 
practice's centralized building. A group practice may have more than 
one centralized building.
    Clinical laboratory services means the biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings, including procedures to 
determine, measure, or otherwise describe the presence or absence of 
various substances or organisms in the body, as specifically identified 
by the List of CPT/HCPCS Codes. All services so identified on the List 
of CPT/HCPCS Codes are clinical laboratory services for purposes of 
this subpart. Any service not specifically identified as a clinical 
laboratory service on the List of CPT/HCPCS Codes is not a clinical 
laboratory service for purposes of this subpart.
    Consultation means a professional service furnished to a patient by 
a physician if the following conditions are satisfied:
    (1) The physician's opinion or advice regarding evaluation or 
management or both of a specific medical problem is requested by 
another physician.
    (2) The request and need for the consultation are documented in the 
patient's medical record.
    (3) After the consultation is provided, the physician prepares a 
written report of his or her findings, which is provided to the 
physician who requested the consultation.
    (4) With respect to radiation therapy services provided by a 
radiation oncologist, a course of radiation treatments over a period of 
time will be considered to be pursuant to a consultation, provided that 
the radiation oncologist communicates with the referring physician on a 
regular basis about the patient's course of treatment and progress.
    Designated health services (DHS) means any of the following 
services (other than those provided as emergency physician services 
furnished outside of the U.S.), as they are defined in this section:
    (1)(i) Clinical laboratory services.
    (ii) Physical therapy, occupational therapy, and speech-language 
pathology services.
    (iii) Radiology and certain other imaging services.
    (iv) Radiation therapy services and supplies.
    (v) Durable medical equipment and supplies.
    (vi) Parenteral and enteral nutrients, equipment, and supplies.
    (vii) Prosthetics, orthotics, and prosthetic devices and supplies.
    (viii) Home health services.
    (ix) Outpatient prescription drugs.
    (x) Inpatient and outpatient hospital services.
    (2) Except as otherwise noted in this subpart, the term 
``designated health services'' or DHS means only DHS payable, in whole 
or in part, by Medicare. DHS do not include services that are 
reimbursed by Medicare as part of a composite rate (for example, 
ambulatory surgical center services or SNF Part A payments), except to 
the extent the services listed in paragraphs (1)(i) through (1)(x) of 
this definition are themselves payable through a composite rate (for 
example, all services provided as home health services or inpatient and 
outpatient hospital services are DHS).
    Does not violate the anti-kickback statute, as used in this subpart 
only, means that the particular arrangement--
    (1)(i) Meets a safe harbor under the anti-kickback statute, as set 
forth at Sec.  1001.952 of this title, ``Exceptions'';
    (ii) Has been specifically approved by the OIG in a favorable 
advisory opinion issued to a party to the particular arrangement (for 
example, the entity furnishing DHS) with respect to the particular 
arrangement (and not a similar arrangement), provided that the 
arrangement is conducted in accordance with the facts certified by the 
requesting party and the opinion is otherwise issued in accordance with 
part 1008 of this title, ``Advisory Opinions by the OIG''; or
    (iii) Does not violate the anti-kickback provisions in section 
1128B(b) of the Act.
    (2) For purposes of this definition, a favorable advisory opinion 
means an opinion in which the OIG opines that--
    (i) The party's specific arrangement does not implicate the anti-
kickback statute, does not constitute prohibited remuneration, or fits 
in a safe harbor under Sec.  1001.952 of this title; or
    (ii) The party will not be subject to any OIG sanctions arising 
under the anti-kickback statute (for example, under sections 
1128A(a)(7) and 1128(b)(7) of the Act) in connection with the party's 
specific arrangement.
    Downstream contractor means a ``first tier contractor'' as defined 
at Sec.  1001.952(t)(2)(iii) or a ``downstream contractor'' as defined 
at Sec.  1001.952(t)(2)(i).
    Durable medical equipment (DME) and supplies has the meaning given 
in section 1861(n) of the Act and Sec.  414.202 of this chapter.
    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.
    Employee means any individual who, under the common law rules that 
apply in determining the employer-employee relationship (as applied for 
purposes of section 3121(d)(2) of the Internal Revenue Code of 1986), 
is considered to be employed by, or an employee of, an entity. 
(Application of these common law rules is discussed in 20 CFR 404.1007 
and 26 CFR 31.3121(d)-1(c).)
    Entity means--
    (1) A physician's sole practice or a practice of multiple 
physicians or any other person, sole proprietorship, public or private 
agency or trust, corporation, partnership, limited liability company, 
foundation, nonprofit corporation, or unincorporated association that 
furnishes DHS. An entity does not include the referring physician 
himself or herself, but does include his or her medical practice. A 
person or entity is considered to be furnishing DHS if it--

[[Page 51081]]

    (i) Is the person or entity to which CMS makes payment for the DHS, 
directly or upon assignment on the patient's behalf; or
    (ii) Is the person or entity to which the right to payment for the 
DHS has been reassigned in accordance with Sec.  424.80(b)(1) 
(employer) or (b)(2) (payment under a contractual arrangement) of this 
chapter (other than a health care delivery system that is a health plan 
(as defined at Sec.  1001.952(l) of this title), and other than any 
managed care organization (MCO), provider-sponsored organization (PSO), 
or independent practice association (IPA) with which a health plan 
contracts for services provided to plan enrollees).
    (2) A health plan, MCO, PSO, or IPA that employs a supplier or 
operates a facility that could accept reassignment from a supplier 
under Sec.  424.80(b)(1) and (b)(2) of this chapter, with respect to 
any DHS provided by that supplier.
    (3) For purposes of this subpart, ``entity'' does not include a 
physician's practice when it bills Medicare for a diagnostic test in 
accordance with Sec.  414.50 of this chapter (Physician billing for 
purchased diagnostic tests) and section 30.2.9 of the CMS Internet-only 
Manual, publication 100-04, Claims Processing Manual, Chapter 1 
(general billing requirements), as amended or replaced from time to 
time.
    Fair market value means the value in arm's-length transactions, 
consistent with the general market value. ``General market value'' 
means the price that an asset would bring as the result of bona fide 
bargaining between well-informed buyers and sellers who are not 
otherwise in a position to generate business for the other party, or 
the compensation that would be included in a service agreement as the 
result of bona fide bargaining between well-informed parties to the 
agreement who are not otherwise in a position to generate business for 
the other party, on the date of acquisition of the asset or at the time 
of the service agreement. Usually, the fair market price is the price 
at which bona fide sales have been consummated for assets of like type, 
quality, and quantity in a particular market at the time of 
acquisition, or the compensation that has been included in bona fide 
service agreements with comparable terms at the time of the agreement, 
where the price or compensation has not been determined in any manner 
that takes into account the volume or value of anticipated or actual 
referrals. With respect to rentals and leases described in Sec.  
411.357(a), (b), and (l) (as to equipment leases only), ``fair market 
value'' means the value of rental property for general commercial 
purposes (not taking into account its intended use). In the case of a 
lease of space, this value may not be adjusted to reflect the 
additional value the prospective lessee or lessor would attribute to 
the proximity or convenience to the lessor when the lessor is a 
potential source of patient referrals to the lessee. For purposes of 
this definition, a rental payment does not take into account intended 
use if it takes into account costs incurred by the lessor in developing 
or upgrading the property or maintaining the property or its 
improvements.
    Home health services means the services described in section 
1861(m) of the Act and part 409, subpart E of this chapter.
    Hospital means any entity that qualifies as a ``hospital'' under 
section 1861(e) of the Act, as a ``psychiatric hospital'' under section 
1861(f) of the Act, or as a ``critical access hospital'' under section 
1861(mm)(1) of the Act, and refers to any separate legally organized 
operating entity plus any subsidiary, related entity, or other entities 
that perform services for the hospital's patients and for which the 
hospital bills. However, a ``hospital'' does not include entities that 
perform services for hospital patients ``under arrangements'' with the 
hospital.
    HPSA means, for purposes of this subpart, an area designated as a 
health professional shortage area under section 332(a)(1)(A) of the 
Public Health Service Act for primary medical care professionals (in 
accordance with the criteria specified in part 5 of this title).
    Immediate family member or member of a physician's immediate family 
means husband or wife; birth or adoptive parent, child, or sibling; 
stepparent, stepchild, stepbrother, or stepsister; father-in-law, 
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or 
grandchild.
    ``Incident to'' services or services ``incident to'' means those 
services and supplies that meet the requirements of section 
1861(s)(2)(A) of the Act, Sec.  410.26 of this chapter, and sections 
60, 60.1, 60.2, and 60.3 of the CMS Internet-only Manual, publication 
100-02, Medicare Benefit Policy Manual, Chapter 15 (covered medical and 
other health services), as amended or replaced from time to time.
    Inpatient hospital services means those services defined in section 
1861(b) of the Act and Sec.  409.10(a) and (b) of this chapter and 
include inpatient psychiatric hospital services listed in section 
1861(c) of the Act and inpatient critical access hospital services, as 
defined in section 1861(mm)(2) of the Act. ``Inpatient hospital 
services'' do not include emergency inpatient services provided by a 
hospital located outside of the U.S. and covered under the authority in 
section 1814(f)(2) of the Act and part 424, subpart H of this chapter, 
or emergency inpatient services provided by a nonparticipating hospital 
within the U.S., as authorized by section 1814(d) of the Act and 
described in part 424, subpart G of this chapter. ``Inpatient hospital 
services'' also do not include dialysis furnished by a hospital that is 
not certified to provide end-stage renal dialysis (ESRD) services under 
subpart U of part 405 of this chapter. ``Inpatient hospital services'' 
include services that are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``Inpatient 
hospital services'' do not include professional services performed by 
physicians, physician assistants, nurse practitioners, clinical nurse 
specialists, certified nurse midwives, and certified registered nurse 
anesthetists and qualified psychologists if Medicare reimburses the 
services independently and not as part of the inpatient hospital 
service (even if they are billed by a hospital under an assignment or 
reassignment).
    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.
    Laboratory means an entity furnishing biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings. These examinations also 
include procedures to determine, measure, or otherwise describe the 
presence or absence of various substances or organisms in the body. 
Entities only collecting or preparing specimens (or both) or only 
serving as a mailing service and not performing testing are not 
considered laboratories.
    List of CPT/HCPCS Codes means the list of CPT and HCPCS codes that 
identifies those items and services that are DHS under section 1877 of 
the Act or that may qualify for certain exceptions under section 1877 
of the Act. It is updated annually, as published

[[Page 51082]]

