[Federal Register Volume 84, Number 201 (Thursday, October 17, 2019)]
[Proposed Rules]
[Pages 55766-55847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22028]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 411

[CMS-1720-P]
RIN 0938-AT64


Medicare Program; Modernizing and Clarifying the Physician Self-
Referral Regulations

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would address any undue regulatory impact 
and burden of the physician self-referral law. This proposed rule is 
being issued in conjunction with the Centers for Medicare & Medicaid 
Services' (CMS) Patients over Paperwork initiative and the Department 
of Health and Human Services' (the Department or HHS) Regulatory Sprint 
to Coordinated Care. This proposed rule proposes exceptions to the 
physician self-referral law for certain value-based compensation 
arrangements between or among physicians, providers, and suppliers. It 
would also create a new exception for certain arrangements under which 
a physician receives limited remuneration for items or services 
actually provided by the physician; create a new exception for 
donations of cybersecurity technology and related services; and amend 
the existing exception for electronic health records (EHR) items and 
services. This proposed rule also provides critically necessary 
guidance for physicians and health care providers and suppliers whose 
financial relationships are governed by the physician self-referral 
statute and regulations.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on December 31, 
2019.

ADDRESSES: In commenting, please refer to file code CMS-1720-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. You may submit comments in one of four 
ways (please choose only one of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-1720-P, P.O. Box 8013, 
Baltimore, MD 21244-1850. Please allow sufficient time for mailed 
comments to be received before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1720-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue SW, Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Lisa O. Wilson, (410) 786-8852. 
Matthew Edgar, (410) 786-0698.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following 
website as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that website to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Acronyms

    In addition, because of the many organizations and terms to which 
we refer by acronym in this proposed rule, we are listing these 
acronyms and their corresponding terms in alphabetical order below:

ACO Accountable care organization
API Application programming interface
ASC Ambulatory surgical center
CEC Comprehensive ESRD Care Model
CFR Code of Federal Regulations
CHIP Children's Health Insurance Program
CISA Cybersecurity Information Sharing Act of 2015 (Pub. L. 114-113, 
enacted on December 18, 2015)
CJR Comprehensive Care for Joint Replacement Model
CMP Civil monetary penalty
CMS RFI Request for Information Regarding the Physician Self-
Referral Law (83 FR 29524)
CY Calendar year
DHS Designated health services
DMEPOS Durable medical equipment, prosthetics, orthotics & supplies
DRA Deficit Reduction Act of 2005 (Pub. L. 109-171, enacted on 
February 8, 2006)
DRG Diagnosis-related group
EHR Electronic health records
EKG Electrocardiogram
EMTALA Emergency Medical Treatment and Labor Act (Pub. L. 99-272, 
enacted on April 7, 1986)
ERISA Employee Retirement Income Security Act of 1974 (Pub. L. 93-
406, enacted on September 2, 1974)
ESOP Employee stock ownership plan
ESRD End-stage renal disease
FFS Fee-for-service
FQHC Federally qualified health center
FR Federal Register
FY Fiscal year
HCIC Health care industry cybersecurity
HHS [Department of] Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191, enacted August 21, 1996)
IPA Independent practice association
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRS Internal Revenue Service
IT Information technology
MA Medicare Advantage
MIPPA Medicare Improvements for Patients and Providers Act (Pub. L. 
110-275, enacted on July 15, 2008)
MMA Medicare Prescription Drug, Improvement and Modernization Act of 
2003 (Pub. L. 108-173, enacted on December 8, 2003)
NIST National Institute of Standards and Technology
NPP Nonphysician practitioner
NPRM Notice of proposed rulemaking

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OBRA 89 Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 
enacted on December 19, 1989)
OBRA 90 Omnibus Budget Reconciliation Act of 1990 (Pub. L. 101-508, 
enacted on November 5, 1990)
OBRA 93 Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 
enacted on August 10, 1993)
OCM Oncology Care Model
OIG [HHS] Office of Inspector General
OMB Office of Management and Budget
ONC Office of the National Coordinator for Health Information 
Technology
OPPS Hospital Outpatient Prospective Payment System
PFS Physician Fee Schedule
PHI Protected health information
PHSA Public Health Service Act (Pub. L. 178-410, enacted on July 1, 
1944)
PPS Prospective payment system
RFI Request for information
RHC Rural health clinic
RVU Relative value unit
SNF Skilled nursing facility
SRDP CMS Voluntary Physician Self-Referral Disclosure Protocol

I. Background

A. Statutory and Regulatory History

    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 payable by Medicare to 
an entity with which he or she (or an immediate family member) has a 
financial relationship, 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. 
A financial relationship is an ownership or investment interest in the 
entity or a compensation arrangement with the entity. The statute 
establishes a number of specific exceptions and grants the Secretary of 
the Department of Health and Human Services (the Secretary) the 
authority to create regulatory exceptions for financial relationships 
that do not pose a risk of program or patient abuse. Section 1903(s) of 
the Act extends aspects of the physician self-referral prohibitions to 
Medicaid. For additional information about section 1903(s) of the Act, 
see 66 FR 857 through 858.
    This rulemaking follows a history of rulemakings related to the 
physician self-referral law. The following discussion provides a 
chronology of our more significant and comprehensive rulemakings; it is 
not an exhaustive list of all rulemakings related to the physician 
self-referral law. After the passage of section 1877 of the Act, we 
proposed rulemakings in 1992 (related only to referrals for clinical 
laboratory services) (57 FR 8588) (the 1992 proposed rule) and 1998 
(addressing referrals for all designated health services) (63 FR 1659) 
(the 1998 proposed rule). We finalized the proposals from the 1992 
proposed rule in 1995 (60 FR 41914) (the 1995 final rule), and issued 
final rules following the 1998 proposed rule in three stages. The first 
final rulemaking (Phase I) was published in the Federal Register on 
January 4, 2001 as a final rule with comment period (66 FR 856). The 
second final rulemaking (Phase II) was published in the Federal 
Register on March 26, 2004 as an interim final rule with comment period 
(69 FR 16054). 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). The third final rulemaking (Phase III) was published in the 
Federal Register on September 5, 2007 as a final rule (72 FR 51012).
    In addition to Phase I, Phase II, and Phase III, we issued final 
regulations on August 19, 2008 in the Fiscal Year (FY) 2009 Inpatient 
Prospective Payment System final rule with comment period (73 FR 48434) 
(the FY 2009 IPPS final rule). That rulemaking made various revisions 
to the physician self-referral regulations, including: (1) Revisions to 
the ``stand in the shoes'' provisions; (2) establishment of provisions 
regarding the period of disallowance and temporary noncompliance with 
signature requirements; (3) prohibitions on per unit of service (``per-
click'') and percentage-based compensation formulas for determining the 
rental charges for office space and equipment lease arrangements; and 
(4) expansion of the definition of ``entity.''
    After passage of the Patient Protection and Affordable Care Act of 
2010 (Pub. L. 111-148) (Affordable Care Act), we issued final 
regulations on November 29, 2010 in the Calendar Year (CY) 2011 
Physician Fee Schedule (PFS) final rule with comment period that 
codified a disclosure requirement established by the Affordable Care 
Act for the in-office ancillary services exception (75 FR 73443). We 
also issued final regulations on November 24, 2010 in the CY 2011 
Outpatient Prospective Payment System (OPPS) final rule with comment 
period (75 FR 71800), on November 30, 2011 in the CY 2012 OPPS final 
rule with comment period (76 FR 74122), and on November 10, 2014 in the 
CY 2015 OPPS final rule with comment period (79 FR 66987) that 
established or revised certain regulatory provisions concerning 
physician-owned hospitals to codify and interpret the Affordable Care 
Act's revisions to section 1877 of the Act. On November 16, 2015, in 
the CY 2016 PFS final rule, we issued regulations to reduce burden and 
facilitate compliance (80 FR 71300 through 71341). In that rulemaking, 
we established two new exceptions, clarified certain provisions of the 
physician self-referral regulations, updated regulations to reflect 
changes in terminology, and revised definitions related to physician-
owned hospitals. On November 15, 2016, we included in the CY 2017 PFS 
final rule, at Sec.  411.357(a)(5)(ii)(B), (b)(4)(ii)(B), (l)(3)(ii), 
and (p)(1)(ii)(B), requirements identical to regulations that have been 
in effect since October 1, 2009 that the rental charges for the lease 
of office space or equipment are not determined using a formula based 
on per-unit of service rental charges, to the extent that such charges 
reflect services provided to patients referred by the lessor to the 
lessee (81 FR 80534).
    On November 23, 2018, in our most recent update, the CY 2019 PFS 
final rule (83 FR 59715 through 59717), we incorporated into our 
regulations provisions at sections 1877(h)(1)(D) and (E) of the Act 
that were added by section 50404 of the Bipartisan Budget Act of 2018 
(Pub. L. 115-123). Specifically, we codified in regulations our 
longstanding policy that the writing requirement in various 
compensation arrangement exceptions in Sec.  411.357 can be satisfied 
by a collection of documents, including contemporaneous documents 
evidencing the course of conduct between the parties. We also amended 
the special rule for temporary noncompliance with signature 
requirements at Sec.  411.353(g), removing the limitation on the use of 
the rule to once every 3 years with respect to the same physician and 
making other changes to conform the regulatory provision to section 
1877(h)(1)(E) of the Act.

B. Health Care Delivery and Payment Reform: Transition to Value-Based 
Care

1. The Regulatory Sprint to Coordinated Care
    The Department has identified the broad reach of the physician 
self-referral law, as well as the Federal anti-kickback statute and 
beneficiary inducements civil monetary penalty (CMP) law, sections 
1128B(b) and 1128A(a)(5) of the Act, respectively, as potentially 
inhibiting beneficial arrangements that would advance the transition to 
value-based care and the coordination of care among providers in both 
the Federal and commercial sectors. Industry stakeholders have informed 
us that,

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because the consequences of noncompliance with the physician self-
referral law (and the anti-kickback statute) are so dire, providers, 
suppliers, and physicians may be discouraged from entering into 
innovative arrangements that would improve quality outcomes, produce 
health system efficiencies, and lower costs (or slow their rate of 
growth). To address these concerns, and to help accelerate the 
transformation of the health care system into one that better pays for 
value and promotes care coordination, HHS launched a Regulatory Sprint 
to Coordinated Care (the Regulatory Sprint), led by the Deputy 
Secretary of HHS. This Regulatory Sprint aims to remove potential 
regulatory barriers to care coordination and value-based care created 
by four key Federal health care laws and associated regulations: (1) 
The physician self-referral law; (2) the anti-kickback statute; (3) the 
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 
104-191) (HIPAA); and (4) the rules under 42 CFR part 2 related to 
opioid and substance use disorder treatment. Through the Regulatory 
Sprint, HHS aims to encourage and improve--
     A patient's ability to understand treatment plans and make 
empowered decisions;
     Providers' alignment on an end-to-end treatment approach 
(that is, coordination among providers along the patient's full care 
journey);
     Incentives for providers to coordinate, collaborate, and 
provide patients with tools to be more involved; and
     Information-sharing among providers, facilities, and other 
stakeholders in a manner that facilitates efficient care while 
preserving and protecting patient access to data.
    The Department believes that the realization of these goals would 
meaningfully improve the quality of care received by all American 
patients. As part of the Regulatory Sprint, CMS, the HHS Office of 
Inspector General (OIG), and the HHS Office for Civil Rights (OCR) each 
issued requests for information to solicit comments that may help to 
inform the Department's approach to achieving the goals of the 
Regulatory Sprint (83 FR 29524, 83 FR 43607, and 83 FR 64302, 
respectively). We discuss our request for information (the CMS RFI) in 
this section of this proposed rule, including the specific information 
we requested from commenters, and how we used the information shared by 
commenters to inform this proposed rulemaking.
2. Policy Considerations and Other Information Relevant to the 
Development of This Proposed Rule
a. Medicare Payment Was Volume-Based When the Physician Self-Referral 
Statute Was Enacted
    When the physician self-referral statute was enacted in 1989, under 
traditional fee-for-service (FFS) Medicare (that is, Parts A and B), 
the vast majority of covered services were paid based on volume. 
Although some services were ``bundled'' into a single payment, such as 
inpatient hospital services that were paid on the basis of the 
diagnosis-related group (DRG) that corresponded to the patient's 
diagnosis and the services provided (known as the Hospital Inpatient 
Prospective Payment System, or IPPS), in general, Medicare made a 
payment each time a provider or supplier furnished a service to a 
beneficiary. Thus, the more services a provider or supplier furnished, 
the more Medicare payments it would receive. Importantly, these bundled 
payments typically covered services furnished by a single provider or 
supplier, directly or by contract; payments were not bundled across 
multiple providers, each billing independently. This volume-based 
reimbursement system continues to apply under traditional Medicare to 
both services paid under a prospective payment system (PPS) and 
services paid under a retrospective FFS system.
    As described in this proposed rule, the physician self-referral 
statute was enacted to address concerns that arose in Medicare's 
volume-based reimbursement system where the more designated health 
services that a physician ordered, the more payments Medicare would 
make to the entity that furnished the designated health services. If 
the referring physician had an ownership or investment interest in the 
entity furnishing the designated health services, he or she could 
increase the entity's revenue by referring patients for more or higher 
value services, potentially increasing the profit distributions tied to 
the physician's ownership interest. Similarly, a physician who had a 
service or other compensation arrangement with an entity might increase 
his or her aggregate compensation if he or she made referrals that 
resulted in more Medicare payments to the entity. The physician self-
referral statute was enacted to combat the potential that financial 
self-interest would affect a physician's medical decision making and 
ensure that patients have options for quality care. The law's 
prohibitions were intended to prevent a patient from being referred for 
services that are not needed or steered to less convenient, lower 
quality, or more expensive health care providers because the patient's 
physician can improve his or her financial standing through those 
referrals. This statutory structure was designed for and made sense in 
Medicare's then largely volume-based reimbursement system.
b. The Medicare Shared Savings Program, the Center for Medicare and 
Medicaid Innovation, and Medicare's Transition to Value-Based Payment
    Since the enactment of the physician self-referral statute in 1989, 
significant changes in the delivery of health care services and the 
payment for such services have occurred, both within the Medicare and 
Medicaid programs and for non-Federal payors and patients. For some 
time, we have engaged in efforts to align payment under the Medicare 
program with the quality of the care provided to our beneficiaries. 
Laws such as the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (Pub. L. 108-173) (MMA), the Deficit 
Reduction Act of 2005 (Pub. L. 109-171) (DRA), and the Medicare 
Improvements for Patients and Providers Act of 2008 (Pub. L. 110-275) 
(MIPPA) guided our early efforts to move toward health care delivery 
and payment reform. More recently, the Affordable Care Act required 
significant changes to the Medicare program's payment systems and 
provides the Secretary with broad authority to test innovative payment 
and service delivery models.
    Section 3022 of the Affordable Care Act established the Medicare 
Shared Savings Program (Shared Savings Program). The Congress created 
the Shared Savings Program to promote accountability for a patient 
population and coordinate items and services under Medicare Parts A and 
B and encourage investment in infrastructure and redesigned care 
processes for high-quality and efficient service delivery. In essence, 
the Shared Savings Program would facilitate coordination among 
providers to improve the quality of care for Medicare FFS beneficiaries 
and reduce unnecessary costs. Physicians, hospitals, and other eligible 
providers and suppliers may participate in the Shared Savings Program 
by creating or participating in an accountable care organization (ACO) 
that agrees to be held accountable for the quality, cost, and 
experience of care of an assigned Medicare FFS beneficiary population. 
ACOs that successfully meet quality and savings requirements share a 
percentage of the achieved savings with Medicare. Since enactment, we 
have issued