in the Federal Register, and is posted on the CMS Web site at http://www.cms.hhs.gov/PhysicianSelfReferral/11_List_of_Codes.asp#TopOfPage.
    Locum tenens physician means a physician who substitutes (that is, 
``stands in the shoes'') in exigent circumstances for a physician, in 
accordance with applicable reassignment rules and regulations, 
including section 30.2.11 of the CMS Internet-only Manual, publication 
100-04, Claims Processing Manual, Chapter 1 (general billing 
requirements), as amended or replaced from time to time.
    Member of the group or member of a group practice means, for 
purposes of this subpart, a direct or indirect physician owner of a 
group practice (including a physician whose interest is held by his or 
her individual professional corporation or by another entity), a 
physician employee of the group practice (including a physician 
employed by his or her individual professional corporation that has an 
equity interest in the group practice), a locum tenens physician (as 
defined in this section), or an on-call physician while the physician 
is providing on-call services for members of the group practice. A 
physician is a member of the group during the time he or she furnishes 
``patient care services'' to the group as defined in this section. An 
independent contractor or a leased employee is not a member of the 
group (unless the leased employee meets the definition of an 
``employee'' under this Sec.  411.351).
    Outpatient hospital services means the therapeutic, diagnostic, and 
partial hospitalization services listed under sections 1861(s)(2)(B) 
and (s)(2)(C) of the Act; outpatient services furnished by a 
psychiatric hospital, as defined in section 1861(f) of the Act; and 
outpatient critical access hospital services, as defined in section 
1861(mm)(3) of the Act. ``Outpatient hospital services'' do not include 
emergency services furnished by nonparticipating hospitals and covered 
under the conditions described in section 1835(b) of the Act and 
subpart G of part 424 of this chapter. ``Outpatient hospital services'' 
include services that are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``Outpatient 
hospital services'' do not include professional services performed by 
physicians, physician assistants, nurse practitioners, clinical nurse 
specialists, certified nurse midwives, certified registered nurse 
anesthetists, and qualified psychologists if Medicare reimburses the 
services independently and not as part of the outpatient hospital 
service (even if they are billed by a hospital under an assignment or 
reassignment).
    Outpatient prescription drugs means all drugs covered by Medicare 
Part B or Part D.
    Parenteral and enteral nutrients, equipment, and supplies means the 
following services (including all HCPCS level 2 codes for these 
services):
    (1) Parenteral nutrients, equipment, and supplies, meaning those 
items and supplies needed to provide nutriment to a patient with 
permanent, severe pathology of the alimentary tract that does not allow 
absorption of sufficient nutrients to maintain strength commensurate 
with the patient's general condition, as described in section 108.2 of 
the National Coverage Determinations Manual, as amended or replaced 
from time to time; and
    (2) Enteral nutrients, equipment, and supplies, meaning items and 
supplies needed to provide enteral nutrition to a patient with a 
functioning gastrointestinal tract who, due to pathology to or 
nonfunction of the structures that normally permit food to reach the 
digestive tract, cannot maintain weight and strength commensurate with 
his or her general condition, as described in section 108.2 of the 
National Coverage Determinations Manual, as amended or replaced from 
time to time.
    Patient care services means any task(s) performed by a physician in 
the group practice that address the medical needs of specific patients 
or patients in general, regardless of whether they involve direct 
patient encounters or generally benefit a particular practice. Patient 
care services can include, for example, the services of physicians who 
do not directly treat patients, such as time spent by a physician 
consulting with other physicians or reviewing laboratory tests, or time 
spent training staff members, arranging for equipment, or performing 
administrative or management tasks.
    Physical therapy, occupational therapy, and speech-language 
pathology services means those particular services so identified on the 
List of CPT/HCPCS Codes. All services so identified on the List of CPT/
HCPCS Codes are physical therapy, occupational therapy, and speech-
language pathology services for purposes of this subpart. Any service 
not specifically identified as physical therapy, occupational therapy 
or speech-language pathology on the List of CPT/HCPCS Codes is not a 
physical therapy, occupational therapy, or speech-language pathology 
service for purposes of this subpart. The list of codes identifying 
physical therapy, occupational therapy, and speech-language pathology 
services for purposes of this regulation includes the following:
    (1) Physical therapy services, meaning those outpatient physical 
therapy services (including speech-language pathology services) 
described in section 1861(p) of the Act that are covered under Medicare 
Part A or Part B, regardless of who provides them, if the services 
include--
    (i) Assessments, function tests, and measurements of strength, 
balance, endurance, range of motion, and activities of daily living;
    (ii) Therapeutic exercises, massage, and use of physical medicine 
modalities, assistive devices, and adaptive equipment;
    (iii) Establishment of a maintenance therapy program for an 
individual whose restoration potential has been reached; however, 
maintenance therapy itself is not covered as part of these services; or
    (iv) Speech-language pathology services that are for the diagnosis 
and treatment of speech, language, and cognitive disorders that include 
swallowing and other oral-motor dysfunctions.
    (2) Occupational therapy services, meaning those services described 
in section 1861(g) of the Act that are covered under Medicare Part A or 
Part B, regardless of who provides them, if the services include--
    (i) Teaching of compensatory techniques to permit an individual 
with a physical or cognitive impairment or limitation to engage in 
daily activities;
    (ii) Evaluation of an individual's level of independent 
functioning;
    (iii) Selection and teaching of task-oriented therapeutic 
activities to restore sensory-integrative function; or
    (iv) Assessment of an individual's vocational potential, except 
when the assessment is related solely to vocational rehabilitation.
    Physician means a doctor of medicine or osteopathy, a doctor of 
dental surgery or dental medicine, a doctor of podiatric medicine, a 
doctor of optometry, or a chiropractor, as defined in section 1861(r) 
of the Act.
    Physician in the group practice means a member of the group 
practice, as well as an independent contractor physician during the 
time the independent contractor is furnishing patient care services (as 
defined in this section) for the group practice under a contractual 
arrangement directly with the group practice to provide services to the 
group practice's patients in the group practice's facilities. The 
contract must

[[Page 51083]]

contain the same restrictions on compensation that apply to members of 
the group practice under Sec.  411.352(g) (or the contract must satisfy 
the requirements of the personal service arrangements exception in 
Sec.  411.357(d)), and the independent contractor's arrangement with 
the group practice must comply with the reassignment rules in Sec.  
424.80(b)(2) of this chapter (see also section 30.2.11 of the CMS 
Internet-only Manual, publication 100-04, Claims Processing Manual, 
Chapter 1 (general billing requirements), as amended or replaced from 
time to time). Referrals from an independent contractor who is a 
physician in the group practice are subject to the prohibition on 
referrals in Sec.  411.353(a), and the group practice is subject to the 
limitation on billing for those referrals in Sec.  411.353(b).
    Physician incentive plan means any compensation arrangement between 
an entity (or downstream contractor) and a physician or physician group 
that may directly or indirectly have the effect of reducing or limiting 
services furnished with respect to individuals enrolled with the 
entity.
    Physician organization means a physician (including a professional 
corporation of which the physician is the sole owner), a physician 
practice, or a group practice that complies with the requirements of 
Sec.  411.352.
    Plan of care means the establishment by a physician of a course of 
diagnosis or treatment (or both) for a particular patient, including 
the ordering of services.
    Professional courtesy means the provision of free or discounted 
health care items or services to a physician or his or her immediate 
family members or office staff.
    Prosthetics, Orthotics, and Prosthetic Devices and Supplies means 
the following services (including all HCPCS level 2 codes for these 
items and services that are covered by Medicare):
    (1) Orthotics, meaning leg, arm, back, and neck braces, as listed 
in section 1861(s)(9) of the Act.
    (2) Prosthetics, meaning artificial legs, arms, and eyes, as 
described in section 1861(s)(9) of the Act.
    (3) Prosthetic devices, meaning devices (other than a dental 
device) listed in section 1861(s)(8) of the Act that replace all or 
part of an internal body organ, including colostomy bags, and one pair 
of conventional eyeglasses or contact lenses furnished subsequent to 
each cataract surgery with insertion of an intraocular lens.
    (4) Prosthetic supplies, meaning supplies that are necessary for 
the effective use of a prosthetic device (including supplies directly 
related to colostomy care).
    Radiation therapy services and supplies means those particular 
services and supplies, including (effective January 1, 2007) 
therapeutic nuclear medicine services and supplies, so identified on 
the List of CPT/HCPCS Codes. All services and supplies so identified on 
the List of CPT/HCPCS Codes are radiation therapy services and supplies 
for purposes of this subpart. Any service or supply not specifically 
identified as radiation therapy services or supplies on the List of 
CPT/HCPCS Codes is not a radiation therapy service or supply for 
purposes of this subpart. The list of codes identifying radiation 
therapy services and supplies is based on section 1861(s)(4) of the Act 
and Sec.  410.35 of this chapter.
    Radiology and certain other imaging services means those particular 
services so identified on the List of CPT/HCPCS Codes. All services so 
identified on the List of CPT/HCPCS Codes are radiology and certain 
other imaging services for purposes of this subpart. Any service not 
specifically identified as radiology and certain other imaging services 
on the List of CPT/HCPCS Codes is not a radiology or certain other 
imaging service for purposes of this subpart. The list of codes 
identifying radiology and certain other imaging services includes the 
professional and technical components of any diagnostic test or 
procedure using x-rays, ultrasound, computerized axial tomography, 
magnetic resonance imaging, nuclear medicine (effective January 1, 
2007), or other imaging services. All codes identified as radiology and 
certain other imaging services are covered under section 1861(s)(3) of 
the Act and Sec.  410.32 and Sec.  410.34 of this chapter, but do not 
include--
    (1) X-ray, fluoroscopy, or ultrasound procedures that require the 
insertion of a needle, catheter, tube, or probe through the skin or 
into a body orifice; and
    (2) Radiology procedures that are integral to the performance of a 
nonradiological medical procedure and performed)--
    (i) During the nonradiological medical procedure; or
    (ii) Immediately following the nonradiological medical procedure 
when necessary to confirm placement of an item placed during the 
nonradiological medical procedure.
    Referral--
    (1) Means either of the following:
    (i) Except as provided in paragraph (2) of this definition, the 
request by a physician for, or ordering of, or the certifying or 
recertifying of the need for, any designated health service for which 
payment may be made under Medicare Part B, including a request for a 
consultation with another physician and any test or procedure ordered 
by or to be performed by (or under the supervision of) that other 
physician, but not including any designated health service personally 
performed or provided by the referring physician. A designated health 
service is not personally performed or provided by the referring 
physician if it is performed or provided by any other person, 
including, but not limited to, the referring physician's employees, 
independent contractors, or group practice members.
    (ii) Except as provided in paragraph (2) of this definition, a 
request by a physician that includes the provision of any designated 
health service for which payment may be made under Medicare, the 
establishment of a plan of care by a physician that includes the 
provision of such a designated health service, or the certifying or 
recertifying of the need for such a designated health service, but not 
including any designated health service personally performed or 
provided by the referring physician. A designated health service is not 
personally performed or provided by the referring physician if it is 
performed or provided by any other person including, but not limited 
to, the referring physician's employees, independent contractors, or 
group practice members.
    (2) Does not include a request by a pathologist for clinical 
diagnostic laboratory tests and pathological examination services, by a 
radiologist for diagnostic radiology services, and by a radiation 
oncologist for radiation therapy or ancillary services necessary for, 
and integral to, the provision of radiation therapy, if--
    (i) The request results from a consultation initiated by another 
physician (whether the request for a consultation was made to a 
particular physician or to an entity with which the physician is 
affiliated); and
    (ii) The tests or services are furnished by or under the 
supervision of the pathologist, radiologist, or radiation oncologist, 
or under the supervision of a pathologist, radiologist, or radiation 
oncologist, respectively, in the same group practice as the 
pathologist, radiologist, or radiation oncologist.
    (3) Can be in any form, including, but not limited to, written, 
oral, or electronic.
    Referring physician means a physician who makes a referral as 
defined in this section or who directs another person or entity to make 
a referral or who controls referrals made

[[Page 51084]]

by another person or entity. A referring physician and the professional 
corporation of which he or she is a sole owner are the same for 
purposes of this subpart.
    Remuneration means any payment or other benefit made directly or 
indirectly, overtly or covertly, in cash or in kind, except that the 
following are not considered remuneration for purposes of this section:
    (1) The forgiveness of amounts owed for inaccurate tests or 
procedures, mistakenly performed tests or procedures, or the correction 
of minor billing errors.
    (2) The furnishing of items, devices, or supplies (not including 
surgical items, devices, or supplies) that are used solely to collect, 
transport, process, or store specimens for the entity furnishing the 
items, devices, or supplies or are used solely to order or communicate 
the results of tests or procedures for the entity.
    (3) A payment made by an insurer or a self-insured plan (or a 
subcontractor of the insurer or self-insured plan) to a physician to 
satisfy a claim, submitted on a fee-for-service basis, for the 
furnishing of health services by that physician to an individual who is 
covered by a policy with the insurer or by the self-insured plan, if--
    (i) The health services are not furnished, and the payment is not 
made, under a contract or other arrangement between the insurer or the 
self-insured plan (or a subcontractor of the insurer or self-insured 
plan) and the physician;
    (ii) The payment is made to the physician on behalf of the covered 
individual and would otherwise be made directly to the individual; and
    (iii) The amount of the payment is set in advance, does not exceed 
fair market value, and is not determined in a manner that takes into 
account directly or indirectly the volume or value of any referrals.
    Rural area means an area that is not an urban area as defined at 
Sec.  412.62(f)(1)(ii) of this chapter.
    Same building means a structure with, or combination of structures 
that share, a single street address as assigned by the U.S. Postal 
Service, excluding all exterior spaces (for example, lawns, courtyards, 
driveways, parking lots) and interior loading docks or parking garages. 
For purposes of this section, the ``same building'' does not include a 
mobile vehicle, van, or trailer.
    Specialty hospital means a subsection (d) hospital (as defined in 
section 1886(d)(1)(B) of the Act) that is primarily or exclusively 
engaged in the care and treatment of one of the following:
    (1) Patients with a cardiac condition;
    (2) Patients with an orthopedic condition;
    (3) Patients receiving a surgical procedure; or
    (4) Any other specialized category of services that the Secretary 
designates as inconsistent with the purpose of permitting physician 
ownership and investment interests in a hospital. A ``specialty 
hospital'' does not include any hospital--
    (1) Determined by the Secretary to be in operation before or under 
development as of November 18, 2003;
    (2) For which the number of physician investors at any time on or 
after such date is no greater than the number of such investors as of 
such date;
    (3) For which the type of categories described above is no 
different at any time on or after such date than the type of such 
categories as of such date;
    (4) For which any increase in the number of beds occurs only in the 
facilities on the main campus of the hospital and does not exceed 50 
percent of the number of beds in the hospital as of November 18, 2003, 
or 5 beds, whichever is greater; and
    (5) That meets such other requirements as the Secretary may 
specify.
    Transaction means an instance or process of two or more persons or 
entities doing business. An isolated financial transaction means one 
involving a single payment between two or more persons or entities or a 
transaction that involves integrally related installment payments 
provided that--
    (1) The total aggregate payment is fixed before the first payment 
is made and does not take into account, directly or indirectly, the 
volume or value of referrals or other business generated by the 
referring physician; and
    (2) The payments are immediately negotiable or are guaranteed by a 
third party, or secured by a negotiable promissory note, or subject to 
a similar mechanism to ensure payment even in the event of default by 
the purchaser or obligated party.