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numerous regulations to implement and update the Shared Savings 
Program.
    In keeping with the Secretary's vision for achieving value-based 
transformation by pioneering bold new payment models, we recently 
finalized changes to the Shared Savings Program that allow us to take 
an important step forward in how Medicare pays for value. In the 
December 31, 2018, final rule entitled ``Medicare Shared Savings 
Program; Accountable Care Organizations--Pathways to Success'' (the 
2018 Shared Savings Program final rule) (83 FR 67816), we recognized 
Shared Savings Program ACOs as an important innovation for moving our 
payment systems away from paying for volume and toward paying for value 
and outcomes, as ACOs are held accountable for the total cost of care 
and quality outcomes for the assigned beneficiary patient populations 
they serve. We made significant design changes to the Shared Savings 
Program that are intended to put the program on a path toward achieving 
a more measurable move to value, demonstrate savings to the Medicare 
program, and promote a competitive and accountable marketplace (83 FR 
68050). Specifically, we finalized a significant redesign of the 
participation options available under the Shared Savings Program to 
encourage ACOs to transition to two-sided risk models (in which they 
may share in savings and are accountable for repaying shared losses), 
increase savings and mitigate losses for the Medicare Trust Funds, and 
increase program integrity. For more information about the Shared 
Savings Program, see http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavings program/index.html.
    Section 1115A of the Act, as added by section 3021 of the 
Affordable Care Act, established the Center for Medicare and Medicaid 
Innovation (the Innovation Center) within CMS. The purpose of the 
Innovation Center is to test innovative payment and service delivery 
models to reduce expenditures for the care furnished to patients in the 
Medicare and Medicaid programs and the Children's Health Insurance 
Program (CHIP) while preserving or enhancing the quality of that care. 
Using its authority in section 1115A of the Act, the Innovation Center 
has tested numerous health care delivery and payment models in which 
providers, suppliers, and individual practitioners participate. Most 
Innovation Center models generally fall into three categories: 
Accountable care models, episode-based payment models, and primary care 
transformation models. The Innovation Center also tests initiatives 
targeted to the Medicaid and CHIP population and to Medicare-Medicaid 
(dual eligible) enrollees, and is focused on other initiatives to 
accelerate the development and testing of new payment and service 
delivery models, as well as to speed the adoption of best practices. We 
describe a few representative Innovation Center models in this section 
of the proposed rule.
    The Innovation Center recently released financial and quality 
results for the second year of another of its ACO models, the Next 
Generation ACO model, which requires participants to assume the highest 
level of risk out of all CMS ACO programs and models, and in exchange 
for this level of risk, rewards participants with greater regulatory 
flexibility. The Next Generation ACO model actuarial results show that 
net savings to the Medicare Trust Funds from the model in 2017 were 
more than $164 million across 44 ACOs. The model is also showing strong 
performance on quality metrics. See https://www.cms.gov/newsroom/press-releases/cms-finalizes-pathways-success-overhaul-medicares-national-aco-program.
    The Innovation Center is also testing several episode-based payment 
models, including the Oncology Care Model (OCM) and the Comprehensive 
Care for Joint Replacement (CJR) Model. The goal of OCM is to utilize 
appropriately aligned financial incentives to enable improved care 
coordination, appropriateness of care, and access to care for 
beneficiaries undergoing chemotherapy. Under this model, physician 
practices have entered into payment arrangements that include financial 
and performance accountability for episodes of care surrounding 
chemotherapy administration to cancer patients. The OCM encourages 
participating practices to improve care and lower costs through an 
episode-based payment model that financially incentivizes high-quality, 
coordinated care. The practices participating in OCM have committed to 
providing enhanced services to Medicare beneficiaries such as care 
coordination, navigation, and national treatment guidelines for care. 
The OCM provides an incentive to participating physician practices to 
comprehensively and appropriately address the complex care needs of the 
beneficiary population receiving chemotherapy treatment and heighten 
their focus on furnishing services that specifically improve the 
patient experience or health outcomes. Fourteen commercial payors are 
participating in OCM in alignment with Medicare to create broader 
incentives for care transformation at the physician practice level. 
Aligned financial incentives that result from engaging multiple payors 
leverage the opportunity to transform care for oncology patients across 
a broader population. Other payors benefit from savings, better 
outcomes for their enrollees, and greater information around care 
quality. Participating payors have the flexibility to design their own 
payment incentives to support their enrollees while aligning with the 
Innovation Center's specific goals for OCM of care improvement and 
efficiency.
    In addition to the Innovation Center's overarching goal of reduced 
program expenditures while preserving or enhancing quality of care, 
like OCM, the goal of the CJR Model is to transform care delivery with 
the result of better and more efficient care for patients undergoing 
the most common inpatient surgeries for Medicare beneficiaries: Hip and 
knee replacements (also called lower extremity joint replacements). 
This model tests bundled payment and quality measurement for an episode 
of care associated with hip and knee replacements to encourage 
hospitals, physicians, and post-acute care providers to work together 
to improve the quality and coordination of care from the initial 
hospitalization through recovery.
    For more information about the Innovation Center's innovative 
health care payment and service delivery models, see https://innovation.cms .gov/. Importantly, the Congress granted the Secretary 
broad authority to waive provisions of section 1877 of the Act and 
certain other Federal fraud and abuse laws when he determines it is 
necessary to implement the Shared Savings Program (see section 1899(f) 
of the Act) or test models under the Innovation Center's authority (see 
section 1115A(d)(1) of the Act). For more information about waivers 
issued using these authorities and guidance documents related to 
specific waivers, see https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/Fraud-and-Abuse-Waivers.html.
c. Commercial Payor and Provider-Driven Activity
    Although payments directly from a payor to a physician generally do 
not implicate the physician self-referral law unless the payor is 
itself an entity that furnishes designated health services, 
remuneration between physicians and other health care providers that 
provide care to a payor's enrolled patients (or subscribers) likely 
does implicate the physician self-referral law. Commercial

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payors and health care providers have implemented and continue to 
develop numerous innovative health care payment and care delivery 
models that do not include or specifically relate to CMS. Even though 
the physicians and health care providers who participate in these 
initiatives do not necessarily provide designated health services 
payable by Medicare as part of the initiatives, financial relationships 
between them may nonetheless implicate the physician self-referral law, 
which, in turn, may restrict referrals of Medicare patients. In 
considering the policies proposed in this proposed rule, we examined 
the value-based care delivery and payment models developed by 
commercial payors, as well as those developed directly by health care 
providers, to better understand the need for exceptions to the 
physician self-referral law that would permit financial relationships 
among health care providers who provide services to patients outside 
the Medicare program.
    CMS is aware of developments by payors, including the development 
of value-based care delivery and payment initiatives, that are intended 
to achieve the same population health goals as ACOs: Better health, 
affordability, and experience. The approach of these payment 
initiatives is to reward health care professionals for value rather 
than volume and promote higher quality of care and lower total medical 
costs. CMS is aware of numerous initiative arrangements with primary 
care physician groups in over 30 states. One particular program 
encompassed more than 2 million commercial subscribers and more than 
140,000 primary care physicians and specialists. The initiative 
expanded on prior initiatives involving large physician groups and 
integrated delivery systems, which showed successes, including better-
than-market quality performance, and total medical cost; 50 percent 
fewer unnecessary emergency room visits; better compliance with 
diabetes measures; and closure of 21 percent more gaps in care.
    Also of note, another payor has developed plans that promote care 
coordination measures by providing financial incentives to their 
hospital networks for reaching Integrated Care Certification from The 
Joint Commission. This payor's initiative was developed to evaluate the 
ability of identified health care settings to provide collaborative, 
coordinated services. The certification is a 3-year recognition of an 
organization's ability to provide clinically integrated care. (See 
https://www.jointcommission.org/assets/1/18/ICC_eligibility_12-14.pdf.) 
This type of care coordination is similar to the goals set forth in 
CMS' ACO programs and models, as well as our Bundled Payments for Care 
Improvement initiatives.
    In response to the CMS RFI mentioned in section I.B.1. of this 
proposed rule and in more detail in section I.B.2.d. of this proposed 
rule, commenters shared information regarding alternative payment 
models and other innovative programs sponsored by commercial payors. 
One commenter described its value-based contracting with physicians and 
health care providers as a move away from traditional volume-driven 
practices. This payor reimburses physicians for care coordination 
activities with incentive payments to facilitate better care; shares 
savings with physicians where their efforts helped achieve the cost 
savings; pays bundled rates for surgical procedures performed in 
ambulatory surgical centers (ASCs); and makes incentive payments to 
encourage the use of certain sites of service for particular cases. 
This commenter also noted that pharmaceutical manufacturers and other 
service providers are part of its value-based models. According to this 
commenter, its efforts will help align financial incentives with 
patient health outcomes and help prepare physicians and other providers 
to deliver care that improves patient outcomes but at lower cost, all 
while assuming greater financial risk. Other commenters described the 
breadth of their involvement in value-based health care delivery and 
payment. One of these commenters noted that 61 million (60 percent) of 
its subscribers have access to value-based providers and, in 2017, its 
value-based reimbursement accounted for 31 percent of total claims 
spending. Another commenter stated that it has 1,000 ACOs, with 15 
million subscribers who access care from over 110,000 physicians and 
1,100 hospitals participating in this value-based care program. These 
commenters stressed that their achievements in programs where the 
physician self-referral law is not implicated or does not impose an 
absolute prohibition on physician referrals could be expanded to 
benefit the Medicare program and its beneficiaries with meaningful 
reform of the physician self-referral regulations.
d. Request for Information Regarding the Physician Self-Referral Law 
(CMS-1720-NC)
    As described previously, the Secretary identified four priorities 
for HHS, the first of which is transforming our health care system into 
one that pays for value. Dramatically different from the system that 
existed when the physician self-referral statute was enacted, a value-
driven health care system pays for health and outcomes rather than 
sickness and procedures. We believe that a successful value-based 
system requires integration and coordination among physicians and other 
health care providers and suppliers. The Secretary has laid out four 
areas of emphasis for building a system that delivers value: maximizing 
the promise of health information technology (IT), improving 
transparency in price and quality, pioneering bold new models in 
Medicare and Medicaid, and removing government burdens that impede care 
coordination. This proposed rule focuses primarily on the final two 
areas of emphasis for value-based transformation--pioneering new models 
in Medicare and Medicaid and removing regulatory barriers that impede 
care coordination.
    As the Secretary and the Administrator of CMS (the Administrator) 
have made clear, we are well aware of the burden that regulations, 
including the physician self-referral regulations, place on health care 
professionals and organizations, especially with respect to care 
coordination. In 2017, through the annual payment rules, CMS requested 
comments on improvements that could be made to the health care delivery 
system that would reduce unnecessary burdens for clinicians, other 
providers, and patients and their families. In response, commenters 
shared information regarding the barriers to participation in health 
care delivery and payment reform efforts, both public and private, as 
well as the burdens of compliance with the physician self-referral 
statute and regulations as they exist today. As a result of our review 
of these comments, and with a goal of reducing regulatory burden and 
dismantling barriers to value-based care transformation while also 
protecting the integrity of the Medicare program, on June 25, 2018, we 
published in the Federal Register a Request for Information Regarding 
the Physician Self-Referral Law (as noted previously, the CMS RFI) 
seeking recommendations and input from the public on how to address any 
undue impact and burden of the physician self-referral statute and 
regulations (83 FR 29524). In the CMS RFI, we stated that we are 
particularly interested in input on issues that include the structure 
of arrangements between parties that participate in alternative payment 
models or other

[[Page 55771]]

novel financial arrangements, the need for revisions or additions to 
exceptions to the physician self-referral regulations, and terminology 
related to alternative payment models and the physician self-referral 
statute and regulations in general (83 FR 29525).
    We received approximately 375 comments in response to the CMS RFI. 
A wide range of stakeholders, including physicians and associations 
representing physicians, hospitals and associations representing 
hospitals, integrated health care delivery systems, non-Federal payors, 
individuals, rural stakeholders, and other components of the health 
care industry submitted comments. Commenters indicated that they 
appreciated the opportunity to submit feedback and recognized that the 
health care system is moving away from paying based on volume and 
toward payments based on value. Although most commenters believed that 
changes to the physician self-referral regulations are needed to 
support the move to a value-based payment system, many recognized that 
the potential for program integrity vulnerability or other abuses 
continues to be a significant threat that CMS should not ignore. We 
received comments on most of the issues for which we requested 
information. We appreciate the detailed comments submitted, and found 
them extremely informative and helpful in developing our proposals.
    Comments fell within five general themes. First, commenters 
requested new exceptions to the physician self-referral law to protect 
a variety of compensation arrangements between and among parties in 
CMS-sponsored alternative payment models and also those models that are 
sponsored by other payors. Commenters also requested protection for 
care coordination arrangements. Generally, commenters recognized the 
need for appropriate safeguards. Second, commenters requested a new 
exception to permit entities to donate cybersecurity technology and 
services to physicians. Third, commenters provided helpful feedback on 
terminology and concepts critical to the physician self-referral law, 
such as commercial reasonableness, fair market value, and compensation 
that ``takes into account'' the volume or value of referrals and is 
``set in advance.'' Fourth, some commenters expressed concerns that new 
exceptions or easing current restrictions could exacerbate 
overutilization and other harms. For example, some commenters indicated 
that financial gain should never be permitted to influence medical 
decision making, and some expressed concern that value-based payment 
systems drive industry consolidation and reduce competition. Finally, a 
few commenters provided feedback on issues that were not covered by the 
CMS RFI, such as requests to eliminate or keep the statutory 
restrictions for physician-owned hospitals and requests to eliminate, 
expand, or limit the scope and availability of the in-office ancillary 
services exception.

C. Application and Scope of the Physician Self-Referral Law--Generally

    Our intent in interpreting and implementing section 1877 of the Act 
has always been ``to interpret the [referral and billing] prohibitions 
narrowly and the exceptions broadly, to the extent consistent with 
statutory language and intent,'' and we have not vacillated from this 
position (66 FR 860). Our 1998 proposed rule was informed by our review 
of the legislative history of section 1877 of the Act, consultation 
with our law enforcement partners about their experience implementing 
and enforcing the Federal fraud and abuse laws, and empirical studies 
of physicians' referral patterns and practices, which concluded that a 
physician's financial relationship with an entity can affect a 
physician's medical decision-making and lead to overutilization. At the 
time of our earliest rulemakings, we did not have as much experience in 
administering the physician self-referral law or working with our law 
enforcement partners on investigations and actions involving violations 
of the physician self-referral law. Thus, despite our stated intention 
to interpret the law's prohibitions narrowly and the exceptions 
broadly, we proceeded with great caution when designing exceptions.
    Over the past decade, in particular, we have vastly expanded our 
knowledge of the aspects of financial relationships that result in 
Medicare program or patient abuse. Our administration of the CMS 
Voluntary Self-Referral Disclosure Protocol (SRDP), which has received 
over 1,100 submissions since its inception in 2010, has provided us 
insight into thousands of financial relationships--most of which were 
compensation arrangements--that ran afoul of the physician self-
referral law but posed no real risk of Medicare program or patient 
abuse. We made revisions to our regulations and shared policy 
clarifications in the CY 2016 and 2019 PFS rulemakings to address many 
issues related to the documentation requirements in the statutory and 
regulatory exceptions to the physician self-referral law, but we have 
not, to date, addressed other requirements in the regulatory exceptions 
that stakeholders, including CMS RFI commenters, have identified as 
adding unnecessary complexity without increasing safeguards for program 
integrity. In this proposed rule, we are proposing to delete certain 
requirements in our regulatory exceptions that may be unnecessary at 
this time. We are also proposing to revise existing exceptions or 
propose new exceptions for nonabusive arrangements that we identified 
through our administration of the SRDP and the CMS RFI comments, and 
for which there is currently no applicable exception to the physician 
self-referral law's referral and billing prohibitions. In sections 
II.D. and E. of this proposed rule, we describe our specific proposals.