0
3a. Section 411.352 is revised to read as follows:


Sec.  411.352  Group practice.

    For purposes of this subpart, a group practice is a physician 
practice that meets the following conditions:
    (a) Single legal entity. The group practice must consist of a 
single legal entity operating primarily for the purpose of being a 
physician group practice in any organizational form recognized by the 
State in which the group practice achieves its legal status, including, 
but not limited to, a partnership, professional corporation, limited 
liability company, foundation, nonprofit corporation, faculty practice 
plan, or similar association. The single legal entity may be organized 
by any party or parties, including, but not limited to, physicians, 
health care facilities, or other persons or entities (including, but 
not limited to, physicians individually incorporated as professional 
corporations). The single legal entity may be organized or owned (in 
whole or in part) by another medical practice, provided that the other 
medical practice is not an operating physician practice (and regardless 
of whether the medical practice meets the conditions for a group 
practice under this section). For purposes of this subpart, a single 
legal entity does not include informal affiliations of physicians 
formed substantially to share profits from referrals, or separate group 
practices under common ownership or control through a physician 
practice management company, hospital, health system, or other entity 
or organization. A group practice that is otherwise a single legal 
entity may itself own subsidiary entities. A group practice operating 
in more than one State will be considered to be a single legal entity 
notwithstanding that it is composed of multiple legal entities, 
provided that--
    (1) The States in which the group practice is operating are 
contiguous (although each State need not be contiguous to every other 
State);
    (2) The legal entities are absolutely identical as to ownership, 
governance, and operation; and
    (3) Organization of the group practice into multiple entities is 
necessary to comply with jurisdictional licensing laws of the States in 
which the group practice operates.
    (b) Physicians. The group practice must have at least two 
physicians who are members of the group (whether employees or direct or 
indirect owners), as defined at Sec.  411.351.
    (c) Range of care. Each physician who is a member of the group, as 
defined at Sec.  411.351, must furnish substantially the full range of 
patient care services that the physician routinely furnishes, including 
medical care, consultation, diagnosis, and treatment, through the joint 
use of shared office space, facilities, equipment, and personnel.
    (d) Services furnished by group practice members. (1) Except as 
otherwise provided in paragraphs (d)(3), (d)(4), (d)(5), and (d)(6) of 
this section, substantially all of the patient care services of the 
physicians who are members of the group (that is, at least

[[Page 51085]]

75 percent of the total patient care services of the group practice 
members) must be furnished through the group and billed under a billing 
number assigned to the group, and the amounts received must be treated 
as receipts of the group. Patient care services must be measured by one 
of the following:
    (i) The total time each member spends on patient care services 
documented by any reasonable means (including, but not limited to, time 
cards, appointment schedules, or personal diaries). (For example, if a 
physician practices 40 hours a week and spends 30 hours a week on 
patient care services for a group practice, the physician has spent 75 
percent of his or her time providing patient care services for the 
group.)
    (ii) Any alternative measure that is reasonable, fixed in advance 
of the performance of the services being measured, uniformly applied 
over time, verifiable, and documented.
    (2) The data used to calculate compliance with this substantially 
all test and related supportive documentation must be made available to 
the Secretary upon request.
    (3) The substantially all test set forth in paragraph (d)(1) of 
this section does not apply to any group practice that is located 
solely in a HPSA, as defined at Sec.  411.351.
    (4) For a group practice located outside of a HPSA (as defined at 
Sec.  411.351), any time spent by a group practice member providing 
services in a HPSA should not be used to calculate whether the group 
practice has met the substantially all test, regardless of whether the 
member's time in the HPSA is spent in a group practice, clinic, or 
office setting.
    (5) During the start up period (not to exceed 12 months) that 
begins on the date of the initial formation of a new group practice, a 
group practice must make a reasonable, good faith effort to ensure that 
the group practice complies with the substantially all test requirement 
set forth in paragraph (d)(1) of this section as soon as practicable, 
but no later than 12 months from the date of the initial formation of 
the group practice. This paragraph (d)(5) does not apply when an 
existing group practice admits a new member or reorganizes.
    (6)(i) If the addition to an existing group practice of a new 
member who would be considered to have relocated his or her medical 
practice under Sec.  411.357(e)(2) would result in the existing group 
practice not meeting the substantially all test set forth in paragraph 
(d)(1) of this section, the group practice will have 12 months 
following the addition of the new member to come back into full 
compliance, provided that--
    (A) For the 12-month period the group practice is fully compliant 
with the substantially all test if the new member is not counted as a 
member of the group for purposes of Sec.  411.352; and
    (B) The new member's employment with, or ownership interest in, the 
group practice is documented in writing no later than the beginning of 
his or her new employment, ownership, or investment.
    (ii) This paragraph (d)(6) does not apply when an existing group 
practice reorganizes or admits a new member who is not relocating his 
or her medical practice.
    (e) Distribution of expenses and income. The overhead expenses of, 
and income from, the practice must be distributed according to methods 
that are determined before the receipt of payment for the services 
giving rise to the overhead expense or producing the income. Nothing in 
this section prevents a group practice from adjusting its compensation 
methodology prospectively, subject to restrictions on the distribution 
of revenue from DHS under Sec.  411.352(i).
    (f) Unified business. (1) The group practice must be a unified 
business having at least the following features:
    (i) Centralized decision-making by a body representative of the 
group practice that maintains effective control over the group's assets 
and liabilities (including, but not limited to, budgets, compensation, 
and salaries); and
    (ii) Consolidated billing, accounting, and financial reporting.
    (2) Location and specialty-based compensation practices are 
permitted with respect to revenues derived from services that are not 
DHS and may be permitted with respect to revenues derived from DHS 
under Sec.  411.352(i).
    (g) Volume or value of referrals. No physician who is a member of 
the group practice directly or indirectly receives compensation based 
on the volume or value of his or her referrals, except as provided in 
Sec.  411.352(i).
    (h) Physician-patient encounters. Members of the group must 
personally conduct no less than 75 percent of the physician-patient 
encounters of the group practice.
    (i) Special rule for productivity bonuses and profit shares. (1) A 
physician in the group practice may be paid a share of overall profits 
of the group, provided that the share is not determined in any manner 
that is directly related to the volume or value of referrals of DHS by 
the physician. A physician in the group practice may be paid a 
productivity bonus based on services that he or she has personally 
performed, or services ``incident to'' such personally performed 
services, or both, provided that the bonus is not determined in any 
manner that is directly related to the volume or value of referrals of 
DHS by the physician (except that the bonus may directly relate to the 
volume or value of DHS referrals by the physician if the referrals are 
for services ``incident to'' the physician's personally performed 
services).
    (2) Overall profits means the group's entire profits derived from 
DHS payable by Medicare or Medicaid or the profits derived from DHS 
payable by Medicare or Medicaid of any component of the group practice 
that consists of at least five physicians. Overall profits should be 
divided in a reasonable and verifiable manner that is not directly 
related to the volume or value of the physician's referrals of DHS. The 
share of overall profits will be deemed not to relate directly to the 
volume or value of referrals if one of the following conditions is met:
    (i) The group's profits are divided per capita (for example, per 
member of the group or per physician in the group).
    (ii) Revenues derived from DHS are distributed based on the 
distribution of the group practice's revenues attributed to services 
that are not DHS payable by any Federal health care program or private 
payer.
    (iii) Revenues derived from DHS constitute less than 5 percent of 
the group practice's total revenues, and the allocated portion of those 
revenues to each physician in the group practice constitutes 5 percent 
or less of his or her total compensation from the group.
    (3) A productivity bonus must be calculated in a reasonable and 
verifiable manner that is not directly related to the volume or value 
of the physician's referrals of DHS. A productivity bonus will be 
deemed not to relate directly to the volume or value of referrals of 
DHS if one of the following conditions is met:
    (i) The bonus is based on the physician's total patient encounters 
or relative value units (RVUs). (The methodology for establishing RVUs 
is set forth in Sec.  414.22 of this chapter.)
    (ii) The bonus is based on the allocation of the physician's 
compensation attributable to services that are not DHS payable by any 
Federal health care program or private payer.
    (iii) Revenues derived from DHS are less than 5 percent of the 
group practice's total revenues, and the allocated portion of those 
revenues to each physician in the group practice constitutes 5 percent 
or less of his or her

[[Page 51086]]

total compensation from the group practice.
    (4) Supporting documentation verifying the method used to calculate 
the profit share or productivity bonus under paragraphs (i)(2) and 
(i)(3) of this section, and the resulting amount of compensation, must 
be made available to the Secretary upon request.

0
4. Section 411.353 is revised to read as follows:


Sec.  411.353  Prohibition on certain referrals by physicians and 
limitations on billing.

    (a) Prohibition on referrals. Except as provided in this subpart, a 
physician who has a direct or indirect financial relationship with an 
entity, or who has an immediate family member who has a direct or 
indirect financial relationship with the entity, may not make a 
referral to that entity for the furnishing of DHS for which payment 
otherwise may be made under Medicare. A physician's prohibited 
financial relationship with an entity that furnishes DHS is not imputed 
to his or her group practice or its members or its staff. However, a 
referral made by a physician's group practice, its members, or its 
staff may be imputed to the physician if the physician directs the 
group practice, its members, or its staff to make the referral or if 
the physician controls referrals made by his or her group practice, its 
members, or its staff.
    (b) Limitations on billing. An entity that furnishes DHS pursuant 
to a referral that is prohibited by paragraph (a) of this section may 
not present or cause to be presented a claim or bill to the Medicare 
program or to any individual, third party payer, or other entity for 
the DHS performed pursuant to the prohibited referral.
    (c) Denial of payment. Except as provided in paragraph (e) of this 
section, no Medicare payment may be made for a designated health 
service that is furnished pursuant to a prohibited referral.
    (d) Refunds. An entity that collects payment for a designated 
health service that was performed pursuant to a prohibited referral 
must refund all collected amounts on a timely basis, as defined at 
Sec.  1003.101 of this title.
    (e) Exception for certain entities. Payment may be made to an 
entity that submits a claim for a designated health service if--
    (1) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the identity of the 
physician who made the referral of the designated health service to the 
entity; and
    (2) The claim otherwise complies with all applicable Federal and 
State laws, rules, and regulations.
    (f) Exception for certain arrangements involving temporary 
noncompliance. (1) Except as provided in paragraphs (f)(2), (f)(3), and 
(f)(4) of this section, an entity may submit a claim or bill and 
payment may be made to an entity that submits a claim or bill for a 
designated health service if--
    (i) The financial relationship between the entity and the referring 
physician fully complied with an applicable exception under Sec.  
411.355, Sec.  411.356, or Sec.  411.357 for at least 180 consecutive 
calendar days immediately preceding the date on which the financial 
relationship became noncompliant with the exception;
    (ii) The financial relationship has fallen out of compliance with 
the exception for reasons beyond the control of the entity, and the 
entity promptly takes steps to rectify the noncompliance; and
    (iii) The financial relationship does not violate the anti-kickback 
statute (section 1128B(b) of the Act), and the claim or bill otherwise 
complies with all applicable Federal and State laws, rules, and 
regulations.
    (2) Paragraph (f)(1) of this section applies only to DHS furnished 
during the period of time it takes the entity to rectify the 
noncompliance, which must not exceed 90 consecutive calendar days 
following the date on which the financial relationship became 
noncompliant with an exception.
    (3) Paragraph (f)(1) may be used by an entity only once every 3 
years with respect to the same referring physician.
    (4) Paragraph (f)(1) does not apply if the exception with which the 
financial relationship previously complied was Sec.  411.357(k) or (m).

0
4a. Section 411.354 is revised to read as follows:


Sec.  411.354  Financial relationship, compensation, and ownership or 
investment interest.

    (a) Financial relationships. (1) Financial relationship means--
    (i) A direct or indirect ownership or investment interest (as 
defined in paragraph (b) of this section) in any entity that furnishes 
DHS; or
    (ii) A direct or indirect compensation arrangement (as defined in 
paragraph (c) of this section) with an entity that furnishes DHS.
    (2) Types of financial relationships. (i) A direct financial 
relationship exists if remuneration passes between the referring 
physician (or a member of his or her immediate family) and the entity 
furnishing DHS without any intervening persons or entities between the 
entity furnishing DHS and the referring physician (or a member of his 
or her immediate family).
    (ii) An indirect financial relationship exists under the conditions 
described in paragraphs (b)(5) and (c)(2) of this section.
    (b) Ownership or investment interest. An ownership or investment 
interest in the entity may be through equity, debt, or other means, and 
includes an interest in an entity that holds an ownership or investment 
interest in any entity that furnishes DHS.
    (1) An ownership or investment interest includes, but is not 
limited to, stock, stock options other than those described in Sec.  
411.354(b)(3)(ii), partnership shares, limited liability company 
memberships, as well as loans, bonds, or other financial instruments 
that are secured with an entity's property or revenue or a portion of 
that property or revenue.
    (2) An ownership or investment interest in a subsidiary company is 
neither an ownership or investment interest in the parent company, nor 
in any other subsidiary of the parent, unless the subsidiary company 
itself has an ownership or investment interest in the parent or such 
other subsidiaries. It may, however, be part of an indirect financial 
relationship.
    (3) Ownership and investment interests do not include, among other 
things--
    (i) An interest in a retirement plan;
    (ii) Stock options and convertible securities received as 
compensation until the stock options are exercised or the convertible 
securities are converted to equity (before this time the stock options 
or convertible securities are compensation arrangements as defined in 
paragraph (c) of this section);
    (iii) An unsecured loan subordinated to a credit facility (which is 
a compensation arrangement as defined in paragraph (c) of this 
section);
    (iv) An ``under arrangements'' contract between a hospital and an 
entity owned by one or more physicians (or a group of physicians) 
providing DHS ``under arrangements'' with the hospital (such a contract 
is a compensation arrangement as defined in paragraph (c) of this 
section); or
    (v) A security interest held by a physician in equipment sold by 
the physician to a hospital and financed through a loan from the 
physician to the hospital (such an interest is a compensation 
arrangement as defined in paragraph (c) of this section).
    (4) An ownership or investment interest that meets an exception set 
forth in Sec.  411.355 or Sec.  411.356 need not also

[[Page 51087]]

meet an exception for compensation arrangements set forth in Sec.  
411.357 with respect to profit distributions, dividends, or interest 
payments on secured obligations.
    (5)(i) An indirect ownership or investment interest exists if--
    (A) Between the referring physician (or immediate family member) 
and the entity furnishing DHS there exists an unbroken chain of any 
number (but no fewer than one) of persons or entities having ownership 
or investment interests; and
    (B) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) has some ownership or 
investment interest (through any number of intermediary ownership or 
investment interests) in the entity furnishing the DHS.
    (ii) An indirect ownership or investment interest exists even 
though the entity furnishing DHS does not know, or acts in reckless 
disregard or deliberate ignorance of, the precise composition of the 
unbroken chain or the specific terms of the ownership or investment 
interests that form the links in the chain.
    (iii) Notwithstanding anything in this paragraph (b)(5), common 
ownership or investment in an entity does not, in and of itself, 
establish an indirect ownership or investment interest by one common 
owner or investor in another common owner or investor.
    (iv) An indirect ownership or investment interest requires an 
unbroken chain of ownership interests between the referring physician 
and the entity furnishing DHS such that the referring physician has an 
indirect ownership or investment interest in the entity furnishing DHS.
    (c) Compensation arrangement. A compensation arrangement is any 
arrangement involving remuneration, direct or indirect, between a 
physician (or a member of a physician's immediate family) and an 
entity. An ``under arrangements'' contract between a hospital and an 
entity providing DHS ``under arrangements'' to the hospital creates a 
compensation arrangement for purposes of these regulations. A 
compensation arrangement does not include the portion of any business 
arrangement that consists solely of the remuneration described in 
section 1877(h)(1)(C) of the Act and in paragraphs (1) through (3) of 
the definition of the term ``remuneration'' at Sec.  411.351. (However, 
any other portion of the arrangement may still constitute a 
compensation arrangement.)
    (1)(i) A direct compensation arrangement exists if remuneration 
passes between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS without any intervening 
persons or entities.
    (ii) A physician is deemed to have a direct compensation 
arrangement with an entity furnishing DHS if the only intervening 
entity between the physician and the entity furnishing DHS is his or 
her physician organization. In such situations, for purposes of this 
section, the physician is deemed to stand in the shoes of the physician 
organization.
    (2) An indirect compensation arrangement exists if--
    (i) Between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS there exists an 
unbroken chain of any number (but not fewer than one) of persons or 
entities that have financial relationships (as defined in paragraph (a) 
of this section) between them (that is, each link in the chain has 
either an ownership or investment interest or a compensation 
arrangement with the preceding link);
    (ii) The referring physician (or immediate family member) receives 
aggregate compensation from the person or entity in the chain with 
which the physician (or immediate family member) has a direct financial 
relationship that varies with, or takes into account, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS, regardless of whether the 
individual unit of compensation satisfies the special rules on unit-
based compensation under paragraphs (d)(2) or (d)(3) of this section. 
If the financial relationship between the physician (or immediate 
family member) and the person or entity in the chain with which the 
referring physician (or immediate family member) has a direct financial 
relationship is an ownership or investment interest, the determination 
whether the aggregate compensation varies with, or takes into account, 
the volume or value of referrals or other business generated by the 
referring physician for the entity furnishing the DHS will be measured 
by the nonownership or noninvestment interest closest to the referring 
physician (or immediate family member). (For example, if a referring 
physician has an ownership interest in company A, which owns company B, 
which has a compensation arrangement with company C, which has a 
compensation arrangement with entity D that furnishes DHS, we would 
look to the aggregate compensation between company B and company C for 
purposes of this paragraph (c)(2)(ii)); and
    (iii) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) receives aggregate 
compensation that varies with, or takes into account, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS.
    (iv) For purposes of paragraph (c)(2)(i), a physician is deemed to 
``stand in the shoes'' of his or her physician organization.
    (3)(i) For purposes of paragraphs (c)(1)(ii) and (c)(2)(iv), a 
physician who ``stands in the shoes'' of his or her physician 
organization is deemed to have the same compensation arrangements (with 
the same parties and on the same terms) as the physician organization. 
For purposes of applying the exceptions in Sec.  411.355 and Sec.  
411.357 to arrangements described in paragraphs (c)(1)(i) and 
(c)(2)(i), the ``parties'' to the arrangements are considered to be the 
entity furnishing DHS and the physician organization (including all 
members, employees, or independent contractor physicians).
    (ii) The provisions of paragraphs (c)(1)(ii) and (c)(2)(iv) need 
not apply during the original term or current renewal term of an 
arrangement that satisfied the requirements of Sec.  411.357(p) as of 
September 5, 2007.
    (d) Special rules on compensation. The following special rules 
apply only to compensation under section 1877 of the Act and subpart J 
of this part:
    (1) Compensation is considered ``set in advance'' if the aggregate 
compensation, a time-based or per-unit of service-based (whether per-
use or per-service) amount, or a specific formula for calculating the 
compensation is set in an agreement between the parties before the 
furnishing of the items or services for which the compensation is to be 
paid. The formula for determining the compensation must be set forth in 
sufficient detail so that it can be objectively verified, and the 
formula may not be changed or modified during the course of the 
agreement in any manner that takes into account the volume or value of 
referrals or other business generated by the referring physician.
    (2) Unit-based compensation (including time-based or per-unit of 
service-based compensation) is deemed not to take into account ``the 
volume or value of referrals'' if the compensation

[[Page 51088]]

is fair market value for services or items actually provided and does 
not vary during the course of the compensation arrangement in any 
manner that takes into account referrals of DHS.
    (3) Unit-based compensation (including time-based or per-unit of 
service-based compensation) is deemed not to take into account ``other 
business generated between the parties,'' provided that the 
compensation is fair market value for items and services actually 
provided and does not vary during the course of the compensation 
arrangement in any manner that takes into account referrals or other 
business generated by the referring physician, including private pay 
health care business (except for services personally performed by the 
referring physician, which are not considered ``other business 
generated'' by the referring physician).
    (4) A physician's compensation from a bona fide employer or under a 
managed care contract or other contract for personal services may be 
conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier, provided that the compensation arrangement 
meets all of the following conditions. The compensation arrangement:
    (i) Is set in advance for the term of the agreement.
    (ii) Is consistent with fair market value for services performed 
(that is, the payment does not take into account the volume or value of 
anticipated or required referrals).
    (iii) Otherwise complies with an applicable exception under Sec.  
411.355 or Sec.  411.357.
    (iv) Complies with both of the following conditions:
    (A) The requirement to make referrals to a particular provider, 
practitioner, or supplier is set forth in a written agreement signed by 
the parties.
    (B) The requirement to make referrals to a particular provider, 
practitioner, or supplier does not apply if the patient expresses a 
preference for a different provider, practitioner, or supplier; the 
patient's insurer determines the provider, practitioner, or supplier; 
or the referral is not in the patient's best medical interests in the 
physician's judgment.
    (v) The required referrals relate solely to the physician's 
services covered by the scope of the employment or the contract, and 
the referral requirement is reasonably necessary to effectuate the 
legitimate business purposes of the compensation arrangement. In no 
event may the physician be required to make referrals that relate to 
services that are not provided by the physician under the scope of his 
or her employment or contract.

0
5. Section 411.355 is revised to read as follows:


Sec.  411.355  General exceptions to the referral prohibition related 
to both ownership/investment and compensation.

    The prohibition on referrals set forth in Sec.  411.353 does not 
apply to the following types of services:
    (a) Physician services. (1) Physician services as defined in Sec.  
410.20(a) of this chapter that are furnished--
    (i) Personally by another physician who is a member of the 
referring physician's group practice or is a physician in the same 
group practice (as defined at Sec.  411.351) as the referring 
physician; or
    (ii) Under the supervision of another physician who is a member of 
the referring physician's group practice or is a physician in the same 
group practice (as defined at Sec.  411.351) as the referring 
physician, provided that the supervision complies with all other 
applicable Medicare payment and coverage rules for the physician 
services.
    (2) For purposes of paragraph (a) of this section, ``physician 
services'' include only those ``incident to'' services (as defined at 
Sec.  411.351) that are physician services under Sec.  410.20(a) of 
this chapter.
    (b) In-office ancillary services. Services (including certain items 
of durable medical equipment (DME), as defined in paragraph (b)(4) of 
this section, and infusion pumps that are DME (including external 
ambulatory infusion pumps), but excluding all other DME and parenteral 
and enteral nutrients, equipment, and supplies (such as infusion pumps 
used for PEN)), that meet the following conditions:
    (1) They are furnished personally by one of the following 
individuals:
    (i) The referring physician.
    (ii) A physician who is a member of the same group practice as the 
referring physician.
    (iii) An individual who is supervised by the referring physician 
or, if the referring physician is in a group practice, by another 
physician in the group practice, provided that the supervision complies 
with all other applicable Medicare payment and coverage rules for the 
services.
    (2) They are furnished in one of the following locations:
    (i) The same building (as defined at Sec.  411.351), but not 
necessarily in the same space or part of the building, in which all of 
the conditions of paragraph (b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C) 
of this section are satisfied:
    (A)(1) The referring physician or his or her group practice (if 
any) has an office that is normally open to the physician's or group's 
patients for medical services at least 35 hours per week; and
    (2) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 30 hours per week. The 30 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (B)(1) The patient receiving the DHS usually receives physician 
services from the referring physician or members of the referring 
physician's group practice (if any);
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician regularly practices medicine and 
furnishes physician services to patients at least 6 hours per week. The 
6 hours must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (C)(1) The referring physician is present and orders the DHS during 
a patient visit on the premises as set forth in paragraph 
(b)(2)(i)(C)(2) of this section or the referring physician or a member 
of the referring physician's group practice (if any) is present while 
the DHS is furnished during occupancy of the premises as set forth in 
paragraph (b)(2)(i)(C)(2) of this section;
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 6 hours per week. The 6 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS.
    (ii) A centralized building (as defined at Sec.  411.351) that is 
used by the group practice for the provision of some or all