D. Purpose of the Proposed Rule

    In 2017, CMS launched the Patients over Paperwork initiative, a 
cross-cutting, collaborative process that evaluates and streamlines 
regulations with a goal to reduce unnecessary burden, increase 
efficiencies, and improve the beneficiary experience. This effort 
emphasizes a commitment to removing regulatory obstacles to providers 
spending time with patients. Reducing unnecessary burden generally is a 
shared goal of the Patients over Paperwork initiative and the 
Regulatory Sprint. The Regulatory Sprint is focused specifically on 
identifying regulatory requirements or prohibitions that may act as 
barriers to coordinated care, assessing whether those regulatory 
provisions are unnecessary obstacles to coordinated care, and issuing 
guidance or revising regulations to address such obstacles and, as 
appropriate, encouraging and incentivizing coordinated care. As 
requested by the Administrator and the Deputy Secretary, we reexamined 
the physician self-referral statute and our regulations in order to 
identify ways to address any undue impact and burden of the law. 
Informed by the responses to the CMS RFI and our own experience in 
administering the physician self-referral law, we are proposing 
numerous revisions to modernize and clarify the physician self-referral 
regulations.
    The proposals set forth in section II.A. of this proposed rule are 
intended to alleviate the undue impact of the physician self-referral 
statute and regulations on parties that participate in alternative 
payment models and other novel financial arrangements and to facilitate 
care coordination among such parties. As part of the Regulatory Sprint, 
OIG is concurrently developing proposals under the anti-kickback 
statute and CMP law to address similar

[[Page 55772]]

concerns. Because many of the compensation arrangements between parties 
that participate in alternative payment models and other novel 
financial arrangements implicate both the physician self-referral law 
and the anti-kickback statute, we coordinated closely with OIG in 
developing some of the proposals in this proposed rule. Where 
appropriate, our aim is to promote alignment across our agencies' 
proposed rules to ease the compliance burden on the regulated industry. 
In some cases, CMS' proposals may be different in application or 
potentially more restrictive than OIG's comparable proposals, in 
recognition of the differences in statutory structures, authorities, 
and penalties. In other cases, OIG's proposals may be more restrictive. 
For some arrangements, it may be appropriate for the anti-kickback 
statute, which is an intent-based criminal law, to serve as 
``backstop'' protection for arrangements that might be protected by an 
exception to the strict liability physician self-referral law. Given 
the close nexus between our proposals and OIG's proposals, we encourage 
stakeholders to review and submit comments on both proposed rules. 
However, we may consider comments received only by OIG on its proposed 
rule if the comments address issues relevant to our proposals.
    Our proposals that do not directly address value-based arrangements 
are set forth in sections II.B., C., D., and E. of this proposed rule 
and seek to balance genuine program integrity concerns against the 
considerable burden of the physician self-referral law's billing and 
claims submission prohibitions by reassessing the appropriate scope of 
the statute's reach; establishing exceptions for common nonabusive 
compensation arrangements between physicians and the entities to which 
they refer Medicare beneficiaries for designated health services; and 
providing critically necessary guidance for physicians and health care 
providers and suppliers whose financial relationships are governed by 
the physician self-referral statute and regulations.

II. Provisions of the Proposed Regulations

A. Facilitating the Transition to Value-Based Care and Fostering Care 
Coordination

1. Background
    Transforming our health care system into one that pays for value is 
one of the Secretary's priorities. Based on the comments to the CMS 
RFI, it is clear that there is broad consensus throughout the health 
care industry regarding the urgent need for a movement away from legacy 
systems that pay for care on a FFS basis. Identifying and dismantling 
regulatory barriers to value-based care transformation is a critical 
step in this movement. We are aware of the effect the physician self-
referral law may have on parties participating or considering 
participation in integrated care delivery models, alternative payment 
models, and arrangements to incent improvements in outcomes and 
reductions in cost, and we share the optimism of commenters that the 
changes to the physician self-referral regulations proposed here will 
unlock innovation and enable HHS to realize its goal of transforming 
the health care system into one that pays for value.
    The health care landscape when the physician self-referral law was 
enacted bears little resemblance to the landscape of today. As some CMS 
RFI commenters highlighted, the physician self-referral law was enacted 
at a time when the goals of the various components of the health care 
system were not merely unaligned but often in conflict, with each 
component competing for a bigger share of the health care dollar 
without regard to the inefficiencies that resulted for the system as a 
whole--in other words, a volume-based system. According to several 
commenters, the current physician self-referral regulations--intended 
to combat overutilization in a volume-based world--are outmoded 
because, by their nature, integrated care models protect against 
overutilization by aligning clinical and economic performance as the 
benchmarks for value. And, in general, the greater the economic risk 
that providers assume, the greater the economic disincentive to 
overutilize services. According to more than one of these commenters, 
the current prohibitions are even antithetical to the stated goals of 
policy makers both in the Congress and within HHS for health care 
delivery and payment reform. Although we agree in concept, we continue 
to operate substantially in a volume-based payment system. Thus, we 
must proceed with caution, even as we propose the significant changes 
outlined in this proposed rule.
    The vast majority of CMS RFI commenters requested that CMS revise 
existing exceptions or develop one or more new exceptions to the 
physician self-referral law to address the concerns noted previously. 
(We consider commenters' requests for ``waivers'' of the physician 
self-referral law's prohibitions to be requests for new exceptions, as 
they have the same result; that is, if the conditions of the waiver or 
exception are met, the arrangement will be outside the ambit of the 
physician self-referral law's prohibitions.) Commenters urged us to 
exercise our authority to the broadest extent possible and focus on how 
the physician self-referral law should apply to the emerging models 
likely to dominate in the near future and beyond. Commenters also urged 
us not to limit the application of new policies to Medicare-sponsored 
models and payment methodologies. We intend for our proposals to 
facilitate an evolving health care delivery system, and endeavor here 
to strike the appropriate balance between ensuring program integrity 
and designing policies that will stand the test of time.
    A few commenters stressed that a multi-faceted approach that 
establishes multiple new exceptions would only add more burden and 
complexity to the law. These commenters requested that we establish a 
single exception, similar to the Shared Savings Program Participation 
Waiver (80 FR 66726), that would apply to any compensation arrangement, 
regardless of the type of arrangement, payment model, or level of risk 
undertaken by the parties to the arrangement. Although we appreciate 
the commenters' concerns about complexity, we are cognizant of the need 
to ensure the integrity of the Medicare program and believe that the 
approach advocated by the commenters would not adequately protect the 
program and its beneficiaries. We believe that the proposals described 
in this section of the rule achieve the right balance between ensuring 
program integrity, making compliance with the physician self-referral 
law readily achievable, and providing the flexibility required by 
participants in value-based health care delivery and payment systems. 
As noted previously, in developing the proposed exceptions, 
definitions, and related policies, we coordinated closely with OIG. 
Where possible and feasible, we have aligned with OIG's proposals to 
ease the compliance burden on the regulated industry.
2. Proposed Definitions and Exceptions
    We are proposing at Sec.  411.357(aa) new exceptions to the 
physician self-referral law for compensation arrangements that satisfy 
specified requirements based on the characteristics of the arrangement 
and the level of financial risk undertaken by the parties to the 
arrangement or the value-based enterprise of which they are 
participants. The exceptions would apply regardless of whether the

[[Page 55773]]

arrangement relates to care furnished to Medicare beneficiaries, non-
Medicare patients, or a combination of both. Although we believe that 
revisions to the physician self-referral regulations are crucial to 
facilitating the transition to a value-based health care delivery and 
payment system, nothing in our proposals is intended to suggest that 
many value-based arrangements, such as pay-for-performance arrangements 
or certain risk-sharing arrangements, do not satisfy the requirements 
of existing exceptions to the physician self-referral law.
    For purposes of applying the proposed exceptions, we are proposing 
new definitions at Sec.  411.351 for the following terms: Value-based 
activity; value-based arrangement; value-based enterprise; value-based 
purpose; VBE participant; and target patient population. The 
definitions are essential to the application of the exceptions. The 
proposed exceptions apply only to compensation arrangements that 
qualify as value-based arrangements. Thus, the exceptions may be 
accessed only by those parties that qualify as VBE participants in the 
same value-based enterprise. We intend for the definitions and 
exceptions together to create the set of requirements for protection 
from the physician self-referral law's referral and claims submission 
prohibitions.
    To facilitate readers' review of our proposals, we discuss the 
proposed definitions first.
a. Proposed Definitions
    The proposed ``value-based'' definitions are interconnected and, 
for the best understanding, should be read together. For purposes of 
applying the proposed exceptions at Sec.  411.357(aa), we are proposing 
the following definitions at Sec.  411.351:
     Value-based activity would mean any of the following 
activities, provided that the activity is reasonably designed to 
achieve at least one value-based purpose of the value-based enterprise: 
(1) The provision of an item or service; (2) the taking of an action; 
or (3) the refraining from taking an action. The making of a referral 
is not a value-based activity.
     Value-based arrangement would mean an 
arrangement for the provision of at least one value-based activity for 
a target patient population between or among: (1) The value-based 
enterprise and one or more of its VBE participants; or (2) VBE 
participants in the same value-based enterprise.
     Value-based enterprise would mean two or more 
VBE participants: (1) Collaborating to achieve at least one value-based 
purpose; (2) each of which is a party to a value-based arrangement with 
the other or at least one other VBE participant in the value-based 
enterprise; (3) that have an accountable body or person responsible for 
financial and operational oversight of the value-based enterprise; and 
(4) that have a governing document that describes the value-based 
enterprise and how the VBE participants intend to achieve its value-
based purpose(s).
     Value-based purpose would mean: (1) Coordinating 
and managing the care of a target patient population; (2) improving the 
quality of care for a target patient population; (3) appropriately 
reducing the costs to, or growth in expenditures of, payors without 
reducing the quality of care for a target patient population; or (4) 
transitioning from health care delivery and payment mechanisms based on 
the volume of items and services provided to mechanisms based on the 
quality of care and control of costs of care for a target patient 
population.
     VBE participant would mean an individual or 
entity that engages in at least one value-based activity as part of a 
value-based enterprise.
     Target patient population would mean an 
identified patient population selected by a value-based enterprise or 
its VBE participants based on legitimate and verifiable criteria that 
are set out in writing in advance of the commencement of the value-
based arrangement and further the value-based enterprise's value-based 
purpose(s).
    The activities that serve as the basis for the compensation 
arrangements are key to qualifying as a value-based arrangement to 
which the proposed exceptions at Sec.  411.357(aa) would apply. We are 
proposing to identify these activities as ``value-based activities'' 
and propose at Sec.  411.351 to define ``value-based activity'' to 
include the provision of an item, the provision of a service, the 
taking of an action, or the refraining from taking an action, provided 
that the value-based activity is reasonably designed to achieve at 
least one value-based purpose of the value-based enterprise of which 
the parties are participants. Sometimes value-based activities are 
easily identifiable as the provision of items or services to a patient; 
other times, identifying a specific activity responsible for an outcome 
in a value-based health care system can be difficult. We appreciate 
that remuneration paid in furtherance of the objectives of a value-
based health care system does not always involve one-to-one payments 
for items or services provided by a party to an arrangement. For 
example, a shared savings payment distributed by an entity to a 
downstream physician who joined with other providers and suppliers to 
achieve the savings represents the physician's agreed upon share of 
such savings rather than a payment for specific items or services 
furnished by the physician to the entity (or on the entity's behalf). 
And, when payments are made to encourage a physician to adhere to a 
redesigned care protocol, such payments are made, in part, in 
consideration of the physician refraining from following his or her 
past patient care practices rather than for direct patient care items 
or services furnished by the physician. On the other hand, the act of 
referring patients for designated health services is itself not a 
value-based activity. As a general matter, referrals are not items or 
services for which a physician may be compensated under the physician 
self-referral law, and payments for referrals are antithetical to the 
purpose of the statute (69 FR 16096). We discuss this in further detail 
in section II.D.2.c. of this proposed rule.
    Value-based activities must be reasonably designed to achieve at 
least one value-based purpose of the value-based enterprise. For 
example, if the value-based purpose of the enterprise is to coordinate 
and manage the care of patients who undergo lower extremity joint 
replacement procedures, a value-based arrangement might require routine 
post-discharge meetings between a hospital and the physician primarily 
responsible for the care of the patient following discharge from the 
hospital. However, if the value-based purpose of the enterprise is to 
reduce costs to, or growth in expenditures of, payors while improving 
or maintaining the improved quality of care for the target patient 
population, providing patient care services (the purported value-based 
activity) without monitoring their utilization would not appear to be 
reasonably designed to achieve that purpose.
    The definition of ``value-based arrangement'' is key to our 
proposals aimed at facilitating the transition to value-based care and 
fostering care coordination, as the proposed exceptions apply only to 
arrangements that qualify as value-based arrangements. Under our 
proposal, an arrangement between a value-based enterprise and one or 
more of its VBE participants (if the enterprise is an ``entity'' as 
defined at Sec.  411.351 and the VBE participants are physicians), or 
between VBE participants in the same value-based enterprise, for the 
provision of at least one value-based activity for a target patient 
population would qualify as a value-based arrangement. Because

[[Page 55774]]

our proposed exceptions at Sec.  411.357(aa) would apply only to 
compensation arrangements (as defined at Sec.  411.354(c)), the value-
based arrangement must be a compensation arrangement and not another 
type of financial relationship to which the physician self-referral law 
applies. Effectively, the parties to a value-based arrangement would be 
an entity furnishing designated health services and a physician; 
otherwise, the physician self-referral law's prohibitions would not be 
implicated. We discuss the other terminology used in the proposed 
definition of ``value-based arrangement'' in this section of the 
proposed rule.
    Patient care coordination and management are the foundation of a 
value-based health care delivery system. Reform of the delivery of 
health care through better care coordination--including more efficient 
transitions for patients moving between and across care settings and 
providers,\1\ reduction of orders for duplicative items and services, 
and open sharing of medical records and other important health data 
across care settings and among a patient's providers (consistent with 
privacy and security rules)--is integrally connected to reforming 
health care payment systems to shift from volume-driven to value-driven 
payment models. We expect that most value-based arrangements would 
involve activities that coordinate and manage the care of a target 
patient population, but have not proposed to limit the universe of 
compensation arrangements that would qualify as value-based 
arrangements to those arrangements specifically for the coordination 
and management of patient care. We seek comment regarding whether this 
approach--designed to provide needed flexibility for parties 
participating in alternative payment models (including those sponsored 
by CMS) to succeed in the transition to value-based payment--poses a 
risk of program or patient abuse that should be addressed through a 
revised definition of ``value-based arrangement'' that requires care 
coordination and management in order to qualify as a value-based 
arrangement.
---------------------------------------------------------------------------

    \1\ For purposes of this section, the term ``providers'' 
includes both providers and suppliers as those terms are defined in 
42 CFR 400.202, as well as other components of the health care 
system. The term is used generically unless otherwise noted.
---------------------------------------------------------------------------

    The exceptions proposed at Sec.  411.357(aa) apply only to value-
based arrangements, which, as described previously, must be between a 
value-based enterprise and one or more of its VBE participants or 
between parties in the same value-based enterprise. We intend the 
definition of ``value-based enterprise'' to include only organized 
groups of health care providers, suppliers, and other components of the 
health care system collaborating to achieve the goals of a value-based 
health care system. An ``enterprise'' may be a distinct legal entity--
such as an ACO--with a formal governing body, operating agreement or 
bylaws, and the ability to receive payment on behalf of its affiliated 
health care providers. An ``enterprise'' may also consist only of the 
two parties to a value-based arrangement with the written documentation 
recording the arrangement serving as the required governing document 
that describes the enterprise and how the parties intend to achieve its 
value-based purpose(s). (We note, as described below, that a value-
based arrangement need not be reduced to writing to satisfy the 
requirements of the exceptions proposed at Sec.  411.357(aa)(1) and 
(2).) Whatever its size and structure, a value-based enterprise is 
essentially a network of participants (such as clinicians, providers, 
and suppliers) that have agreed to collaborate with regard to a target 
patient population to put the patient at the center of care through 
care coordination, increase efficiencies in the delivery of care, and 
improve outcomes for patients. We have proposed our definition of 
``value-based enterprise'' in terms of the functions of the enterprise 
as it is not our intention to dictate or limit the appropriate legal 
structures for qualifying as a value-based enterprise.
    To qualify as a value-based enterprise, among other things, each 
participant in the network, whom we refer to as VBE participants, must 
be a party to at least one value-based arrangement with at least one 
other participant in the network or with the value-based enterprise (if 
the enterprise is an ``entity'' as defined at Sec.  411.351). (If the 
network is comprised of only two VBE participants, they must have at 
least one value-based arrangement with each other in order for the 
network to qualify as a value-based enterprise.) We describe the 
proposed definition of VBE participant in more detail in this section 
of the proposed rule. In addition, the network seeking to qualify as a 
value-based enterprise must have an accountable body or person that is 
responsible for the financial and operational oversight of the 
enterprise. This may be the governing board, a committee of the 
governing board, or a corporate officer of the legal entity that is the 
value-based enterprise, or this may be the party to a value-based 
arrangement that is designated as being responsible for the financial 
and operational oversight of the arrangement between the parties (if 
the ``enterprise'' is a network consisting of just the two parties). 
Finally, the network must have a governing document that describes the 
network (that is, the value-based enterprise) and how the VBE 
participants intend to achieve its value-based purpose(s). Implicit in 
this definition is that the value-based enterprise must have at least 
one value-based purpose.
    Also critical to qualifying as a value-based arrangement is the 
purpose of the arrangement. As noted previously, only arrangements 
reasonably designed to achieve at least one value-based purpose may 
potentially qualify as a value-based arrangement to which the 
exceptions proposed at Sec.  411.357(aa) would apply. Our proposed 
definition of ``value-based purpose'' identifies four core goals 
related to a target patient population. These are: coordinating and 
managing the care of the target patient population; improving the 
quality of care for the target patient population; appropriately 
reducing the costs to, or the growth in expenditures of, payors without 
reducing the quality of care for the target patient population; and 
transitioning from health care delivery and payment mechanisms based on 
the volume of items and services provided to mechanisms based on the 
quality of care and control of costs of care for the target patient 
population. One or more of these purposes must anchor every 
compensation arrangement that qualifies as a value-based arrangement to 
which our proposed new exceptions would apply. Some of these goals are 
recognizable as part of the successor frameworks to the ``triple aim'' 
that are integral to CMS' value-based programs and our larger quality 
strategy to reform how health care is delivered and reimbursed. 
Although we expect that stakeholders will be familiar with these 
concepts, we seek comment regarding whether additional interpretation 
is necessary. Specifically, with respect to the value-based purpose of 
appropriately reducing the costs to, or the growth in expenditures of, 
payors without reducing the quality of care for the target patient 
population, we are considering whether to require that the purpose of 
the value-based enterprise is to improve quality or maintain the 
already-improved quality of care for the target patient population (in 
addition to appropriately reducing the costs to or the growth of 
expenditures of payors). That is, the value-based purpose identified at 
proposed Sec.  411.351

[[Page 55775]]

(definition of value-based purpose, paragraph (3)) would state: 
Appropriately reducing the costs to, or the growth in expenditures of, 
payors while improving or maintaining the improved quality of care for 
the target patient population. If we adopt such a policy, a value-based 
enterprise could not select this value-based purpose until after it has 
already achieved some improvement in the quality of care for the target 
patient population that is the subject of the value-based arrangement. 
We seek comment regarding this proposal.
    We are seeking comment whether it is desirable or necessary to 
express in regulation text what is meant by ``coordinating and managing 
care'' and, if so, whether ``coordinating and managing care'' should be 
defined to mean the deliberate organization of patient care activities 
and sharing of information between two or more VBE participants, 
tailored to improving the health outcomes of the target patient 
population, in order to achieve safer and more effective care for the 
target patient population. We note that this would align closely with 
the definition of ``coordinating and managing care'' under 
consideration by OIG. We also seek comment regarding permissible ways 
to determine whether quality of care has improved, a methodology for 
determining whether costs are reduced or expenditure growth has been 
stopped, or what parties must do to show they are transitioning from 
health care delivery and payment mechanisms based on the volume of 
items and services provided to mechanisms based on the quality of care 
and control of costs of care. The transitioning from volume-based to 
value-based health care delivery and payment mechanisms is the fourth 
goal identified in our proposed definition of value-based purpose. We 
interpret ``transitioning from health care delivery and payment 
mechanisms based on the volume of items and services provided to 
mechanisms based on the quality of care and control of costs of care 
for the target patient population'' as a category that includes the 
integration of VBE participants in team-based coordinated care models; 
establishing the infrastructure necessary to provide patient-centered 
coordinated care; and accepting (or preparing to accept) increased 
levels of financial risk from payors or other VBE participants in 
value-based arrangements. We are cognizant that this goal may lack the 
precision desired in the physician self-referral regulations. 
Specifically, without clear boundaries as to what qualifies as 
``transitioning from health care delivery and payment mechanisms based 
on the volume of items and services provided to mechanisms based on the 
quality of care and control of costs of care for the target patient 
population,'' it may be difficult to know whether the underlying 
purpose of an arrangement qualifies as a value-based purpose that 
triggers the availability of the proposed new exceptions at Sec.  
411.357(aa). We seek comment with respect to this concern and the 
proposed definition of value-based purpose generally. We believe that 
reducing costs to patients is a laudable objective of a value-based 
arrangement when the reduction in costs relates to services that are 
unnecessary for the patient and does not inappropriately shift costs to 
the payor or another participant in the health care system. Due to our 
concerns about gaming and the inappropriate shifting of costs, we did 
not propose to include the reduction of costs to patients as a value-
based purpose. We seek comment on this policy determination.
    As noted previously, we proposed to define VBE participant (that 
is, a participant in a value-based enterprise) to mean an individual or 
entity that engages in at least one value-based activity as part of a 
value-based enterprise, as described in this section II.A.2.a. We note 
that the word ``entity,'' as used in the proposed definition of ``VBE 
participant,'' is not limited to non-natural persons that qualify as 
``entities'' as defined at current Sec.  411.351. Our proposed 
definition of ``VBE participant'' is intended to align with the 
definition under consideration by OIG. We seek comment regarding 
whether the use of the word ``entity'' in this definition would cause 
confusion due to the fact that the universe of non-natural persons 
(that is, entities) that could qualify as VBE participants is greater 
than the universe of non-natural persons that qualify as ``entities'' 
as defined at current Sec.  411.351 and, if so, alternatives for 
defining ``VBE participant'' for purposes of section 1877 of the Act 
and the physician self-referral regulations.
    Based on the experience of our law enforcement partners, including 
their oversight experience, we are also concerned about protecting 
potentially abusive arrangements between certain types of entities that 
furnish designated health services for purposes of the physician self-
referral law. Specifically, we are concerned about compensation 
arrangements between physicians and laboratories or suppliers of 
durable medical equipment, prosthetics, orthotics, and supplies 
(DMEPOS) that may be intended to improperly influence or capture 
referrals without contributing to the better coordination of care for 
patients. (See the 2013 EHR final rule (78 FR 78751), issued on 
December 27, 2013, for a discussion of our concerns regarding the 
donation of EHR items and services by laboratories (78 FR 78757 through 
78762).) We are considering whether to also exclude laboratories and 
DMEPOS suppliers from the definition of VBE participant or, in the 
alternative, whether to include in the exceptions at Sec.  411.357(aa), 
if finalized, a requirement that the arrangement is not between a 
physician (or immediate family member of a physician) and a laboratory 
or DMEPOS supplier. In particular, it is not clear to us that 
laboratories and DMEPOS suppliers have the direct patient contacts that 
would justify their inclusion as parties working under a protected 
value-based arrangement to achieve the type of patient-centered care 
that is a core tenet of care coordination and a value-based health care 
system. We solicit public comment on the role laboratories and DMEPOS 
suppliers play in care coordination for patients and value-based 
delivery and payment models. We are interested in learning more about 
how laboratories or DMEPOS suppliers may be important or necessary to 
foster care coordination for patients, as well as roles they may play 
that raise an undue risk of program or patient abuse. We note that, 
regardless of whether we exclude these suppliers (or any other 
providers or suppliers) from the definition of ``VBE participant,'' 
they may nevertheless be part of a value-based enterprise.
    Due to our (and our law enforcement partners') ongoing program 
integrity concerns with certain other components of the health care 
system and to maintain consistency with policies under consideration by 
OIG, we are also considering whether to exclude the following 
providers, suppliers, and other persons from the definition of ``VBE 
participant'': Pharmaceutical manufacturers; manufacturers and 
distributors of DMEPOS; pharmacy benefit managers (PBMs); wholesalers; 
and distributors. We believe that aligning our policies, if finalized, 
would minimize complexity for parties whose arrangements implicate both 
the physician self-referral law and the anti-kickback statute. The 
exclusion from the definition of ``VBE participant'' would, in 
operation, serve to exclude a compensation arrangement between a 
physician and the party that is not a VBE participant from the 
application of the proposed exceptions for value-based

[[Page 55776]]

arrangements. Therefore, in the alternative, we are considering whether 
to include in the exceptions at Sec.  411.357(aa) for value-based 
arrangements, if finalized, a requirement that the arrangement is not 
between a physician (or immediate family member of a physician) and a: 
Pharmaceutical manufacturer; manufacturer or distributor of DMEPOS; 
pharmacy benefit manager; wholesaler; or distributor. We note that 
pharmacy benefit managers, manufacturers, and distributors usually are 
not entities furnishing designated health services for purposes of the 
physician self-referral law and, for the most part, serve only as 
persons in unbroken chains of financial relationships that may 
establish an indirect ownership or investment interest or an indirect 
compensation arrangement under the regulations at Sec.  411.354(b) and 
(c). Finally, even if we exclude pharmaceutical manufacturers, 
manufacturers and distributors of DMEPOS, pharmacy benefit managers, 
wholesalers, distributors, or other parties from the definition of 
``VBE participant,'' no person, whether or not a provider or supplier 
in the Medicare program, would be precluded from participating in and 
contributing to a value-based enterprise. We seek comment on which 
persons and entities should qualify as VBE participants; our 
alternative proposals regarding protection for arrangements involving 
physicians (or their immediate family members) and the specified 
persons or organizations; and, in particular, whether other providers 
or suppliers, such as health technology companies, should be excluded 
from the definition of VBE participant or the application of the 
proposed exceptions due to similar program integrity concerns. We note 
that we intend to align our policies with policies under consideration 
by OIG where possible and appropriate, and will consider comments 
submitted to OIG regarding its proposed definition of ``VBE 
participant'' as we develop policies in any final rule.
    We are proposing to define the target patient population for which 
VBE participants undertake value-based activities to mean the 
identified patient population selected by a value-based enterprise or 
its VBE participants using legitimate and verifiable criteria that are 
set out in writing in advance of the commencement of the value-based 
arrangement and further the value-based enterprise's value-based 
purpose(s). Legitimate and verifiable criteria may include medical or 
health characteristics (for example, patients undergoing knee 
replacement surgery or patients with newly diagnosed type 2 diabetes), 
geographic characteristics (for example, all patients in an identified 
county or set of zip codes), payor status (for example, all patients 
with a particular health insurance plan or payor), or other defining 
characteristics. Selecting a target patient population consisting of 
only lucrative or adherent patients (cherry-picking) and avoiding 
costly or noncompliant patients (lemon-dropping) would not be 
permissible under most circumstances, as we would not consider the 
selection criteria to be legitimate (even if verifiable). Generally 
speaking, choosing a target patient population in a manner driven 
primarily by a profit motive or purely financial concerns would not be 
legitimate. We seek comment regarding the requirement that selection 
criteria be legitimate and verifiable, as well as any additional or 
substitute criteria that we might include in the definition of target 
patient population. We also seek comment on additional selection 
criteria that should or should not be considered ``legitimate and 
verifiable'' and on whether we should specify in regulation text a non-
exhaustive list of selection criteria that would or would not be 
``legitimate and verifiable.''
b. Proposed Exceptions
    The physician self-referral law (along with other Federal fraud and 
abuse laws) provides critical protection against a range of troubling 
patient and program abuses that may result from volume-driven, FFS 
payment. These abuses include unnecessary utilization, increased costs 
to payors and patients, inappropriate steering of patients, corruption 
of medical decision making, and competition based on buying referrals 
instead of delivering quality, convenient care. While value-based 
payment models hold promise for addressing these abuses, they may pose 
risks of their own, including risks of stinting on care 
(underutilization), cherry-picking, lemon-dropping, and manipulation or 
falsification of data used to verify outcomes. Moreover, during the 
transformation to value-based payment, many new delivery and payment 
models include both FFS and value-based payment mechanisms in the same 
model, subjecting providers to mixed incentives, and presenting the 
possibility of arrangements that pose both traditional FFS risk and 
emerging value-based payment risks.
    In removing regulatory barriers to innovative care coordination and 
value-based arrangements, we are faced with the challenge of designing 
protection for emerging health care arrangements, the optimal form, 
design, and efficacy of which remains unknown or unproven. This is a 
fundamental challenge of regulating during a period of innovation and 
experimentation. In addition, the health care industry is experiencing 
very rapid change, and there is a lack of predictability of desired 
future arrangements. Matters are further complicated by the substantial 
variation in care coordination and value-based arrangements 
contemplated by the health care industry, variation among patient 
populations and providers, emerging health technologies and data 
capabilities, and our desire not to chill beneficial innovations. Thus, 
the one-size-fits-all approach to protection from the physician self-
referral law's prohibitions that was recommended by many commenters may 
be less than optimal.
    The design and structure of our proposed exceptions are intended to 
further several complementary goals. First, we have endeavored to 
remove regulatory barriers, real or perceived, to create space and 
flexibility for industry-led innovation in the delivery of better and 
more efficient coordinated health care for patients and improved health 
outcomes. Second, consistent with the Secretary's priorities, the 
historical trend toward improving health care through better care 
coordination, and the increasing adoption of value-based models in the 
health care industry, we are proposing a set of exceptions that, as a 
whole, may create additional incentives for the industry to move away 
from volume-based health care delivery and payment and toward 
population health and other non-FFS payment models. In this regard, our 
proposed exception structure incorporates additional flexibilities for 
compensation arrangements between parties that have increased their 
participation in mature value-based payment models and their assumption 
of downside financial risk under such models. As discussed in more 
detail in this section of the proposed rule, our expectation is that 
meaningful assumption of downside financial risk would not only serve 
the overall transformation of industry payment systems, but could also 
curb, at least to some degree, FFS incentives to order medically 
unnecessary or overly costly items and services, key patient and 
program harms addressed by the physician self-referral law (and other 
Federal fraud and abuse laws).
    As described in this proposed rule and in the CMS RFI, the current 
exceptions to the physician self-referral law include requirements that 
may create significant challenges for parties that wish to develop 
novel financial