[[Page 51089]]

of the group practice's clinical laboratory services.
    (iii) A centralized building (as defined at Sec.  411.351) that is 
used by the group practice for the provision of some or all of the 
group practice's DHS (other than clinical laboratory services).
    (3) They are billed by one of the following:
    (i) The physician performing or supervising the service.
    (ii) The group practice of which the performing or supervising 
physician is a member under a billing number assigned to the group 
practice.
    (iii) The group practice if the supervising physician is a 
``physician in the group practice'' (as defined at Sec.  411.351) under 
a billing number assigned to the group practice.
    (iv) An entity that is wholly owned by the performing or 
supervising physician or by that physician's group practice under the 
entity's own billing number or under a billing number assigned to the 
physician or group practice.
    (v) An independent third party billing company acting as an agent 
of the physician, group practice, or entity specified in paragraphs 
(b)(3)(i) through (b)(3)(iv) of this section under a billing number 
assigned to the physician, group practice, or entity, provided that the 
billing arrangement meets the requirements of Sec.  424.80(b)(5) of 
this chapter. For purposes of this paragraph (b)(3), a group practice 
may have, and bill under, more than one Medicare billing number, 
subject to any applicable Medicare program restrictions.
    (4) For purposes of paragraph (b) of this section, DME covered by 
the in-office ancillary services exception means canes, crutches, 
walkers and folding manual wheelchairs, and blood glucose monitors, 
that meet the following conditions:
    (i) The item is one that a patient requires for the purpose of 
ambulating, a patient uses in order to depart from the physician's 
office, or is a blood glucose monitor (including one starter set of 
test strips and lancets, consisting of no more than 100 of each). A 
blood glucose monitor may be furnished only by a physician or employee 
of a physician or group practice that also furnishes outpatient 
diabetes self-management training to the patient.
    (ii) The item is furnished in a building that meets the ``same 
building'' requirements in the in-office ancillary services exception 
as part of the treatment for the specific condition for which the 
patient-physician encounter occurred.
    (iii) The item is furnished personally by the physician who ordered 
the DME, by another physician in the group practice, or by an employee 
of the physician or the group practice.
    (iv) A physician or group practice that furnishes the DME meets all 
DME supplier standards set forth in Sec.  424.57(c) of this chapter.
    (v) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (vi) All other requirements of the in-office ancillary services 
exception in paragraph (b) of this section are met.
    (5) A designated health service is ``furnished'' for purposes of 
paragraph (b) of this section in the location where the service is 
actually performed upon a patient or where an item is dispensed to a 
patient in a manner that is sufficient to meet the applicable Medicare 
payment and coverage rules.
    (6) Special rule for home care physicians. In the case of a 
referring physician whose principal medical practice consists of 
treating patients in their private homes, the ``same building'' 
requirements of paragraph (b)(2)(i) of this section are met if the 
referring physician (or a qualified person accompanying the physician, 
such as a nurse or technician) provides the DHS contemporaneously with 
a physician service that is not a designated health service provided by 
the referring physician to the patient in the patient's private home. 
For purposes of paragraph (b)(5) of this section only, a private home 
does not include a nursing, long-term care, or other facility or 
institution, except that a patient may have a private home in an 
assisted living or independent living facility.
    (c) Services furnished by an organization (or its contractors or 
subcontractors) to enrollees. Services furnished by an organization (or 
its contractors or subcontractors) to enrollees of one of the following 
prepaid health plans (not including services provided to enrollees in 
any other plan or line of business offered or administered by the same 
organization):
    (1) An HMO or a CMP in accordance with a contract with CMS under 
section 1876 of the Act and part 417, subparts J through M of this 
chapter.
    (2) A health care prepayment plan in accordance with an agreement 
with CMS under section 1833(a)(1)(A) of the Act and part 417, subpart U 
of this chapter.
    (3) An organization that is receiving payments on a prepaid basis 
for Medicare enrollees through a demonstration project under section 
402(a) of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or 
under section 222(a) of the Social Security Amendments of 1972 (42 
U.S.C. 1395b-1 note).
    (4) A qualified HMO (within the meaning of section 1310(d) of the 
Public Health Service Act).
    (5) A coordinated care plan (within the meaning of section 
1851(a)(2)(A) of the Act) offered by an organization in accordance with 
a contract with CMS under section 1857 of the Act and part 422 of this 
chapter.
    (6) A MCO contracting with a State under section 1903(m) of the 
Act.
    (7) A prepaid inpatient health plan (PIHP) or prepaid ambulance 
health plan (PAHP) contracting with a State under part 438 of this 
chapter.
    (8) A health insuring organization (HIO) contracting with a State 
under part 438, subpart D of this chapter.
    (9) An entity operating under a demonstration project under 
sections 1115(a), 1915(a), 1915(b), or 1932(a) of the Act.
    (d) [Reserved]
    (e) Academic medical centers. (1) Services provided by an academic 
medical center if all of the following conditions are met:
    (i) The referring physician--
    (A) Is a bona fide employee of a component of the academic medical 
center on a full-time or substantial part-time basis. (A ``component'' 
of an academic medical center means an affiliated medical school, 
faculty practice plan, hospital, teaching facility, institution of 
higher education, departmental professional corporation, or nonprofit 
support organization whose primary purpose is supporting the teaching 
mission of the academic medical center.) The components need not be 
separate legal entities;
    (B) Is licensed to practice medicine in the State(s) in which he or 
she practices medicine;
    (C) Has a bona fide faculty appointment at the affiliated medical 
school or at one or more of the educational programs at the accredited 
academic hospital (as defined at Sec.  411.355(e)(3)); and
    (D) Provides either substantial academic services or substantial 
clinical teaching services (or a combination of academic services and 
clinical teaching services) for which the faculty member receives 
compensation as part of his or her employment relationship with the 
academic medical center. Parties should use a reasonable and consistent 
method for calculating a physician's academic services and clinical 
teaching services. A physician will be deemed to meet this requirement 
if he or she spends at least 20 percent of his or her professional time 
or 8 hours per week providing

[[Page 51090]]

academic services or clinical teaching services (or a combination of 
academic services or clinical teaching services). A physician who does 
not spend at least 20 percent of his or her professional time or 8 
hours per week providing academic services or clinical teaching 
services (or a combination of academic services or clinical teaching 
services) is not precluded from qualifying under this paragraph 
(e)(1)(i)(D).
    (ii) The compensation paid to the referring physician must meet all 
of the following conditions:
    (A) The total compensation paid by each academic medical center 
component to the referring physician is set in advance.
    (B) In the aggregate, the compensation paid by all academic medical 
center components to the referring physician does not exceed fair 
market value for the services provided.
    (C) The total compensation paid by each academic medical center 
component is not determined in a manner that takes into account the 
volume or value of any referrals or other business generated by the 
referring physician within the academic medical center.
    (iii) The academic medical center must meet all of the following 
conditions:
    (A) All transfers of money between components of the academic 
medical center must directly or indirectly support the missions of 
teaching, indigent care, research, or community service.
    (B) The relationship of the components of the academic medical 
center must be set forth in one or more written agreements or other 
written documents that have been adopted by the governing body of each 
component. If the academic medical center is one legal entity, this 
requirement will be satisfied if transfers of funds between components 
of the academic medical center are reflected in the routine financial 
reports covering the components.
    (C) All money paid to a referring physician for research must be 
used solely to support bona fide research or teaching and must be 
consistent with the terms and conditions of the grant.
    (iv) The referring physician's compensation arrangement does not 
violate the anti-kickback statute (section 1128B(b) of the Act), or any 
Federal or State law or regulation governing billing or claims 
submission.
    (2) The ``academic medical center'' for purposes of this section 
consists of--
    (i) An accredited medical school (including a university, when 
appropriate) or an accredited academic hospital (as defined at Sec.  
411.355(e)(3));
    (ii) One or more faculty practice plans affiliated with the medical 
school, the affiliated hospital(s), or the accredited academic 
hospital; and
    (iii) One or more affiliated hospitals in which a majority of the 
physicians on the medical staff consists of physicians who are faculty 
members and a majority of all hospital admissions is made by physicians 
who are faculty members. The hospital for purposes of this paragraph 
(e)(2)(iii) may be the same hospital that satisfies the requirement of 
paragraph (e)(2)(i) of this section. For purposes of this paragraph, a 
faculty member is a physician who is either on the faculty of the 
affiliated medical school or on the faculty of one or more of the 
educational programs at the accredited academic hospital. In meeting 
this paragraph (e)(2)(iii), faculty from any affiliated medical school 
or accredited academic hospital education program may be aggregated, 
and residents and non-physician professionals need not be counted. Any 
faculty member may be counted, including courtesy and volunteer 
faculty. For purposes of determining whether the majority of physicians 
on the medical staff consists of faculty members, the affiliated 
hospital must include or exclude all individual physicians with the 
same class of privileges at the affiliated hospital (for example, 
physicians holding courtesy privileges).
    (3) An accredited academic hospital for purposes of this section 
means a hospital or a health system that sponsors four or more approved 
medical education programs.
    (f) Implants furnished by an ASC. Implants furnished by an ASC, 
including, but not limited to, cochlear implants, intraocular lenses, 
and other implanted prosthetics, implanted prosthetic devices, and 
implanted DME that meet the following conditions:
    (1) The implant is implanted by the referring physician or a member 
of the referring physician's group practice in an ASC that is certified 
by Medicare under part 416 of this chapter and with which the referring 
physician has a financial relationship.
    (2) The implant is implanted in the patient during a surgical 
procedure paid by Medicare to the ASC as an ASC procedure under Sec.  
416.65 of this chapter.
    (3) The arrangement for the furnishing of the implant does not 
violate the anti-kickback statute (section 1128B(b) of the Act).
    (4) All billing and claims submission for the implants does not 
violate any Federal or State law or regulation governing billing or 
claims submission.
    (5) The exception set forth in this paragraph (f) does not apply to 
any financial relationships between the referring physician and any 
entity other than the ASC in which the implant is furnished to, and 
implanted in, the patient.
    (g) EPO and other dialysis-related drugs. EPO and other dialysis-
related drugs that meet the following conditions:
    (1) The EPO and other dialysis-related drugs are furnished in or by 
an ESRD facility. For purposes of this paragraph, ``EPO and other 
dialysis-related drugs'' means certain outpatient prescription drugs 
that are required for the efficacy of dialysis and identified as 
eligible for this exception on the List of CPT/HCPCS Codes; and 
``furnished'' means that the EPO or dialysis-related drugs are 
administered to a patient in the ESRD facility or, in the case of EPO 
or Aranesp (or equivalent drug identified on the List of CPT/HCPCS 
Codes) only, are dispensed by the ESRD facility for use at home.
    (2) The arrangement for the furnishing of the EPO and other 
dialysis-related drugs does not violate the anti-kickback statute 
(section 1128B(b) of the Act).
    (3) All billing and claims submission for the EPO and other 
dialysis-related drugs does not violate any Federal or State law or 
regulation governing billing or claims submission.
    (4) The exception set forth in this paragraph does not apply to any 
financial relationship between the referring physician and any entity 
other than the ESRD facility that furnishes the EPO and other dialysis-
related drugs to the patient.
    (h) Preventive screening tests, immunizations, and vaccines. 
Preventive screening tests, immunizations, and vaccines that meet the 
following conditions:
    (1) The preventive screening tests, immunizations, and vaccines are 
subject to CMS-mandated frequency limits.
    (2) The arrangement for the provision of the preventive screening 
tests, immunizations, and vaccines does not violate the anti-kickback 
statute (section 1128B(b) of the Act).
    (3) All billing and claims submission for the preventive screening 
tests, immunizations, and vaccines does not violate any Federal or 
State law or regulation governing billing or claims submission.
    (4) The preventive screening tests, immunizations, and vaccines 
must be covered by Medicare and must be listed as eligible for this 
exception on the List of CPT/HCPCS Codes.

[[Page 51091]]

    (i) Eyeglasses and contact lenses following cataract surgery. 
Eyeglasses and contact lenses that are covered by Medicare when 
furnished to patients following cataract surgery that meet the 
following conditions:
    (1) The eyeglasses or contact lenses are provided in accordance 
with the coverage and payment provisions set forth in Sec.  
410.36(a)(2)(ii) and Sec.  414.228 of this chapter, respectively.
    (2) The arrangement for the furnishing of the eyeglasses or contact 
lenses does not violate the anti-kickback statute (section 1128B(b) of 
the Act).
    (3) All billing and claims submission for the eyeglasses or contact 
lenses does not violate any Federal or State law or regulation 
governing billing or claims submission.
    (j) Intra-family rural referrals. (1) Services provided pursuant to 
a referral from a referring physician to his or her immediate family 
member or to an entity furnishing DHS with which the immediate family 
member has a financial relationship, if all of the following conditions 
are met:
    (i) The patient who is referred resides in a rural area as defined 
at Sec.  411.351 of this subpart;
    (ii) Except as provided in paragraph (j)(1)(iii) of this section, 
in light of the patient's condition, no other person or entity is 
available to furnish the services in a timely manner within 25 miles of 
or 45 minutes transportation time from the patient's residence;
    (iii) In the case of services furnished to patients where they 
reside (for example, home health services or DME), no other person or 
entity is available to furnish the services in a timely manner in light 
of the patient's condition; and
    (iv) The financial relationship does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission;
    (2) The referring physician or the immediate family member must 
make reasonable inquiries as to the availability of other persons or 
entities to furnish the DHS. However, neither the referring physician 
nor the immediate family member has any obligation to inquire as to the 
availability of persons or entities located farther than 25 miles of or 
45 minutes transportation time from (whichever test the referring 
physician utilized for purposes of paragraph (j)(1)(ii)) the patient's 
residence.