[[Page 55777]]

arrangements to facilitate their successful participation in health 
care delivery and payment reform efforts. Most of the commonly relied 
upon exceptions to the physician self-referral law include requirements 
related to compensation that may be difficult to satisfy where the 
arrangement is designed to foster the behavior shaping necessary for 
the provision of high-quality patient care that is not reimbursed on a 
traditional FFS basis. Requirements that compensation be set in 
advance, fair market value, and not take into account the volume or 
value of a physician's referrals or the other business generated 
between the parties may inhibit the innovation necessary to achieve 
well-coordinated care that results in better health outcomes and 
reduced expenditures (or reduced growth in expenditures). For example, 
depending on their structure, arrangements for the distribution of 
shared savings or repayment of shared losses, gainsharing arrangements, 
and pay-for-performance arrangements that provide for payments to 
refrain from ordering unnecessary care, among others, may be unable to 
satisfy the requirements of an existing exception to the physician 
self-referral law. According to one commenter, a typical shared savings 
payment inherently takes into account the volume or value of referrals 
for hospital services and other designated health services, but does so 
by creating an inverse correlation between the volume or value of 
referrals and the amount of the shared savings payment. As another 
commenter suggested, many stakeholders simply do not possess a degree 
of risk tolerance sufficient to participate in new models of health 
care delivery and payment if they have to apply the requirements of the 
existing exceptions to their financial arrangements, even when such 
arrangements do not have the characteristics that the physician self-
referral law was intended to constrain. Thus, rather than being a check 
on bad actors, in the context of value-based care models, the physician 
self-referral law may actually be having a chilling effect on models 
and arrangements designed to ``bend the cost curve and improve quality 
of care to patients.''
    We have carefully considered the CMS RFI comments and anecdotal 
information shared by stakeholders regarding the impact of the specific 
requirements that compensation be set in advance, fair market value, 
and not determined in any manner that takes into account the volume or 
value of a physician's referrals or the other business generated 
between the parties, law enforcement and judicial activity related to 
these requirements, and our own observations from our work (including 
our work on fraud and abuse waivers for CMS accountable care and other 
models). We are concerned that the inclusion of such requirements in 
the exceptions for value-based arrangements proposed at Sec.  
411.357(aa) would conflict with our goal of addressing regulatory 
barriers to value-based care transformation. As one commenter stated, 
these requirements simply may not be suited to the collaborative models 
that reward value and outcomes.
    We note that two of the exceptions for value-based arrangements 
that we are proposing are available to protect arrangements even when 
payments from the payor are made on a FFS basis. Even so, we are not 
proposing to require that remuneration is consistent with fair market 
value and not determined in any manner that takes into account the 
volume or value of a physician's referrals or the other business 
generated by the physician for the entity. Instead, we are proposing a 
carefully woven fabric of safeguards, including requirements 
incorporated through the applicable value-based definitions. We believe 
that the disincentives for overutilization, stinting on patient care, 
and other harms the physician self-referral law was intended to address 
that are built into the proposed value-based definitions will operate 
in tandem with the requirements included in the proposed exceptions and 
be sufficient to protect against program and patient abuse. This is 
especially true where full or meaningful downside financial risk is 
assumed. We are, however, including in two of the proposed exceptions 
for value-based arrangements that the methodology used to determine the 
amount of the remuneration--but not the actual amount of the 
remuneration itself--is set in advance of the undertaking of value-
based activities for which the remuneration is provided. We seek 
comment on our approach. We are especially interested in comments 
regarding whether the safeguards provided by the combination of the 
proposed definitions and the requirements of the proposed exceptions 
would be adequate to protect against program or patient abuse and, if 
not, whether it would be appropriate or necessary to include 
requirements in any final exceptions that remuneration: (1) Not take 
into account the volume or value of a physician's referrals or the 
other business generated by the physician for the entity; and (2) is 
consistent with the fair market value of the value-based activities 
provided under the arrangement. We are also interested in comments 
regarding whether we should include a requirement that the value-based 
arrangement is commercially reasonable as defined in our alternative 
proposals described in section II.B.2. of this proposed rule.
    Because the proposed exceptions for value-based arrangements do not 
include a requirement that the remuneration is not determined in any 
manner that takes into account the volume or value of referrals, the 
special rule at current Sec.  411.354(d)(4) would not apply to 
arrangements protected under the exceptions. (See section II.B. of this 
proposed rule for a more fulsome discussion of the history of the 
special rule at Sec.  411.354(d)(4).) This special rule permits the 
entity of which the physician is a bona fide employee, independent 
contractor, or party to a managed care contract to direct the 
physician's referrals to a particular provider, practitioner, or 
supplier, provided that the compensation arrangement meets specified 
conditions designed to preserve the physician's judgment as to the 
patient's best medical interests, avoid interfering in an insurer's 
operations, and, importantly, protect patient choice.
    The right to freedom of choice of providers is expressed and 
reinforced in almost every aspect of the Medicare program. We believe 
that a patient's control over who provides his or her care directly 
contributes to improved health outcomes and patient satisfaction, 
enhanced quality of care and efficiency in the delivery of care, 
increased competition among providers, and reduced medical costs, all 
of which are aims of the Medicare program. Protection of patient choice 
is especially critical in the context of referrals made by a physician 
to an entity with which the physician has a financial relationship, as 
the physician's financial self-interest may impact, if not infringe on, 
a patient's right to control who furnishes his or her care. For this 
reason, we are proposing to make compliance with Sec.  
411.354(d)(4)(iv) a requirement of the exceptions that apply to 
employment arrangements, personal service arrangements, or managed care 
contracts that purport to restrict or direct physician referrals, 
including the proposed exceptions at Sec.  411.357(aa) for value-based 
arrangements. (We are not proposing to include this requirement in the 
exception for group practice arrangements with a hospital at Sec.  
411.357(g) because the statute does not authorize the Secretary to 
impose additional requirements by regulation

[[Page 55778]]

beyond those included in the statute at section 1877(e)(7) of the Act.) 
As described in section II.B. of this proposed rule, we are also 
proposing clarifying revisions to current Sec.  411.354(d)(4). In the 
alternative, rather than reference Sec.  411.354(d)(4)(iv), we are 
proposing to include at Sec.  411.357(aa) a separate requirement 
applicable specifically to value-based arrangements to ensure that, 
regardless of the nature of the value-based arrangement and its value-
based purpose(s), the regulation adequately protects a patient's choice 
of health care provider, the physician's medical judgment, and the 
ability of health insurers to efficiently provide care to their 
members. We seek comment on the best approach to address our concerns.
    Finally, we have endeavored to be as neutral as possible with 
respect to the types of value-based enterprises and value-based 
arrangements the proposed exceptions would cover in order to allow for 
innovation and experimentation in the health care marketplace and so 
that compliance with the physician self-referral law is not the driver 
of innovation or the barrier to innovation. One CMS RFI commenter 
asserted that, in their current state, the physician self-referral 
regulations discourage the development and adoption of rewards that 
encourage change on a broad scale, across all patient populations and 
payor types, and over indefinite periods of time. It is for this reason 
also that we are not proposing to limit the exceptions to CMS-sponsored 
models or establish separate exceptions with different criteria for 
arrangements that exist outside of CMS-sponsored models.
    When the physician self-referral law was expanded in 1993 to apply 
to designated health services beyond the clinical laboratory services 
to which the original 1989 law applied, according to the sponsor of the 
legislation, the Honorable Fortney ``Pete'' Stark, the physician self-
referral law was intended to address physician referrals that drive up 
health care costs and result in unnecessary utilization of services. 
(See Opening Statement of the Honorable Pete Stark, Physician Ownership 
and Referral Arrangements and H.R. 345, ``The Comprehensive Physician 
Ownership and Referral Act of 1993,'' House of Representatives, 
Committee on Ways and Means, Subcommittee on Health, April 20, 1993, p. 
144.) Mr. Stark went on to emphasize the importance of a physician's 
ability to offer patients neutral advice about whether or not services 
are necessary, which services are preferable, and who should provide 
them. He noted that the physician self-referral law would improve 
consumers' confidence in their physicians and the health care system 
generally. In other words, the legislation was proposed (and the law 
ultimately enacted) to counter the effects of physician decision making 
driven by financial self-interest--overutilization of health care 
services, the suppression of patient choice, and the impact on the 
medical marketplace.
    As discussed previously in this proposed rule, in 1989 and 1993, 
the vast majority of Medicare services were reimbursed based on volume 
under a retrospective FFS system. The statutory exceptions to the 
physician self-referral law's referral and billing prohibitions were 
developed during this time of FFS, volume-based payment, with 
conditions which, if met, would allow the physician's ownership or 
investment interest or compensation arrangement to proceed without 
triggering the ban on the physician's referrals or the entity's claims 
submission. We believe that the exceptions in section 1877 of the Act 
indicate the Congress' stance on what safeguards are necessary to 
protect against program or patient abuse in a system where Medicare 
payment is available for each service referred by a physician and 
furnished by a provider or supplier. To date, the exceptions for 
compensation arrangements issued under section 1877(b)(4) of the Act, 
which grants the Secretary authority to establish exceptions for 
financial relationships that the Secretary determines do not pose a 
risk of program or patient abuse, have generally followed the blueprint 
established by the Congress for compensation arrangements that exist in 
a FFS system.
    Value-based health care delivery and payment shifts the paradigm of 
our analysis under section 1877(b)(4) of the Act. When no longer 
operating in a volume-based system, or operating in a system that 
reduces the amount of FFS payment by combining it with some level of 
value-based payment, we believe that our exceptions need fewer 
``traditional'' requirements to ensure the arrangements they protect do 
not pose a risk of program or patient abuse. This is because a value-
based health care delivery and payment system itself provides 
safeguards against harms such as overutilization, care stinting, 
patient steering, and negative impacts on the medical marketplace. 
Using the Secretary's authority under section 1877(b)(4) of the Act, we 
are proposing three exceptions for compensation arrangements that we 
believe do not pose a risk of program or patient abuse when considered 
in concert with: (1) The program integrity and other requirements 
integrated in the proposed definitions used to apply the exceptions 
only to compensation arrangements that qualify as ``value-based 
arrangements;'' and (2) the disincentives to perpetrate the harms the 
physician self-referral law was intended to deter that are intrinsic in 
the assumption of substantial downside financial risk and meaningful 
participation in value-based health care delivery and payment models. 
Specifically, at proposed Sec.  411.357(aa)(1), we are proposing an 
exception that would apply to a value-based arrangement where a value-
based enterprise has, during the entire term of the arrangement, 
assumed full financial risk from a payor for patient care services for 
a target patient population. At proposed Sec.  411.357(aa)(2), we are 
proposing an exception that would apply to a value-based arrangement 
under which the physician is at meaningful downside financial risk for 
failure to achieve the value-based purposes of the value-based 
enterprise during the entire term of the arrangement. Finally, at 
proposed Sec.  411.357(aa)(3), we are proposing an exception that would 
apply to any value-based arrangement, provided that the arrangement 
satisfies specified requirements. The proposed exceptions include fewer 
requirements where a value-based enterprise has assumed full financial 
risk for the cost of the target patient population's health care (that 
is, the value-based enterprise and its VBE participants receive no FFS 
payments in addition to the capitated payments or global budget payment 
made to the value-based enterprise from the payor), with the 
requirements increasing and changing as the level of financial risk in 
the value-based arrangement diminishes.
    The exceptions proposed at Sec.  411.357(aa) and described in 
detail in this section of the proposed rule would be applicable to the 
compensation arrangements between parties in a CMS-sponsored model, 
program, or other initiative (provided that the compensation 
arrangement at issue qualifies as ``value-based arrangement''), and we 
believe that compensation arrangements between parties in a CMS-
sponsored model, program, or other initiative can be structured to 
satisfy the requirements of at least one of the proposed exceptions at 
Sec.  411.357(aa). We intend that this suite of value-based exceptions, 
if finalized, would eliminate the need for any new waivers of section 
1877 of the Act for value-based arrangements. (We note that, even if 
the proposed exceptions are finalized, parties may elect to use the 
waivers

[[Page 55779]]

applicable to the CMS-sponsored models, programs, or initiatives in 
which they participate.) Even so, we are interested in learning whether 
stakeholders view our proposals as leaving gaps in protection from the 
physician self-referral law's prohibitions for certain arrangements 
that are permissible under a CMS-sponsored model, program, or other 
initiative. We are soliciting comments regarding the structure and 
scope of our proposed exceptions; specific compensation arrangements 
that are permissible under a CMS-sponsored model, program, or other 
initiative but might not be able to satisfy the requirements of one of 
the proposed value-based exceptions; and suggested modifications to our 
proposals that would bridge any perceived or actual gaps in the 
protection of the exceptions at proposed Sec.  411.357(aa)(1), (2) and 
(3). We are also interested in comments that address what safeguards 
would be appropriate to include in such a ``gap-filler'' exception in 
order to protect against program or patient abuse. We remind potential 
commenters that an exception issued using the authority at section 
1877(b)(4) of the Act may protect only those financial relationships 
that the Secretary determines do not pose a risk of program or patient 
abuse.
    We are mindful that value-based enterprises and parties to value-
based arrangements may assume other types of risk, including 
operational risk, contractual risk, and investment risk. For example, 
the adopter of EHR technology and the developer of a medical office 
building assume business risk that the investment in the EHR technology 
and the buildout of office space, respectively, does not result in 
profit. For our purposes, we are focused on the financial risk because 
we believe such risk can directly influence the incentives physicians 
and other providers have to order items and services for patients, the 
conduct at the core of the physician self-referral law (and other 
Federal fraud and abuse laws). We are not persuaded other types of risk 
would operate similarly to counter volume-based payment incentives; 
however, we solicit comments on this issue.
    Several CMS RFI commenters requested that we keep in place existing 
exceptions that may protect certain value-based arrangements, 
regardless of any proposed new exceptions and policies. We are not at 
this time proposing any substantive changes to the exception at Sec.  
411.355(c) for services furnished by an organization (or its 
contractors or subcontractors) to enrollees or the exception at Sec.  
411.357(n) for risk-sharing arrangements. However, see section II.D.13. 
of this proposed rule for our proposal to update the exception at Sec.  
411.355(c) to eliminate an out-of-date reference. Many commenters 
discussed the difficulty specialty physicians have in participating in 
alternative payment models, especially advanced alternative payment 
models, and requested that we deem certain financial relationships to 
qualify as alternative payment models. Our proposals do not turn on 
whether the parties to an arrangement are participating in alternative 
payment models or whether arrangements themselves qualify as 
alternative payment models. We believe that the approach discussed in 
this proposed rule, under which the proposed exceptions are available 
for compensation arrangements designed to achieve the value-based 
purpose(s) of an enterprise consisting of at least the physician and 
the entity to which he or she refers designated health services, is the 
better approach. Physician self-referral law policy is not the 
appropriate place to define or identify alternative payment models. Our 
focus here is to remove the regulatory barriers that inhibit the 
transformation to value-based care.
(1) Full Financial Risk (Proposed Sec.  411.357(aa)(1))
    We are proposing at Sec.  411.357(aa)(1) an exception to the 
physician self-referral law (the ``full financial risk exception'') 
that would apply to value-based arrangements between VBE participants 
in a value-based enterprise that has assumed ``full financial risk'' 
for the cost of all patient care items and services covered by the 
applicable payor for each patient in the target patient population for 
a specified period of time; that is, the value-based enterprise is 
financially responsible (or is contractually obligated to be 
financially responsible within the 6 months following the commencement 
date of the value-based arrangement) on a prospective basis for the 
cost of all patient care items and services covered by the applicable 
payor for each patient in the target patient population for a specified 
period of time. For Medicare beneficiaries, we would interpret this 
requirement to mean that the value-based enterprise, at a minimum, is 
responsible for all items and services covered under Parts A and B. We 
seek comments regarding the proposed definition of ``full financial 
risk'' described here and in proposed Sec.  411.357(aa)(1)(viii). 
Specifically, we seek comment regarding whether a value-based 
enterprise should be considered to be at full financial risk if it is 
responsible for the cost of only a defined set of patient care services 
for a target patient population and whether we should require a minimum 
period of time during which the value-based enterprise is at full 
financial risk (for example, 1 year).
    Full financial risk may take the form of capitation payments (that 
is, a predetermined payment per patient per month or other period of 
time) or global budget payment from a payor that compensates the value-
based enterprise for providing all patient care items and services for 
a target patient population for a predetermined period of time. The 
proposed exception would not prohibit other approaches to full 
financial risk, and we seek comment regarding other types of full 
financial risk payment models that may exist currently or that 
stakeholders anticipate as the transition to a value-based health care 
delivery and payment system progresses. As described elsewhere in this 
section, a value-based enterprise need not be a separate legal entity 
with the power to contract on its own. Rather, networks of physicians, 
entities furnishing designated health services, and other components of 
the health care system collaborating to achieve the goals of a value-
based health care system, organized with legal formality or not, may 
qualify as a value-based enterprise. A value-based enterprise may 
assume legal obligations in any number of ways. For example, all VBE 
participants in a value-based enterprise could each sign the contract 
for the value-based enterprise to assume full financial risk from a 
payor. Or, the VBE participants in a value-based enterprise could have 
contractual arrangements among themselves that assign risk jointly and 
severally. Or, similar to physicians in an independent practice 
association (IPA), VBE participants could vest the authority to bind 
all VBE participants in the value-based enterprise with a designated 
person who contracts for the assumption of full financial risk on 
behalf of the value-based enterprise and its VBE participants. We do 
not purport to prescribe in this proposal a specific manner for the 
assumption of full financial risk.
    The financial risk must be prospective; that is, the contract 
between the value-based enterprise and the payor may not allow for any 
additional payment to compensate for costs incurred by the value-based 
enterprise in providing specific patient care items and services to the 
target patient population, nor may any VBE participant claim payment 
from the payor for such items or services. Our

[[Page 55780]]

proposed definition of ``full financial risk'' would not prohibit a 
payor from making payments to a value-based enterprise to offset losses 
incurred by the enterprise above those prospectively agreed to by the 
parties. The payment of shared savings or other incentive payments for 
achieving quality, performance, or other benchmarks also would not be 
prohibited. We are proposing to also protect value-based arrangements 
entered into in preparation for the implementation of the value-based 
enterprise's full financial risk payor contract where such arrangements 
begin after the value-based enterprise is contractually obligated to 
assume full financial risk for the cost of patient care items and 
services for the target patient population but prior to the date the 
provision of patient care items and services under the contract begin. 
We are proposing to limit this period to the 6 months prior to the 
effective date of the full financial risk payor contract. In other 
words, the value-based enterprise must be at full financial risk within 
the 6 months following the commencement of the value-based arrangement. 
We seek comment whether this is a sufficient period of time for parties 
to construct arrangements and begin preparations for the implementation 
of the value-based enterprise's full financial risk payor contract.
    We believe that full financial risk is one defining characteristic 
of a mature value-based payment system. When a value-based enterprise 
is at full financial risk for the cost of all patient care services, 
the incentives to order unnecessary services or steer patients to 
higher-cost sites of service are diminished. Even when downstream 
contractors are paid on something other than a full-risk basis, the 
value-based enterprise itself is incented to monitor for appropriate 
utilization, referral patterns, and quality performance, which we 
believe helps to reduce the risk of program or patient abuse. As one 
CMS RFI commenter noted, where there is a finite amount of payment, if 
costs go up, participating providers may incur direct financial losses. 
According to the commenter, these kinds of payment limitations provide 
stronger and more effective guardrails against increases in the volume 
and costs of services than the fraud and abuse laws ever placed on the 
FFS system. As a precaution, we are including several important 
safeguards in the proposed exception.
    One requirement of the proposed exception is that the value-based 
enterprise must be at full financial risk during the entire duration of 
the value-based arrangement for which the parties to the arrangement 
seek protection. The proposed exception would not protect arrangements 
that begin at some point during a period when the safeguards intrinsic 
to full-risk value-based payment are in place, but that continue into a 
timeframe when such safeguards no longer exist. However, one or both of 
the other proposed exceptions at Sec.  411.357(aa) may be available to 
protect value-based arrangements that exist during a period when the 
value-based enterprise is not at full financial risk for the cost of 
all patient care items and services covered by the applicable payor for 
each patient in the target patient population.
    As described throughout this proposed rule, we believe that well-
coordinated and managed patient care is the cornerstone of a value-
based health care system. We are soliciting comments regarding whether 
it is necessary to include in the full financial risk exception, as 
well as the other exceptions for value-based arrangements at Sec.  
411.357(aa), a requirement that the parties to a value-based 
arrangement engage in value-based activities that include, at a 
minimum, the coordination and management of the care of the target 
patient population or that the value-based arrangement be reasonably 
designed, at a minimum, to coordinate and manage the care of the target 
patient population. We believe that such a requirement would be the 
most direct way to further the goals of the Regulatory Sprint. On the 
other hand, we also believe that, by their nature, arrangements that 
qualify as ``value-based arrangements'' would have care coordination 
and management at their heart, and we question whether an explicit 
requirement is necessary. Moreover, we are concerned that requiring 
every value-based arrangement to include the coordination and 
management of care of the target patient population could leave 
beneficial value-based arrangements that do not directly coordinate or 
manage the care of the target patient population without access to any 
of the exceptions at proposed Sec.  411.357(aa) and potentially unable 
to meet the requirements of any existing exception to the physician 
self-referral law.
    We are also proposing a requirement that the remuneration under the 
value-based arrangement is for or results from value-based activities 
undertaken by the recipient of the remuneration for patients in the 
target patient population. We recognize that payments under certain 
incentive payment arrangements, such as gainsharing arrangements, may 
be difficult to tie to specific items or services furnished by a VBE 
participant. We would not interpret the requirement at proposed Sec.  
411.357(aa)(1)(ii) as mandating a one-to-one payment for an item or 
service (or other value-based activity). Gainsharing payments, shared 
savings distributions, and similar payments may result from value-based 
activities undertaken by the recipient of the payment for patients in 
the target patient population. We believe that the requirement that the 
remuneration is for or results from value-based activities undertaken 
by the recipient of the remuneration for patients in the target patient 
population adequately addresses this issue; however, we are considering 
whether to require that the remuneration also or instead relates to the 
value-based purpose(s) of the value-based enterprise or value-based 
arrangement. Also, we intend for this to be an objective standard; that 
is, the remuneration must, in fact, be for or result from value-based 
activities undertaken by the recipient of the remuneration for patients 
in the target patient population. The proposed exception, therefore, 
would not protect payments for referrals or any other actions or 
business unrelated to the target patient population, such as general 
marketing or sales arrangements. With respect to in-kind remuneration, 
essentially, the remuneration must be necessary and not simply 
duplicate technology or other infrastructure that the recipient already 
has. Finally, although the remuneration must be for or result from 
value-based activities undertaken by the recipient of the remuneration 
for patients in the target patient population, parties would not be 
prohibited from using the remuneration for the benefit of patients who 
are not part of the target patient population.
    Integrated into most of the CMS-sponsored models is a requirement 
that any remuneration between parties to an allowable financial 
arrangement is not provided as an inducement to reduce or limit 
medically necessary items or services to any patient in the assigned 
patient population. We believe this is an important safeguard for 
patient safety and quality of care, regardless of whether Medicare is 
the ultimate payor for the services, and propose to include it in the 
full financial risk exception by requiring at proposed Sec.  
411.357(aa)(1)(iii) that remuneration is not provided as an inducement 
to reduce or limit medically necessary items or services to any 
patient, whether in the target patient population or not. Remuneration 
that leads to a reduction in medically necessary services would be 
inherently suspect and could

[[Page 55781]]

implicate sections 1128A(b)(1) and (2) of the Act.
    In addition, we are proposing to protect only those value-based 
arrangements under which remuneration is not conditioned on referrals 
of patients who are not part of the target patient population or 
business not covered under the value-based arrangement. Although this 
requirement is similar to the requirement that remuneration is for or 
results from value-based activities undertaken by the recipient of the 
remuneration for patients in the target patient population, it is 
intended to address a different concern. The exception would not 
protect arrangements where one or both parties have made referrals or 
other business not covered by the value-based arrangement a condition 
of the remuneration. By way of example, if the value-based enterprise 
is at full financial risk for the total cost of care for all of a 
commercial payor's enrollees in a particular county, the exception 
would not protect a value-based arrangement between an entity and a 
physician that are VBE participants in the value-based enterprise if 
the entity required the physician to refer Medicare patients who are 
not part of the target patient population for designated health 
services furnished by the entity. Similarly, the exception would not 
protect a value-based arrangement related to knee replacement services 
furnished to Medicare beneficiaries if the arrangement required that 
the physician perform all his or her other orthopedic surgeries at the 
hospital. (Our examples relate to value-based arrangements between 
entities furnishing designated health services and physicians because 
the physician self-referral law's prohibitions would not be implicated 
if the arrangement was not between an entity furnishing designated 
health services and a physician (or the physician organization in whose 
shoes the physician stands under Sec.  411.354(c)(2).)
    We are also proposing requirements at Sec.  411.357(aa)(1)(v) and 
(vi) related to requiring a physician to refer to a particular 
provider, practitioner, or supplier and price transparency. We refer to 
our description of these requirements in sections II.B.4. and 
II.A.2.b., of this proposed rule, respectively.
    Finally, we are proposing to require that records of the 
methodology for determining and the actual amount of remuneration paid 
under the value-based arrangement be maintained for a period of at 
least 6 years and made available to the Secretary upon request. 
Requirements similar to this are found in our existing regulations in 
the group practice rules at Sec.  411.352(d)(2) and (i), the exception 
for physician recruitment at Sec.  411.357(4)(iv), and the exception 
for assistance to compensate a nonphysician practitioner at Sec.  
411.357(x)(2). We expect that parties are familiar with these 
requirements and that the maintenance of such records is part of their 
routine business practices.
    We consider the exception at proposed Sec.  411.357(aa)(1) 
comparable, in some respects, to the exception at Sec.  411.357(n) for 
risk-sharing arrangements, which is intended to be a broad exception 
with maximum flexibility, covering all risk-sharing compensation paid 
to a physician by an entity downstream of any type of health plan, 
insurance company, or health maintenance organization (that is, any 
``managed care organization'') or independent practice association, 
provided the arrangement relates to enrollees and meets the conditions 
set forth in the exception (69 FR 16114). All downstream entities are 
included within the scope of the exception for risk-sharing 
arrangements. We endeavored to structure a similar exception here, 
given the underlying parallels between a managed care organization and 
a value-based enterprise at full financial risk for the cost of all 
patient care items and services covered by the applicable payor for 
each patient in the target patient population. Although the proposed 
exception at Sec.  411.357(aa)(1) is not limited to ``risk-sharing 
compensation'' paid to a physician, but, rather, covers any type of 
remuneration paid under a value-based arrangement that is for or 
results from value-based activities undertaken by the recipient of the 
remuneration, for the reasons discussed throughout this section II.A. 
of this proposed rule, we believe that the type of flexibility provided 
in the exception for risk-sharing arrangements is also warranted here. 
Finally, like the exception at Sec.  411.357(n) for risk-sharing 
arrangements, there are no documentation requirements proposed for the 
full financial risk exception. Nevertheless, we believe that reducing 
to writing any arrangement between referral sources is a good business 
practice that allows the parties to monitor and confirm that the 
arrangement is operating as intended.
(2) Value-Based Arrangements With Meaningful Downside Financial Risk to 
the Physician (Proposed Sec.  411.357(aa)(2))
    A few CMS RFI commenters opined that the health care industry is in 
the infancy of its transition to value-based health care delivery and 
payment. Although we believe that our efforts described in section 
I.B.2. of this proposed rule, as well as those of non-Federal payors 
and a significant segment of the health care industry, have advanced us 
beyond ``infancy,'' we acknowledge that most physicians and providers 
are not yet prepared or willing to be responsible for the total cost of 
patient care services for a target patient population. However, some 
physicians are participating in or considering participating in 
alternative payment models that provide for potential financial gain in 
exchange for the undertaking of downside financial risk.
    We believe that financial risk assumed directly by a physician will 
affect his or her practice and referral patterns in a way that curbs 
the influence of traditional FFS, volume-based payment. When that 
financial risk is tied to the failure to achieve value-based purposes, 
we believe there is great potential for the type of behavior-shaping 
necessary to transform our health care delivery system into one that 
improves patient outcomes, eliminates waste and inefficiencies, and 
reduces costs to or the growth in expenditures of payors. Arrangements 
under which a physician is at meaningful downside financial risk for 
failure to achieve predetermined cost, quality, or other performance 
benchmarks contain certain inherent protections against program or 
patient abuse.
    We are proposing an exception at Sec.  411.357(aa)(2) that would 
protect remuneration paid under a value-based arrangement where the 
physician is at meaningful downside financial risk for failure to 
achieve the value-based purpose(s) of the value-based enterprise (the 
``meaningful downside financial risk exception''). (As noted 
previously, for purposes of our proposed exceptions, the parties to a 
value-based arrangement would be an entity furnishing designated health 
services and a physician; otherwise, the physician self-referral law's 
prohibitions would not be implicated.) Although the physician must be 
at meaningful downside financial risk for the entire term of the value-
based arrangement, the remuneration could be paid to or from the 
physician. We seek comment regarding whether the physician would have 
the same incentive to modify his or her practice and referral patterns 
in a manner designed to achieve the important goals described in this 
proposed rule if the party that has assumed the meaningful downside 
financial risk and is paying remuneration under the arrangement is the 
entity furnishing designated health