0
6. Section 411.356 is revised to read as follows:


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

    For purposes of Sec.  411.353, the following ownership or 
investment interests do not constitute a financial relationship:
    (a) Publicly-traded securities. Ownership of investment securities 
(including shares or bonds, debentures, notes, or other debt 
instruments) that at the time the DHS referral was made could be 
purchased on the open market and that meet the requirements of 
paragraphs (a)(1) and (a)(2) of this section.
    (1) They are either--
    (i) Listed for trading on the New York Stock Exchange, the American 
Stock Exchange, or any regional exchange in which quotations are 
published on a daily basis, or foreign securities listed on a 
recognized foreign, national, or regional exchange in which quotations 
are published on a daily basis; or
    (ii) Traded under an automated interdealer quotation system 
operated by the National Association of Securities Dealers.
    (2) They are in a corporation that had stockholder equity exceeding 
$75 million at the end of the corporation's most recent fiscal year or 
on average during the previous 3 fiscal years. ``Stockholder equity'' 
is the difference in value between a corporation's total assets and 
total liabilities.
    (b) Mutual funds. Ownership of shares in a regulated investment 
company as defined in section 851(a) of the Internal Revenue Code of 
1986, if the company had, at the end of its most recent fiscal year, or 
on average during the previous 3 fiscal years, total assets exceeding 
$75 million.
    (c) Specific providers. Ownership or investment interest in the 
following entities, for purposes of the services specified:
    (1) A rural provider, in the case of DHS furnished in a rural area 
(as defined at Sec.  411.351 of this subpart) by the provider. A 
``rural provider'' is an entity that furnishes substantially all (not 
less than 75 percent) of the DHS that it furnishes to residents of a 
rural area and, for the 18-month period beginning on December 8, 2003 
(or such other period as Congress may specify), is not a specialty 
hospital.
    (2) A hospital that is located in Puerto Rico, in the case of DHS 
furnished by such a hospital.
    (3) A hospital that is located outside of Puerto Rico, in the case 
of DHS furnished by such a hospital, if--
    (i) The referring physician is authorized to perform services at 
the hospital;
    (ii) Effective for the 18-month period beginning on December 8, 
2003 (or such other period as Congress may specify), the hospital is 
not a specialty hospital; and
    (iii) The ownership or investment interest is in the entire 
hospital and not merely in a distinct part or department of the 
hospital.

0
7. Section 411.357 is revised to read as follows:


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

    For purposes of Sec.  411.353, the following compensation 
arrangements do not constitute a financial relationship:
    (a) Rental of office space. Payments for the use of office space 
made by a lessee to a lessor if there is a rental or lease agreement 
that meets the following requirements:
    (1) The agreement is set out in writing, is signed by the parties, 
and specifies the premises it covers.
    (2) The term of the agreement is at least 1 year. To meet this 
requirement, if the agreement is terminated during the term with or 
without cause, the parties may not enter into a new agreement during 
the first year of the original term of the agreement.
    (3) The space rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee (and is not shared with or used by the lessor or any 
person or entity related to the lessor), except that the lessee may 
make payments for the use of space consisting of common areas if the 
payments do not exceed the lessee's pro rata share of expenses for the 
space based upon the ratio of the space used exclusively by the lessee 
to the total amount of space (other than common areas) occupied by all 
persons using the common areas.
    (4) The rental charges over the term of the agreement are set in 
advance and are consistent with fair market value.
    (5) The rental charges over the term of the agreement are not 
determined in a manner that takes into account the volume or value of 
any referrals or other business generated between the parties.
    (6) The agreement would be commercially reasonable even if no 
referrals were made between the lessee and the lessor.
    (7) A holdover month-to-month rental for up to 6 months immediately 
following the expiration of an agreement of at least 1 year that met 
the conditions of this paragraph (a) satisfies the requirements of this 
paragraph (a),

[[Page 51092]]

provided that the holdover rental is on the same terms and conditions 
as the immediately preceding agreement.
    (b) Rental of equipment. Payments made by a lessee to a lessor for 
the use of equipment under the following conditions:
    (1) A rental or lease agreement is set out in writing, is signed by 
the parties, and specifies the equipment it covers.
    (2) The equipment rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee and is not shared with or used by the lessor or any 
person or entity related to the lessor.
    (3) The agreement provides for a term of rental or lease of at 
least 1 year. To meet this requirement, if the agreement is terminated 
during the term with or without cause, the parties may not enter into a 
new agreement during the first year of the original term of the 
agreement.
    (4) The rental charges over the term of the agreement are set in 
advance, are consistent with fair market value, and are not determined 
in a manner that takes into account the volume or value of any 
referrals or other business generated between the parties.
    (5) The agreement would be commercially reasonable even if no 
referrals were made between the parties.
    (6) A holdover month-to-month rental for up to 6 months immediately 
following the expiration of an agreement of at least 1 year that met 
the conditions of this paragraph (b) satisfies the requirements of this 
paragraph (b), provided that the holdover rental is on the same terms 
and conditions as the immediately preceding agreement.
    (c) Bona fide employment relationships. Any amount paid by an 
employer to a physician (or immediate family member) who has a bona 
fide employment relationship with the employer for the provision of 
services if the following conditions are met:
    (1) The employment is for identifiable services.
    (2) The amount of the remuneration under the employment is--
    (i) Consistent with the fair market value of the services; and
    (ii) Except as provided in paragraph (c)(4) of this section, is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any referrals by the referring physician.
    (3) The remuneration is provided under an agreement that would be 
commercially reasonable even if no referrals were made to the employer.
    (4) Paragraph (c)(2)(ii) of this section does not prohibit payment 
of remuneration in the form of a productivity bonus based on services 
performed personally by the physician (or immediate family member of 
the physician).
    (d) Personal service arrangements. (1) General--Remuneration from 
an entity under an arrangement or multiple arrangements to a physician 
or his or her immediate family member, or to a group practice, 
including remuneration for specific physician services furnished to a 
nonprofit blood center, if the following conditions are met:
    (i) Each arrangement is set out in writing, is signed by the 
parties, and specifies the services covered by the arrangement.
    (ii) The arrangement(s) covers all of the services to be furnished 
by the physician (or an immediate family member of the physician) to 
the entity. This requirement is met if all separate arrangements 
between the entity and the physician and the entity and any family 
members incorporate each other by reference or if they cross-reference 
a master list of contracts that is maintained and updated centrally and 
is available for review by the Secretary upon request. The master list 
must be maintained in a manner that preserves the historical record of 
contracts. A physician or family member can ``furnish'' services 
through employees whom they have hired for the purpose of performing 
the services; through a wholly-owned entity; or through locum tenens 
physicians (as defined at Sec.  411.351, except that the regular 
physician need not be a member of a group practice).
    (iii) The aggregate services contracted for do not exceed those 
that are reasonable and necessary for the legitimate business purposes 
of the arrangement(s).
    (iv) The term of each arrangement is for at least 1 year. To meet 
this requirement, if an arrangement is terminated during the term with 
or without cause, the parties may not enter into the same or 
substantially the same arrangement during the first year of the 
original term of the arrangement.
    (v) The compensation to be paid over the term of each arrangement 
is set in advance, does not exceed fair market value, and, except in 
the case of a physician incentive plan (as defined at Sec.  411.351 of 
this subpart), is not determined in a manner that takes into account 
the volume or value of any referrals or other business generated 
between the parties.
    (vi) The services to be furnished under each arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates any Federal or State law.
    (vii) A holdover personal service arrangement for up to 6 months 
following the expiration of an agreement of at least 1 year that met 
the conditions of paragraph (d) of this section satisfies the 
requirements of paragraph (d) of this section, provided that the 
holdover personal service arrangement is on the same terms and 
conditions as the immediately preceding agreement.
    (2) Physician incentive plan exception. In the case of a physician 
incentive plan (as defined at Sec.  411.351) between a physician and an 
entity (or downstream contractor), the compensation may be determined 
in a manner (through a withhold, capitation, bonus, or otherwise) that 
takes into account directly or indirectly the volume or value of any 
referrals or other business generated between the parties, if the plan 
meets the following requirements:
    (i) No specific payment is made directly or indirectly under the 
plan to a physician or a physician group as an inducement to reduce or 
limit medically necessary services furnished with respect to a specific 
individual enrolled with the entity.
    (ii) Upon request of the Secretary, the entity provides the 
Secretary with access to information regarding the plan (including any 
downstream contractor plans), in order to permit the Secretary to 
determine whether the plan is in compliance with paragraph (d)(2) of 
this section.
    (iii) In the case of a plan that places a physician or a physician 
group at substantial financial risk as defined at Sec.  422.208, the 
entity or any downstream contractor (or both) complies with the 
requirements concerning physician incentive plans set forth in Sec.  
422.208 and Sec.  422.210 of this chapter.
    (e) Physician recruitment. (1) Remuneration provided by a hospital 
to recruit a physician that is paid directly to the physician and that 
is intended to induce the physician to relocate his or her medical 
practice to the geographic area served by the hospital in order to 
become a member of the hospital's medical staff, if all of the 
following conditions are met:
    (i) The arrangement is set out in writing and signed by both 
parties;
    (ii) The arrangement is not conditioned on the physician's referral 
of patients to the hospital;
    (iii) The hospital does not determine (directly or indirectly) the 
amount of the remuneration to the physician based on the volume or 
value of any actual or anticipated referrals by the physician or

[[Page 51093]]