[[Page 55782]]

services. We expect that, in such a case, the entity would be 
appropriately motivated to monitor and respond to a physician's 
practice and referral patterns if such patterns could negatively impact 
the entity's financial position, but we are not convinced that such 
motivation to monitor would be sufficient to safeguard against program 
or patient abuse.
    For purposes of the exception, we are proposing to define 
``meaningful downside financial risk'' to mean that the physician is 
responsible to pay the entity no less than 25 percent of the value of 
the remuneration the physician receives under the value-based 
arrangement. We believe that this level of financial risk is high 
enough to curb the influence of traditional FFS, volume-based payment 
and achieve the type of behavior-shaping necessary to facilitate 
achievement of the goals set forth in this proposed rule. Defining 
meaningful downside financial risk in this way would establish 
consistency with the 25 percent threshold determined by the Secretary 
for the statutory and regulatory exceptions for physician incentive 
plans at section 1877(e)(3)(B) of the Act and Sec.  411.357(d)(2), 
respectively, which reference ``substantial financial risk'' to a 
physician (or physician group). For purposes of those exceptions, the 
Secretary has defined ``substantial financial risk'' to mean the risk 
for referral services that exceeds the risk threshold, which is 
currently set at 25 percent (see Sec.  422.208). We have proposed to 
require that the financial risk be ``downside'' risk for clarity. 
Because we are not proposing to limit the type of remuneration that may 
be provided, we require the risk of repayment to be for no less than 25 
percent of the value of the remuneration to account for remuneration 
that may be provided in-kind, such as infrastructure or care 
coordination services.
    Meaningful downside financial risk would also include full 
financial risk. That is, for purposes of the meaningful downside 
financial risk exception, we are proposing to define ``meaningful 
downside financial risk'' to also mean that the physician is 
financially responsible to the payor or the entity on a prospective 
basis for the cost of all or a defined set of items and services 
covered by the applicable payor for each patient in the target patient 
population for a specified period of time. Thus, a physician would be 
at meaningful downside financial risk when he or she is at ``full'' 
financial risk; that is, when the physician is paid a capitated 
payment, global budget payment, or some other payment for all or a 
defined set of patient care services for the target patient population. 
We are, however, concerned about the potential for gaming if the 
parties established too narrow a set of patient care services for which 
the physician is at meaningful downside financial risk. We are 
considering an approach that defines meaningful downside financial risk 
only to mean that the physician is responsible to pay the entity no 
less than 25 percent of the value of the remuneration the physician 
receives under the value-based arrangement and exclude a specific 
reference to total cost of care. We seek comment on our approaches as 
to how we might appropriately define meaningful downside financial risk 
for purposes of proposed Sec.  411.357(aa)(2). Specifically, we seek 
comment on whether the proposed 25 percent threshold is appropriate, 
and whether downside risk for 25 percent of only a nominal amount of 
remuneration would be sufficient to curb the influence of traditional 
FFS, volume-based payment.
    As we discussed previously, under the full financial risk 
exception, we are proposing to protect value-based arrangements entered 
into in preparation for the implementation of the value-based 
enterprise's full financial risk payor contract where such arrangements 
begin after the value-based enterprise is contractually obligated to 
assume full financial risk for the cost of patient care items and 
services for the target patient population but prior to the date the 
provision of patient care items and services under the contract begin. 
We are proposing to limit this period to the 6 months prior to the 
effective date of the full financial risk payor contract. We seek 
comment whether we should include an analogous provision in the 
meaningful downside financial risk exception and, if so, whether 6 
months is an appropriate period of time for parties to construct 
arrangements and begin preparations for the physician's assumption of 
meaningful downside financial risk.
    Because the exception proposed at Sec.  411.357(aa)(2) does not 
require the type of global risk to the value-based enterprise as our 
proposed full financial risk exception, we believe that additional or 
different requirements are necessary to protect against program or 
patient abuse. We are proposing a requirement at Sec.  
411.357(aa)(2)(i) that the physician must be at meaningful downside 
financial risk for the entire term of the value-based arrangement. We 
believe this is important to curtail any gaming that could occur by 
adding meaningful downside financial risk to a physician during only a 
short portion of the term of an arrangement.
    To buttress our oversight ability and that of our law enforcement 
partners, we are proposing at Sec.  411.357(aa)(2)(ii) a requirement 
that the nature and extent of the physician's financial risk is set 
forth in writing. This is also, of course, a good business practice 
that allows the parties to monitor their value-based arrangements and 
ensure that they are operating as intended. For similar reasons, but 
also as a safeguard against manipulating a value-based arrangement to 
reward referrals, we are proposing a requirement that the methodology 
used to determine the amount of the remuneration is set in advance of 
the furnishing of the items or services for which the remuneration is 
provided. The special rule on compensation at Sec.  411.354(d)(1) that 
deems compensation to be set in advance when certain conditions are met 
would apply. However, that provision is merely a deeming provision and 
parties would be free to confirm satisfaction of the proposed 
requirement another way.
    Integrated into most of the CMS-sponsored models is a requirement 
that any remuneration between parties to an allowable financial 
arrangement is not provided as an inducement to reduce or limit 
medically necessary items or services to any patient in the assigned 
patient population. We believe this is an important safeguard for 
patient safety and quality of care, regardless of whether Medicare is 
the ultimate payor for the services, and propose to include it in the 
meaningful downside financial risk exception by requiring at proposed 
Sec.  411.357(aa)(2)(v) that remuneration is not provided as an 
inducement to reduce or limit medically necessary items or services to 
any patient, whether in the target patient population or not. 
Remuneration that leads to a reduction in medically necessary services 
would be inherently suspect and could implicate sections 1128A(b)(1) 
and (2) of the Act.
    For the reasons discussed in section II.A.2.b.(1). of this proposed 
rule, we are also proposing to include in the meaningful downside 
financial risk exception requirements that the remuneration is for or 
results from value-based activities undertaken by the recipient of the 
remuneration for patients in the target patient population; 
remuneration is not provided as an inducement to reduce or limit 
medically necessary items or services to any patient, whether in the 
target patient population or not; remuneration is not conditioned on 
referrals of patients who are not part of the target patient population 
or business not covered

[[Page 55783]]

under the value-based arrangement; and that records of the methodology 
for determining and the actual amount of remuneration paid under the 
value-based arrangement must be maintained for a period of at least 6 
years and made available to the Secretary upon request. We would 
interpret these requirements as described in section II.A.2.b.(1). of 
this proposed rule and seek comments as requested. We are also 
proposing requirements at Sec.  411.357(aa)(2)(vii) and (viii) related 
to requiring a physician to refer to a particular provider, 
practitioner, or supplier and price transparency.
(3) Value-Based Arrangements (Proposed Sec.  411.357(aa)(3))
    One CMS RFI commenter stated that, because physician decisions 
drive the overwhelming majority of all health care spending and patient 
outcomes, it is not possible to transform health care without a strong, 
aligned shared partnership between entities furnishing designated 
health services and physicians. According to other commenters, 
alignment of parties' financial interests is key to the behavior 
shaping necessary to succeed in a value-based payment system. Another 
commenter, a commercial payor, asserted that permitting physicians and 
physician groups (especially smaller practices that are not used to 
risk-sharing or are too small to absorb downside financial risk) to 
assume only upside risk--or, for that matter, no financial risk--would 
encourage more physicians to participate in care coordination 
activities now while they continue to build towards being able to enter 
into two-sided risk-sharing arrangements. In consideration of these and 
similar comments, as well as our belief that bold reforms to the 
physician self-referral regulations are necessary to foster the 
delivery of coordinated patient care and achieve the Secretary's vision 
of transitioning to a truly value-based health care delivery and 
payment system, we are proposing an exception at Sec.  411.357(aa)(3) 
for compensation arrangements that qualify as value-based arrangements, 
regardless of the level of risk undertaken by the value-based 
enterprise or any of its VBE participants (the ``value-based 
arrangement exception''). As proposed, the exception would permit both 
monetary and nonmonetary remuneration between the parties. We are 
considering whether to limit the scope of the proposed exception to 
nonmonetary remuneration only and seek comment regarding the impact 
such a limitation may have on the transition to a value-based health 
care delivery and payment system.
    We are proposing to include in the value-based arrangement 
exception certain requirements that are included in the proposed 
meaningful downside financial risk exception, some of which are also 
included in the proposed full financial risk exception. We would 
interpret these requirements as described in section II.A.2.b.(1). of 
this proposed rule, and include them in the value-based arrangement 
exception for the same reasons articulated with respect to our other 
proposed exceptions. We also seek comments as requested previously in 
sections II.A.2.b.(1). and II.A.2.b.(2). of this proposed rule. These 
requirements are: The remuneration is for or results from value-based 
activities undertaken by the recipient of the remuneration for patients 
in the target patient population; remuneration is not provided as an 
inducement to reduce or limit medically necessary items or services to 
a patient in the target patient population; remuneration is not 
conditioned on referrals of patients who are not part of the target 
patient population or business not covered by the value-based 
arrangement; the methodology used to determine the amount of the 
remuneration is set in advance of the furnishing of the items or 
services for which the remuneration is provided; and records of the 
methodology for determining and the actual amount of remuneration paid 
under the value-based arrangement must be maintained for a period of at 
least 6 years and made available to the Secretary upon request. We are 
also proposing requirements at Sec.  411.357(aa)(2)(vii) and (viii) 
related to requiring a physician to refer to a particular provider, 
practitioner, or supplier and price transparency.
    Because the exception proposed at Sec.  411.357(aa)(3) would be 
applicable even to value-based arrangements where neither party, but 
especially not the physician, has undertaken any downside financial 
risk, we believe that safeguards beyond those included in the proposed 
meaningful downside financial risk exception are necessary to protect 
against program or patient abuse. Specifically, we are proposing, as an 
alternative to the requirement that remuneration is not conditioned on 
referrals of patients who are not part of the target patient population 
or business not covered by the value-based arrangement, a requirement 
that remuneration is not conditioned on the volume or value of 
referrals of any patients to the entity or the volume or value of any 
other business generated by the physician for the entity. We note that, 
as described in section II.A.2.b. of this proposed rule, we are not 
proposing to include in the value-based arrangement exception a 
requirement that the remuneration is not determined in any manner that 
takes into account the volume or value of a physician's referrals or 
the other business generated by the physician. The alternative proposal 
described here would prohibit remuneration that is conditioned on the 
volume or value of referrals of any patients to the entity or the 
volume or value of any other business generated by the physician for 
the entity. We seek comments regarding this alternative proposal; the 
interplay of the proposed alternative requirement with our longstanding 
policy that the entity of which the physician is a bona fide employee 
or independent contractor, or that is a party to a managed care 
contract with the physician, may direct the physician's referrals to a 
particular provider, practitioner, or supplier, as long as the 
compensation arrangement meets specified conditions designed to 
preserve the physician's judgment as to the patient's best medical 
interests, avoid interfering in an insurer's operations, and protect 
patient choice; and whether including such an alternative requirement 
would impede parties' ability to achieve the value-based purposes on 
which their value-based arrangement is premised if the entity cannot 
direct referrals as historically permitted.
    In addition, we are proposing additional requirements in the 
exception proposed at Sec.  411.357(aa)(3) that the value-based 
arrangement is set forth in writing and signed by the parties, and that 
the writing includes a description of: The value-based activities to be 
undertaken under the arrangement; how the value-based activities are 
expected to further the value-based purpose(s) of the value-based 
enterprise; the target patient population for the arrangement; the type 
or nature of the remuneration; the methodology used to determine the 
amount of the remuneration; and the performance or quality standards 
against which the recipient of the remuneration will be measured, if 
any. We believe that the documentation requirements are self-
explanatory. Although we expect that parties would plan to satisfy the 
writing requirement in advance of the commencement of the value-based 
arrangement, the special rule at proposed Sec.  411.354(e)(3) 
(modified, in part, from existing Sec.  411.353(g)(1)(ii)) would apply. 
We highlight that we intend that the value-based purpose of the 
arrangement must relate to the value-based enterprise as a

[[Page 55784]]

whole (which, as noted previously in section II.A.2.a. of this proposed 
rule, may be the two parties to the value-based arrangement). The 
exception would not protect a ``side'' arrangement between two VBE 
participants that is unrelated to the goals and objectives (that is, 
the value-based purposes) of the value-based enterprise of which they 
are participants, even if the arrangement itself serves a value-based 
purpose, as defined at proposed Sec.  411.351. We seek comment whether 
we should specifically include this policy in the proposed value-based 
arrangement exception as a requirement separate from the writing 
requirement.
    In addition, we are proposing to require that the performance or 
quality standards against which the recipient of the remuneration will 
be measured, if any, are objective and measurable. Such standards must 
be determined prospectively, and any changes to the performance or 
quality standards must be set forth in writing and apply only 
prospectively. We recognize that performance or quality standards may 
not be applicable to all value-based arrangements--for example, an 
arrangement under which a hospital provides needed infrastructure to a 
physician in the same value-based enterprise may not require the 
physician to achieve specific performance or quality goals in order to 
receive or keep the infrastructure items or services. However, if the 
value-based arrangement does include performance or quality standards 
that relate to the receipt of the remuneration--for example, an 
arrangement to share the internal cost savings achieved if the 
physician meaningfully participates in the hospital's quality and 
outcomes improvement program and reaches or exceeds predetermined 
benchmarks for his or her personal performance or quality measurement--
such performance or quality standards must be determined in advance of 
their implementation. The exception would not protect arrangements 
where the performance or quality standards are set retrospectively. 
Moreover, any performance or qualify standards against which the 
recipient of the remuneration will be measured should not simply 
reflect the status quo. We are considering whether to require that 
performance or quality standards be designed to drive meaningful 
improvements in physician performance, quality, health outcomes, or 
efficiencies in care delivery. We seek comment regarding whether we 
should include this as a requirement of the proposed value-based 
arrangement exception and the burden or cost of including such a 
requirement.
    We expect that, as a prudent business practice, parties would 
monitor their arrangements to determine whether they are operating as 
intended and serving their intended purposes, regardless of whether the 
arrangements are value-based, and have in place mechanisms to address 
identified deficiencies, as appropriate. In fact, there is an implicit 
ongoing obligation for an entity to monitor its financial relationship 
with a physician for compliance with an applicable exception.
    In general, if a physician has a financial relationship with an 
entity that does not satisfy all requirements of an applicable 
exception (after applying any special rules), section 1877(a)(1)(A) of 
the Act prohibits the physician from making a referral to the entity 
for the furnishing of designated health services for which payment may 
otherwise be made under Medicare, section 1877(a)(1)(B) of the Act 
prohibits the entity from presenting or causing to present a claim 
under Medicare for the designated health services furnished pursuant to 
a prohibited referral, and section 1877(g)(1) of the Act prohibits 
Medicare from making payment for a designated health service that is 
provided pursuant to a prohibited referral. Parties must ensure the 
compliance of their financial relationship with an applicable exception 
at the time the physician makes a referral for designated health 
service(s).
    To illustrate, assume a hospital donates EHR items and services to 
Physician A, including ongoing software upgrades, maintenance, and 
services, for which the vendor charges the hospital monthly in advance 
of providing the EHR items and services. The regulation at Sec.  
411.357(w)(4) requires that, before the receipt of the items and 
services, the physician pays 15 percent of the donor's cost for the 
items and services. The parties agree that Physician A will pay 15 
percent of the monthly cost of the EHR items and services prior to the 
beginning of each month. If Physician A fails to make the July 31st 
payment as scheduled, the arrangement would no longer satisfy the 
requirements of Sec.  411.357(w)(4), and Physician A would be 
prohibited from making referrals for designated health services to the 
hospital as of August 1st and the hospital would be prohibited from 
submitting claims to the Medicare program for any improperly referred 
designated health services. If the arrangement is later brought back 
into compliance with the requirements of the exception, the physician 
would again be permitted to make referrals for designated health 
services to the hospital, and the hospital could submit claims for such 
designated health services (but not the designated health services 
referred during the period of noncompliance). The hospital has an 
obligation to ensure that the claims it submits to Medicare for 
designated health services referred by a physician are permissible and, 
in fact, explicitly certifies compliance with the physician self-
referral law on each claim form and cost report it submits. We note 
that the arrangement described would also implicate the Federal anti-
kickback statute, and the parties must also ensure compliance with that 
statute.
    With respect to arrangements that would qualify for protection 
under the exception for value-based arrangements as proposed at Sec.  
411.357(aa)(3), there would also exist an implicit ongoing obligation 
to monitor for compliance with the exception. To illustrate, assume a 
hospital revised its care protocol for screening for a certain type of 
cancer to incorporate newly issued guidelines from a nationally 
recognized organization. The new guidelines, and the revised protocol, 
no longer support a single screening modality for the disease. Instead, 
the organization recommends screening by combining two modalities to 
achieve more accurate results. The revised guidelines and hospital care 
protocol are intended to improve the quality of care for patients by 
detecting more cancers and avoiding potential unnecessary overtreatment 
of false positive results (which can be frequent for single-modality 
screening for the disease). The hospital observes that most community 
physicians continue to refer patients to the hospital for single-
modality screening. To align referring physician practices with the 
hospital's revised care protocol, the hospital offers to pay physicians 
$10 for each instance that they order dual-modality screening in 
accordance with the revised care protocol during a 2-year period. The 
hospital expects that it would take approximately 2 years to shape 
physician behavior to always follow the recommended care protocol 
(except when not medically appropriate for the particular patient). 
Assume that both single-modality and dual-modality screening are 
designated health services payable by Medicare.
    The exception at proposed Sec.  411.357(aa)(3) is applicable only 
to arrangements that qualify as ``value-based arrangements,'' as 
proposed at Sec.  411.351. The arrangement must be for the provision of 
at least one value-based activity for a target patient population and 
must be between a value-based