other business generated between the parties; and
    (iv) The physician is allowed to establish staff privileges at any 
other hospital(s) and to refer business to any other entities (except 
as referrals may be restricted under an employment or services contract 
that complies with Sec.  411.354(d)(4)).
    (2)(i) The ``geographic area served by the hospital'' is the area 
composed of the lowest number of contiguous zip codes from which the 
hospital draws at least 75 percent of its inpatients. The geographic 
area served by the hospital may include one or more zip codes from 
which the hospital draws no inpatients, provided that such zip codes 
are entirely surrounded by zip codes in the geographic area described 
above from which the hospital draws at least 75 percent of its 
inpatients.
    (ii) With respect to a hospital that draws fewer than 75 percent of 
its inpatients from all of the contiguous zip codes from which it draws 
inpatients, the ``geographic area served by the hospital'' will be 
deemed to be the area composed of all of the contiguous zip codes from 
which the hospital draws its inpatients.
    (iii) Special optional rule for rural hospitals. In the case of a 
hospital located in a rural area (as defined at Sec.  411.351), the 
``geographic area served by the hospital'' may also be the area 
composed of the lowest number of contiguous zip codes from which the 
hospital draws at least 90 percent of its inpatients. If the hospital 
draws fewer than 90 percent of its inpatients from all of the 
contiguous zip codes from which it draws inpatients, the ``geographic 
area served by the hospital'' may include noncontiguous zip codes, 
beginning with the noncontiguous zip code in which the highest 
percentage of the hospital's inpatients resides, and continuing to add 
noncontiguous zip codes in decreasing order of percentage of 
inpatients.
    (iv) A physician will be considered to have relocated his or her 
medical practice if the medical practice was located outside the 
geographic area served by the hospital and--
    (A) The physician moves his or her medical practice at least 25 
miles and into the geographic area served by the hospital; or
    (B) The physician moves his medical practice into the geographic 
area served by the hospital, and the physician's new medical practice 
derives at least 75 percent of its revenues from professional services 
furnished to patients (including hospital inpatients) not seen or 
treated by the physician at his or her prior medical practice site 
during the preceding 3 years, measured on an annual basis (fiscal or 
calendar year). For the initial ``start up'' year of the recruited 
physician's practice, the 75 percent test in the preceding sentence 
will be satisfied if there is a reasonable expectation that the 
recruited physician's medical practice for the year will derive at 
least 75 percent of its revenues from professional services furnished 
to patients not seen or treated by the physician at his or her prior 
medical practice site during the preceding 3 years.
    (3) The recruited physician will not be subject to the relocation 
requirement of this paragraph, provided that he or she establishes his 
or her medical practice in the geographic area served by the recruiting 
hospital, if--
    (i) He or she is a resident or physician who has been in practice 1 
year or less;
    (ii) He or she was employed on a full-time basis for at least 2 
years immediately prior to the recruitment arrangement by one of the 
following (and did not maintain a private practice in addition to such 
full-time employment):
    (A) A Federal or State bureau of prisons (or similar entity 
operating one or more correctional facilities) to serve a prison 
population;
    (B) The Department of Defense or Department of Veterans Affairs to 
serve active or veteran military personnel and their families; or
    (C) A facility of the Indian Health Service to serve patients who 
receive medical care exclusively through the Indian Health Service; or
    (iii) The Secretary has deemed in an advisory opinion issued under 
section 1877(g) of the Act that the physician does not have an 
established medical practice that serves or could serve a significant 
number of patients who are or could become patients of the recruiting 
hospital.
    (4) In the case of remuneration provided by a hospital to a 
physician either indirectly through payments made to another physician 
practice, or directly to a physician who joins a physician practice, 
the following additional conditions must be met:
    (i) The written agreement in paragraph (e)(1) is also signed by the 
party to whom the payments are directly made.
    (ii) Except for actual costs incurred by the physician practice in 
recruiting the new physician, the remuneration is passed directly 
through to or remains with the recruited physician.
    (iii) In the case of an income guarantee of any type made by the 
hospital to a recruited physician who joins a physician practice, the 
costs allocated by the physician practice to the recruited physician do 
not exceed the actual additional incremental costs attributable to the 
recruited physician. With respect to a physician recruited to join a 
physician practice located in a rural area or HPSA, if the physician is 
recruited to replace a physician who, within the previous 12-month 
period, retired, relocated outside of the geographic area served by the 
hospital, or died, the costs allocated by the physician practice to the 
recruited physician do not exceed either--
    (A) The actual additional incremental costs attributable to the 
recruited physician; or
    (B) The lower of a per capita allocation or 20 percent of the 
practice's aggregate costs.
    (iv) Records of the actual costs and the passed-through amounts are 
maintained for a period of at least 5 years and made available to the 
Secretary upon request.
    (v) The remuneration from the hospital under the arrangement is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of any actual or anticipated referrals by the 
recruited physician or the physician practice (or any physician 
affiliated with the physician practice) receiving the direct payments 
from the hospital.
    (vi) The physician practice may not impose on the recruited 
physician practice restrictions that unreasonably restrict the 
recruited physician's ability to practice medicine in the geographic 
area served by the hospital.
    (vii) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (5) Recruitment of a physician by a hospital located in a rural 
area (as defined at Sec.  411.351) to an area outside the geographic 
area served by the hospital is permitted under this exception if the 
Secretary determines in an advisory opinion issued under section 
1877(g) of the Act that the area has a demonstrated need for the 
recruited physician and all other requirements of this paragraph (e) 
are met.
    (6) This paragraph (e) applies to remuneration provided by a 
federally qualified health center or a rural health clinic in the same 
manner as it applies to remuneration provided by a hospital, provided 
that the arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.

[[Page 51094]]

    (f) Isolated transactions. Isolated financial transactions, such as 
a one-time sale of property or a practice, if all of the following 
conditions are met:
    (1) The amount of remuneration under the isolated transaction is--
    (i) Consistent with the fair market value of the transaction; and
    (ii) Not determined in a manner that takes into account (directly 
or indirectly) the volume or value of any referrals by the referring 
physician or other business generated between the parties.
    (2) The remuneration is provided under an agreement that would be 
commercially reasonable even if the physician made no referrals to the 
entity.
    (3) There are no additional transactions between the parties for 6 
months after the isolated transaction, except for transactions that are 
specifically excepted under the other provisions in Sec.  411.355 
through Sec.  411.357 and except for commercially reasonable post-
closing adjustments that do not take into account (directly or 
indirectly) the volume or value of referrals or other business 
generated by the referring physician.
    (g) Certain arrangements with hospitals. Remuneration provided by a 
hospital to a physician if the remuneration does not relate, directly 
or indirectly, to the furnishing of DHS. To qualify as ``unrelated,'' 
remuneration must be wholly unrelated to the furnishing of DHS and must 
not in any way take into account the volume or value of a physician's 
referrals. Remuneration relates to the furnishing of DHS if it--
    (1) Is an item, service, or cost that could be allocated in whole 
or in part to Medicare or Medicaid under cost reporting principles;
    (2) Is furnished, directly or indirectly, explicitly or implicitly, 
in a selective, targeted, preferential, or conditioned manner to 
medical staff or other persons in a position to make or influence 
referrals; or
    (3) Otherwise takes into account the volume or value of referrals 
or other business generated by the referring physician.
    (h) Group practice arrangements with a hospital. An arrangement 
between a hospital and a group practice under which DHS are furnished 
by the group but are billed by the hospital if the following conditions 
are met:
    (1) With respect to services furnished to an inpatient of the 
hospital, the arrangement is pursuant to the provision of inpatient 
hospital services under section 1861(b)(3) of the Act.
    (2) The arrangement began before, and has continued in effect 
without interruption since, December 19, 1989.
    (3) With respect to the DHS covered under the arrangement, at least 
75 percent of these services furnished to patients of the hospital are 
furnished by the group under the arrangement.
    (4) The arrangement is in accordance with a written agreement that 
specifies the services to be furnished by the parties and the 
compensation for services furnished under the agreement.
    (5) The compensation paid over the term of the agreement is 
consistent with fair market value, and the compensation per unit of 
service is fixed in advance and is not determined in a manner that 
takes into account the volume or value of any referrals or other 
business generated between the parties.
    (6) The compensation is provided in accordance with an agreement 
that would be commercially reasonable even if no referrals were made to 
the entity.
    (i) Payments by a physician. Payments made by a physician (or his 
or her immediate family member)--
    (1) To a laboratory in exchange for the provision of clinical 
laboratory services; or
    (2) To an entity as compensation for any other items or services 
that are furnished at a price that is consistent with fair market 
value, and that are not specifically addressed by another provision in 
Sec.  411.355 through Sec.  411.357 (including, but not limited to, 
Sec.  411.357(l)). ``Services'' in this context means services of any 
kind (not merely those defined as ``services'' for purposes of the 
Medicare program in Sec.  400.202 of this chapter).
    (j) Charitable donations by a physician. Bona fide charitable 
donations made by a physician (or immediate family member) to an entity 
if all of the following conditions are satisfied:
    (1) The charitable donation is made to an organization exempt from 
taxation under the Internal Revenue Code (or to a supporting 
organization);
    (2) The donation is neither solicited, nor offered, in any manner 
that takes into account the volume or value of referrals or other 
business generated between the physician and the entity; and
    (3) The donation arrangement does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (k) Nonmonetary compensation. (1) Compensation from an entity in 
the form of items or services (not including cash or cash equivalents) 
that does not exceed an aggregate of $300 per calendar year, as 
adjusted for inflation in accordance with paragraph (k)(2) of this 
section, if all of the following conditions are satisfied:
    (i) The compensation is not determined in any manner that takes 
into account the volume or value of referrals or other business 
generated by the referring physician.
    (ii) The compensation may not be solicited by the physician or the 
physician's practice (including employees and staff members).
    (iii) The compensation arrangement does not violate the anti-
kickback statute (section 1128B(b) of the Act) or any Federal or State 
law or regulation governing billing or claims submission.
    (2) The annual aggregate nonmonetary compensation limit in this 
paragraph (k) is adjusted each calendar year to the nearest whole 
dollar by the increase in the Consumer Price Index--Urban All Items 
(CPI-U) for the 12-month period ending the preceding September 30. CMS 
displays after September 30 each year both the increase in the CPI-U 
for the 12-month period and the new nonmonetary compensation limit on 
the physician self-referral Web site: http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
    (3) Where an entity has inadvertently provided nonmonetary 
compensation to a physician in excess of the limit (as set forth in 
paragraph (k)(1) of this section), such compensation is deemed to be 
within the limit if--
    (i) The value of the excess nonmonetary compensation is no more 
than 50 percent of the limit; and
    (ii) The physician returns to the entity the excess nonmonetary 
compensation (or an amount equal to the value of the excess nonmonetary 
compensation) by the end of the calendar year in which the excess 
nonmonetary compensation was received or within 180 consecutive 
calendar days following the date the excess nonmonetary compensation 
was received by the physician, whichever is earlier.
    (iii) Paragraph (k)(3) may be used by an entity only once every 3 
years with respect to the same referring physician.
    (4) In addition to nonmonetary compensation up to the limit 
described in paragraph (k)(1) of this section, an entity that has a 
formal medical staff may provide one local medical staff appreciation 
event per year for the entire medical staff. Any gifts or gratuities 
provided in connection with the medical staff appreciation event are 
subject to the limit in paragraph (k)(1).
    (l) Fair market value compensation. Compensation resulting from an 
arrangement between an entity and a

[[Page 51095]]

physician (or an immediate family member) or any group of physicians 
(regardless of whether the group meets the definition of a group 
practice set forth in Sec.  411.352) for the provision of items or 
services (other than the rental of office space) by the physician (or 
an immediate family member) or group of physicians to the entity, or by 
the entity to the physician (or an immediate family member) or a group 
of physicians, if the arrangement is set forth in an agreement that 
meets the following conditions:
    (1) The arrangement is in writing, signed by the parties, and 
covers only identifiable items or services, all of which are specified 
in the agreement.
    (2) The writing specifies the timeframe for the arrangement, which 
can be for any period of time and contain a termination clause, 
provided that the parties enter into only one arrangement for the same 
items or services during the course of a year. An arrangement made for 
less than 1 year may be renewed any number of times if the terms of the 
arrangement and the compensation for the same items or services do not 
change.
    (3) The writing specifies the compensation that will be provided 
under the arrangement. The compensation must be set in advance, 
consistent with fair market value, and not determined in a manner that 
takes into account the volume or value of referrals or other business 
generated by the referring physician.
    (4) The arrangement is commercially reasonable (taking into account 
the nature and scope of the transaction) and furthers the legitimate 
business purposes of the parties.
    (5) 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.
    (6) The services to be performed under the arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates a Federal or State law.
    (m) Medical staff incidental benefits. Compensation in the form of 
items or services (not including cash or cash equivalents) from a 
hospital to a member of its medical staff when the item or service is 
used on the hospital's campus, if all of the following conditions are 
met:
    (1) The compensation is offered to all members of the medical staff 
practicing in the same specialty (but not necessarily accepted by every 
member to whom it is offered) without regard to the volume or value of 
referrals or other business generated between the parties.
    (2) Except with respect to identification of medical staff on a 
hospital web site or in hospital advertising, the compensation is 
provided only during periods when the medical staff members are making 
rounds or are engaged in other services or activities that benefit the 
hospital or its patients.
    (3) The compensation is provided by the hospital and used by the 
medical staff members only on the hospital's campus. Compensation, 
including, but not limited to, internet access, pagers, or two-way 
radios, used away from the campus only to access hospital medical 
records or information or to access patients or personnel who are on 
the hospital campus, as well as the identification of the medical staff 
on a hospital web site or in hospital advertising, meets the ``on 
campus'' requirement of this paragraph (m) of this section.
    (4) The compensation is reasonably related to the provision of, or 
designed to facilitate directly or indirectly the delivery of, medical 
services at the hospital.
    (5) The compensation is of low value (that is, less than $25) with 
respect to each occurrence of the benefit (for example, each meal given 
to a physician while he or she is serving patients who are hospitalized 
must be of low value). The $25 limit in this paragraph (m)(5) is 
adjusted each calendar year to the nearest whole dollar by the increase 
in the Consumer Price Index--Urban All Items (CPI-I) for the 12 month 
period ending the preceding September 30. CMS displays after September 
30 each year both the increase in the CPI-I for the 12 month period and 
the new limits on the physician self-referral web site: http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
    (6) The compensation is not determined in any manner that takes 
into account the volume or value of referrals or other business 
generated between the parties.
    (7) The compensation arrangement does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (8) Other facilities and health care clinics (including, but not 
limited to, federally qualified health centers) that have bona fide 
medical staffs may provide compensation under this paragraph (m) on the 
same terms and conditions applied to hospitals under this paragraph 
(m).
    (n) Risk-sharing arrangements. Compensation pursuant to a risk-
sharing arrangement (including, but not limited to, withholds, bonuses, 
and risk pools) between a MCO or an IPA and a physician (either 
directly or indirectly through a subcontractor) for services provided 
to enrollees of a health plan, provided that the arrangement does not 
violate the anti-kickback statute (section 1128B(b) of the Act), or any 
Federal or State law or regulation governing billing or claims 
submission. For purposes of this paragraph (n), ``health plan'' and 
``enrollees'' have the meanings set forth in Sec.  1001.952(l) of this 
title.
    (o) Compliance training. Compliance training provided by an entity 
to a physician (or to the physician's immediate family member or office 
staff) who practices in the entity's local community or service area, 
provided that the training is held in the local community or service 
area. For purposes of this paragraph (o), ``compliance training'' means 
training regarding the basic elements of a compliance program (for 
example, establishing policies and procedures, training of staff, 
internal monitoring, or reporting); specific training regarding the 
requirements of Federal and State health care programs (for example, 
billing, coding, reasonable and necessary services, documentation, or 
unlawful referral arrangements); or training regarding other Federal, 
State, or local laws, regulations, or rules governing the conduct of 
the party for whom the training is provided. For purposes of this 
paragraph, ``compliance training'' includes programs that offer 
continuing medical education credit, provided that compliance training 
is the primary purpose of the program.
    (p) Indirect compensation arrangements. Indirect compensation 
arrangements, as defined at Sec.  411.354(c)(2), if all of the 
following conditions are satisfied:
    (1) The compensation received by the referring physician (or 
immediate family member) described in Sec.  411.354(c)(2)(ii) is fair 
market value for services and items actually provided and not 
determined in any manner that takes into account the volume or value of 
referrals or other business generated by the referring physician for 
the entity furnishing DHS.
    (2) The compensation arrangement described in Sec.  
411.354(c)(2)(ii) is set out in writing, signed by the parties, and 
specifies the services covered by the arrangement, except in the case 
of a bona fide employment relationship between an employer and an 
employee, in which case the arrangement need not be set out in a 
written contract, but must be for identifiable services and be 
commercially reasonable even if no referrals are made to the employer.

[[Page 51096]]

    (3) The compensation arrangement does not violate the anti-kickback 
statute (section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (q) Referral services. Remuneration that meets all of the 
conditions set forth in Sec.  1001.952(f) of this title.
    (r) Obstetrical malpractice insurance subsidies. Remuneration to 
the referring physician that meets all of the conditions set forth in 
Sec.  1001.952(o) of this title.
    (s) Professional courtesy. Professional courtesy (as defined at 
Sec.  411.351) offered by an entity with a formal medical staff to a 
physician or a physician's immediate family member or office staff if 
all of the following conditions are met:
    (1) The professional courtesy is offered to all physicians on the 
entity's bona fide medical staff or in such entity's local community or 
service area without regard to the volume or value of referrals or 
other business generated between the parties;
    (2) The health care items and services provided are of a type 
routinely provided by the entity;
    (3) The entity has a professional courtesy policy that is set out 
in writing and approved in advance by the entity's governing body;
    (4) The professional courtesy is not offered to a physician (or 
immediate family member) who is a Federal health care program 
beneficiary, unless there has been a good faith showing of financial 
need; and
    (5) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (t) Retention payments in underserved areas.
    (1) Bona fide written offer. Remuneration provided by a hospital 
directly to a physician on the hospital's medical staff to retain the 
physician's medical practice in the geographic area served by the 
hospital (as defined in paragraph (e)(2) of this section), if all of 
the following conditions are met:
    (i) The physician has a bona fide firm, written recruitment offer 
or offer of employment from a hospital, academic medical center (as 
defined at Sec.  411.355(e)), or physician organization (as defined at 
Sec.  411.351) that is not related to the hospital making the payment, 
and the offer specifies the remuneration being offered and requires the 
physician to move the location of his or her medical practice at least 
25 miles and outside of the geographic area served by the hospital 
making the retention payment.
    (ii) The requirements of Sec.  411.357(e)(1)(i) through Sec.  
411.357(e)(1)(iv) are satisfied.
    (iii) Any retention payment is subject to the same obligations and 
restrictions, if any, on repayment or forgiveness of indebtedness as 
the written recruitment offer or offer of employment.
    (iv) The retention payment does not exceed the lower of--
    (A) The amount obtained by subtracting the physician's current 
income from physician and related services from the income the 
physician would receive from comparable physician and related services 
in the written recruitment or employment offer, provided that the 
respective incomes are determined using a reasonable and consistent 
methodology, and that they are calculated uniformly over no more than a 
24-month period; or
    (B) The reasonable costs the hospital would otherwise have to 
expend to recruit a new physician to the geographic area served by the 
hospital to join the medical staff of the hospital to replace the 
retained physician.
    (v) The requirements of paragraph (t)(3) are satisfied.
    (2) Written certification from physician. Remuneration provided by 
a hospital directly to a physician on the hospital's medical staff to 
retain the physician's medical practice in the geographic area served 
by the hospital (as defined in paragraph (e)(2) of this section), if 
all of the following conditions are met:
    (i) The physician furnishes to the hospital before the retention 
payment is made a written certification that the physician has a bona 
fide opportunity for future employment by a hospital, academic medical 
center (as defined at Sec.  411.355(e)), or physician organization (as 
defined at Sec.  411.351) that requires the physician to move the 
location of his or her medical practice at least 25 miles and outside 
the geographic area served by the hospital. The certification contains 
at least the following--
    (A) Details regarding the steps taken by the physician to 
effectuate the employment opportunity;
    (B) Details of the physician's employment opportunity, including 
the identity and location of the physician's future employer or 
employment location or both, and the anticipated income and benefits 
(or a range for income and benefits);
    (C) A certification that the future employer is not related to the 
hospital making the payment;
    (D) The date on which the physician anticipates relocating his or 
medical practice outside of the geographic area served by the hospital; 
and
    (E) Information sufficient for the hospital to verify the 
information included in the written certification.
    (ii) The hospital takes reasonable steps to verify that the 
physician has a bona fide opportunity for future employment that 
requires the physician to relocate outside the geographic area served 
by the hospital.
    (iii) The requirements of Sec.  411.357(e)(1)(i) through Sec.  
411.357(e)(1)(iv) are satisfied.
    (iv) The retention payment does not exceed the lower of--
    (A) An amount equal to 25 percent of the physician's current income 
(measured over no more than a 24-month period), using a reasonable and 
consistent methodology that is calculated uniformly; or
    (B) The reasonable costs the hospital would otherwise have to 
expend to recruit a new physician to the geographic area served by the 
hospital to join the medical staff of the hospital to replace the 
retained physician.
    (v) The requirements of paragraph (t)(3) are satisfied.
    (3) Remuneration provided under paragraph (t)(1) or (t)(2) must 
meet the following additional requirements:
    (i)(A) The physician's current medical practice is located in a 
rural area or HPSA (regardless of the physician's specialty) or is 
located in an area with demonstrated need for the physician as 
determined by the Secretary in an advisory opinion issued in accordance 
with section 1877(g)(6) of the Act; or
    (B) At least 75 percent of the physician's patients reside in a 
medically underserved area or are members of a medically underserved 
population.
    (ii) The hospital does not enter into a retention arrangement with 
a particular referring physician more frequently than once every 5 
years.
    (iii) The amount and terms of the retention payment are not altered 
during the term of the arrangement in any manner that takes into 
account the volume or value of referrals or other business generated by 
the physician.
    (iv) 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.
    (4) The Secretary may waive the relocation requirement of 
paragraphs (t)(1) and (t)(2) of this section for payments made to 
physicians practicing in a HPSA or an area with demonstrated need for 
the physician through an advisory opinion issued in accordance with 
section 1877(g)(6) of the Act, if the

[[Page 51097]]

retention payment arrangement otherwise complies with all of the 
conditions of this paragraph.
    (5) This paragraph (t) applies to remuneration provided by a 
federally qualified health center or a rural health clinic in the same 
manner as it applies to remuneration provided by a hospital.
    (u) Community-wide health information systems. Items or services of 
information technology provided by an entity to a physician that allow 
access to, and sharing of, electronic health care records and any 
complementary drug information systems, general health information, 
medical alerts, and related information for patients served by 
community providers and practitioners, in order to enhance the 
community's overall health, provided that--
    (1) The items or services are available as necessary to enable the 
physician to participate in a community-wide health information system, 
are principally used by the physician as part of the community-wide 
health information system, and are not provided to the physician in any 
manner that takes into account the volume or value of referrals or 
other business generated by the physician;
    (2) The community-wide health information systems are available to 
all providers, practitioners, and residents of the community who desire 
to participate; and
    (3) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (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;
    (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 payer 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 is 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 must 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

[[Page 51098]]

    (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 is 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 must 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 payer 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.
    (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.

0
8. Section 411.361 is revised to read as follows:


Sec.  411.361   Reporting requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this 
section, all entities furnishing services for which payment may be made 
under Medicare must submit information to CMS or to the Office of 
Inspector General (OIG) concerning their reportable financial 
relationships (as defined in paragraph (d) of this section), in the 
form, manner, and at the times that CMS or OIG specifies.
    (b) Exception. The requirements of paragraph (a) of this section do 
not apply to entities that furnish 20 or fewer Part A and Part B 
services during a calendar year, or to any Medicare covered services 
furnished outside the United States.
    (c) Required information. The information requested by CMS or OIG 
can include the following:
    (1) The name and unique physician identification number (UPIN) or 
the national provider identifier (NPI) of each physician who has a 
reportable financial relationship with the entity.
    (2) The name and UPIN or NPI of each physician who has an immediate 
family member (as defined at Sec.  411.351) who has a reportable 
financial relationship with the entity.
    (3) The covered services furnished by the entity.
    (4) With respect to each physician identified under paragraphs 
(c)(1) and (c)(2) of this section, the nature of the financial 
relationship (including the extent or value of the ownership or 
investment interest or the compensation arrangement) as evidenced in 
records that the entity knows or should know about in the course of 
prudently conducting business, including, but not limited to, records 
that the entity is already required to retain to comply with the rules 
of the Internal Revenue Service and the Securities and Exchange 
Commission and other rules of the Medicare and Medicaid programs.
    (d) Reportable financial relationships. For purposes of this 
section, a reportable financial relationship is any ownership or 
investment interest, as defined at Sec.  411.354(b) or any compensation 
arrangement, as defined at Sec.  411.354(c), except for ownership or 
investment interests that satisfy the exceptions set forth in Sec.  
411.356(a) or Sec.  411.356(b) regarding publicly-traded securities and 
mutual funds.
    (e) Form and timing of reports. Entities that are subject to the 
requirements of this section must submit the required information, upon 
request, within the time period specified by the request. Entities are 
given at least 30 days from the date of the request to provide the 
information. Entities must retain the information, and documentation 
sufficient to verify the information, for the length of time specified 
by the applicable regulatory requirements for the information, and, 
upon request, must make that information and documentation available to 
CMS or OIG.
    (f) Consequences of failure to report. Any person who is required, 
but fails, to submit information concerning his or her financial 
relationships in accordance with this section is subject to a civil 
money penalty of up to $10,000 for each day following the deadline 
established under paragraph (e) of this section until the information 
is submitted. Assessment of these penalties will comply with the 
applicable provisions of part 1003 of this title.
    (g) Public disclosure. Information furnished to CMS or OIG under 
this section is subject to public disclosure in accordance with the 
provisions of part 401 of this chapter.

0
9. Section 411.370 is amended by revising paragraph (a) to read as 
follows:


Sec.  411.370   Advisory opinions relating to physician referrals.

    (a) Period during which CMS accepts requests. The provisions of 
Sec.  411.370 through Sec.  411.389 apply to requests for advisory 
opinions that are submitted to CMS during any time period in which CMS 
is required by law to issue the advisory opinions described in this 
subpart.
* * * * *

PART 424--CONDITIONS FOR MEDICARE PAYMENT

0
10. The authority citation for part 424 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

Subpart B--Certification and Plan of Treatment Requirements

0
11. In Sec.  424.22, paragraph (d) is revised to read as follows:


Sec.  424.22   Requirements for home health services.

* * * * *
    (d) Limitation on the performance of certification and plan of 
treatment functions. A physician who has a financial relationship, as 
defined at Sec.  411.354 of this chapter, with a HHA may not certify or 
recertify the need for home health services or establish or review a 
plan of treatment for the HHA unless the financial relationship 
satisfies the requirements of one of the

[[Page 51099]]

exceptions set forth in Sec.  411.355 through Sec.  411.357 of this 
chapter.

(Program No. 93.774, Medicare--Supplementary Medical Insurance 
Program)

    Dated: January 4, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: June 11, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-4252 Filed 8-27-07; 3:45 pm]
BILLING CODE 4120-01-P