[[Page 55785]]

enterprise and one or more of its VBE participants or between VBE 
participants in the same value-based enterprise. The value-based 
activity must be reasonably designed to achieve at least one value-
based purpose of the value-based enterprise that is a party to the 
arrangement or is the value-based enterprise in which the parties to 
the arrangement are each VBE participants. In this illustration, the 
value-based enterprise is the hospital and identified community 
physicians. (The hospital and the community physicians could also be 
part of a larger value-based enterprise.) The target patient population 
is patients in the hospital's service area that receive screening for 
the particular disease. The value-based activity is adherence with the 
hospital's revised care protocol by ordering dual-modality screening 
instead of single-modality screening. The value-based purpose of the 
value-based enterprise is to improve the quality of care for patients 
in the hospital's service area by detecting more cancers and avoiding 
potential unnecessary overtreatment of false positive results.
    At its inception, provided that an arrangement between the hospital 
and Physician B satisfies all requirements of proposed Sec.  
411.357(aa)(3), Physician B's referrals of designated health services 
to the hospital and the hospital's submission of claims to Medicare for 
the designated health services referred by Physician B would not 
violate the physician self-referral law. However, assume that one year 
into the arrangement, the hospital's data analysis indicates that the 
use of dual-modality screening not only does not result in earlier 
detection of cancer, but results in more false positive results, 
invasive biopsies, and unnecessary treatment than single-modality 
screening. As a result, the hospital determines that the use of dual-
modality screening, despite the nationally-recognized recommendations, 
will not achieve its goal to improve the quality of care for patients 
in the hospital's service area by detecting more cancers and avoiding 
potential unnecessary overtreatment of false positive results. At that 
point, because the value-based activities under the arrangement would 
no longer be reasonably designed to achieve the value-based purpose of 
improving the quality of care for patients in the hospital's service 
area by detecting more cancers and avoiding potential unnecessary 
overtreatment of false positive results, the arrangement would no 
longer qualify as a ``value-based arrangement'' and would no longer 
qualify for protection under the exception at proposed Sec.  
411.357(aa)(3). Absent modification of the arrangement to ensure 
qualification as a ``value-based arrangement'' and compliance with the 
requirements of the exception at proposed Sec.  411.357(aa)(3), 
Physician B would be prohibited from making future referrals of any 
designated health services to the hospital unless the arrangement 
satisfies the requirements of another applicable exception to the 
physician self-referral law (which it likely would not). In addition, 
the hospital would be prohibited from submitting claims to Medicare for 
any improperly referred designated health services.
    As described previously, parties must ensure the compliance of 
their financial relationship with an applicable exception at the time 
of the physician's referral for the designated health service(s). The 
failure to monitor for or a lack of knowledge of such compliance does 
not nullify the prohibition. If the hospital did not monitor the 
arrangement for progress toward the value-based purpose of the value-
based enterprise, Physician B's future referrals would nevertheless be 
prohibited due to the fact that adherence to the revised care protocol 
could not, in fact, achieve the value-based purpose of the value-based 
enterprise and would no longer be a ``value-based activity'' as that 
term is defined at proposed Sec.  411.351. In turn, the arrangement 
would not qualify as a ``value-based arrangement'' and the exception at 
proposed Sec.  411.357(aa)(3) would no longer be available to protect 
Physician B's referrals.
    As illustrated, implicit in the physician self-referral law, as 
applied, is a requirement that one or both parties monitor the 
compliance of their value-based arrangement with an applicable 
exception, including whether the value-based activities under the 
arrangement are furthering (or could further) the value-based 
purpose(s) of the value-based enterprise. Even so, as additional 
program integrity safeguards, we are considering whether to require 
that: (1) The value-based enterprise or the VBE participant providing 
the remuneration must monitor to determine whether the value-based 
activities under the arrangement are furthering the value-based 
purpose(s) of the value-based enterprise; and (2) if the value-based 
activities will be unable to achieve the value-based purpose(s) of the 
arrangement, the physician must cease referring designated health 
services to the entity, either immediately upon the determination that 
the value-based purpose(s) will not be achieved through the value-based 
activities or within 60 days of such determination. We seek comment 
regarding whether we should include these as requirements of the 
proposed value-based arrangement exception, how parties could monitor 
for achievement of value-based purposes, and the burden or cost of 
including such a requirement. Specifically, we seek comment regarding 
whether we should require that monitoring should occur at specified 
intervals and, if so, what the intervals should be. Recognizing that 
cost savings, in particular, may take an extended period of time to 
achieve, we also seek comment regarding whether to impose time limits 
with respect to a value-based enterprise's or VBE participant's 
determination that the value-based purpose of the enterprise will not 
be achieved through the value-based activities required under the 
arrangement; that is, require that the value-based purpose must be 
achieved within a certain timeframe, such as 3 years and, if it is not, 
the value-based purpose would be deemed not achievable through the 
value-based activities requirement under the arrangement. We also seek 
comment regarding the types of monitoring activities that parties to 
value-based arrangements are currently performing.
    We are also considering whether to require the recipient of any 
nonmonetary remuneration under a value-based arrangement to contribute 
at least 15 percent of the donor's cost of the nonmonetary 
remuneration. We would require that the 15 percent contribution is 
made: (1) Within 90 calendar days of the donation of the nonmonetary 
remuneration if the donation is a one-time cost to the donor; and (2) 
at reasonable, regular intervals if the donation of the nonmonetary 
remuneration is an ongoing cost to the donor. As we stated with respect 
to the 15 percent contribution required under the current exception at 
Sec.  411.357(w) for EHR items and services, parties should use a 
reasonable and verifiable method for allocating costs and are strongly 
encouraged to maintain contemporaneous and accurate documentation (71 
FR 45161 through 45162). Requiring financial participation by a 
recipient of nonmonetary remuneration under a value-based arrangement 
would help ensure that the nonmonetary remuneration is appropriate and 
beneficial for the achievement the value-based purpose(s) of the value-
based enterprise, as well as that the recipient will actually use the 
nonmonetary remuneration. However, we are concerned that such a 
requirement could inhibit the adoption

[[Page 55786]]

of value-based arrangements. As discussed in section II.D.11.d.(1) of 
this proposed rule, many commenters to the CMS RFI expressed that the 
15 percent contribution requirement under the existing exception for 
EHR items and services is burdensome to some recipients and acts as a 
barrier to adoption of EHR technology. We are concerned that the burden 
of a 15 percent contribution requirement would prove similarly 
burdensome under value-based arrangements, particularly with respect to 
small and rural physicians, providers, and suppliers that cannot afford 
the contribution. We seek comment regarding whether we should include a 
recipient contribution requirement in the proposed value-based 
arrangement exception and the burden or cost of including such a 
requirement. Specifically, we seek comment regarding the appropriate 
level for any required contribution (if 15 percent is not an 
appropriate level) and whether certain recipients (for example, small 
or rural physicians, providers, and suppliers) should be exempt from 
compliance with the requirement.
    Finally, as discussed throughout sections I. and II.A. of this 
proposed rule, where possible and feasible, we aim to align our 
policies with those under consideration by OIG to ease the compliance 
burden on the regulated industry by minimizing complexity for parties 
whose arrangements implicate both the physician self-referral law and 
the anti-kickback statute. For this reason, we are considering whether 
to adopt any other requirements included in the safe harbor at proposed 
Sec.  1001.952(ee) and not specifically proposed in this section 
II.A.2.b.(3). We will consider comments received by OIG on its 
proposals when developing any final policies for the value-based 
arrangement exception to the physician self-referral law.
(4) Indirect Compensation Arrangements to Which the Exceptions at 
Proposed Sec.  411.357(aa) are Applicable (Proposed Sec.  
411.354(c)(4))
    The prohibitions of section 1877 of the Act apply if a physician 
(or an immediate family member of a physician) has an ownership or 
investment interest in an entity or a compensation arrangement with an 
entity. For purposes of the physician self-referral law, a compensation 
arrangement is any arrangement involving direct or indirect 
remuneration between a physician (or an immediate family member of the 
physician) and an entity, and remuneration means any payment or other 
benefit made directly, indirectly, overtly, covertly, in cash, or in 
kind. (See Sec. Sec.  411.351 and 411.354(c).) In Phase I, we finalized 
regulations that define when an indirect compensation arrangement 
exists between a physician and the entity to which he or she refers 
designated health services. For purposes of applying these regulations, 
in the FY 2008 IPPS final rule, we finalized additional regulations 
that deem a physician to stand in the shoes of his or her physician 
organization if the physician has an ownership or investment interest 
in the physician organization that is not merely a titular interest. 
These regulations are found at Sec.  411.354(c)(2) and (3).
    Under our current regulations, if an indirect compensation 
arrangement exists, the exception for indirect compensation 
arrangements at Sec.  411.357(p) is available to protect the 
compensation arrangement. If all of the requirements of the exception 
are satisfied, the physician would not be barred from referring 
patients to the entity for designated health services and the entity 
would not be barred from submitting claims for the referred services. 
No other exception in Sec.  411.357 is applicable to indirect 
compensation arrangements. However, the parties may elect to protect 
individual referrals of and claims for designated health services using 
an applicable exception in Sec.  411.355 of our regulations.
    We anticipate that an unbroken chain of financial relationships 
described in current Sec.  411.354(c)(2)(i) may include a value-based 
arrangement, as that term is proposed to be defined at Sec.  411.351. 
Thus, an unbroken chain of financial relationships that includes a 
value-based arrangement could form an ``indirect compensation 
arrangement'' for purposes of the physician self-referral law if the 
circumstances described in Sec.  411.354(c)(2)(ii) and (iii) also 
exist. In such an event, despite the existence of the value-based 
arrangement in the unbroken chain of financial relationships, under our 
current regulations, the only exception available to ensure the 
permissibility of all the physician's referrals to the entity (assuming 
no other financial relationships exist between the parties) would be 
the exception for indirect compensation arrangements at Sec.  
411.357(p), which includes requirements not found in the proposed 
exceptions for value-based arrangements at Sec.  411.357(aa). (If the 
parties elect to utilize a ``services'' exception at Sec.  411.355, 
designated health services are protected only on a service-by-service 
basis and satisfaction of the requirements of an applicable exception 
permits only the referral of and claim submission for the particular 
designated health service that satisfied the requirements of the 
exception.) For the reasons discussed previously in this section 
II.A.2.b. of this proposed rule, it is possible that an indirect 
compensation arrangement that includes a value-based arrangement in the 
unbroken chain of financial relationships that forms the indirect 
compensation arrangement could not satisfy the requirements of Sec.  
411.357(p) because the compensation to the physician could take into 
account the volume or value of referrals or other business generated by 
the physician for the entity or may not be fair market value for 
specific items or services provided by the physician to the entity.
    In this section II.A.2.b. of this proposed rule, we are proposing 
exceptions available only to compensation arrangements that qualify as 
value-based arrangements. Although our proposals do not limit the 
applicability of the exceptions to value-based arrangements directly 
between a physician and the entity to which he or she refers designated 
health services, the definition of ``value-based arrangement'' proposed 
at Sec.  411.351 requires that the compensation arrangement is 
``between'' (or ``among,'' if there are more than two parties to the 
arrangement) specified parties. We are proposing here to identify the 
circumstances under which the proposed exceptions at Sec.  411.357(aa) 
would apply to an indirect compensation arrangement that includes a 
value-based arrangement in the unbroken chain of financial 
relationships described in Sec.  411.354(c)(2)(i). Specifically, we are 
proposing that, when the value-based arrangement is the link in the 
chain closest to the physician--that is, the physician is a direct 
party to the value-based arrangement--the indirect compensation 
arrangement would qualify as a ``value-based arrangement'' for purposes 
of applying the proposed exceptions at Sec.  411.357(aa). To be clear, 
the link closest to the physician may not be an ownership interest; it 
must be a compensation arrangement that meets the definition of value-
based arrangement at proposed Sec.  411.351. For purposes of 
determining whether the indirect compensation arrangement satisfies the 
requirements of an applicable exception at proposed Sec.  411.357(aa), 
we would look at the value-based arrangement to which the physician is 
a party. For the reasons described in section II.A.2.a. of this 
proposed rule, we are considering

[[Page 55787]]

whether to exclude an unbroken chain of financial relationships between 
an entity and a physician from the definition of ``indirect value-based 
arrangement'' if the link closest to the physician (that is, the value-
based arrangement to which the physician is a party) is a compensation 
arrangement between the physician and a: Pharmaceutical manufacturer; 
manufacturer, distributor, or supplier of DMEPOS; laboratory; pharmacy 
benefit manager; wholesaler; or distributor. In the alternative, we are 
considering whether to exclude an unbroken chain of financial 
relationships between an entity and a physician from the definition of 
``indirect value-based arrangement'' if one of these persons or 
organizations is a party to any financial relationship in the chain of 
financial relationships. We are also considering whether to include 
health technology companies in any such exclusion in order to align our 
policies with policies under consideration by OIG where possible and 
appropriate. We seek comment on these approaches and their 
effectiveness in enhancing program integrity.
    Under this proposal, parties would first determine if an indirect 
compensation arrangement exists and, if it does, determine whether the 
compensation arrangement to which the physician is a direct party 
qualifies as a value-based arrangement. If so, the exceptions at 
proposed Sec.  411.357(aa) for value-based arrangements would be 
applicable. To illustrate, assume an unbroken chain of financial 
relationships between a hospital and a physician that runs: Hospital--
(owned by)--parent organization--(owns)--physician practice--
(employs)--physician. Thus, the links in the unbroken chain are 
ownership or investment interest--ownership or investment interest--
compensation arrangement. For purposes of determining whether an 
indirect compensation exists between the physician and the hospital, 
under Sec.  411.354(c)(2)(ii), we analyze the compensation arrangement 
between the physician practice and the physician. Assume also that the 
compensation paid to the physician under her employment arrangement 
varies with the volume or value of her referrals to the hospital 
because she is paid a bonus for each referral for designated health 
services furnished by the hospital provided that she adheres to 
redesigned care protocols intended to further one or more value-based 
purposes (as defined at proposed Sec.  411.351). Finally, assume that 
the hospital has actual knowledge that the physician receives aggregate 
compensation that varies with the volume or value of her referrals to 
the hospital. The unbroken chain of financial relationships establishes 
an indirect compensation arrangement; therefore, in order for the 
physician to refer patients to the hospital for designated health 
services and for the hospital to submit claims to Medicare for the 
referred designated health services, the indirect compensation 
arrangement must satisfy the requirements of an applicable exception. 
Under this alternative proposal, if the compensation arrangement 
between the physician practice and the physician qualifies as a value-
based arrangement (as defined at proposed Sec.  411.351), the 
exceptions at proposed Sec.  411.357(aa) would be available to protect 
the value-based arrangement (that is, the indirect compensation 
arrangement) between the hospital and the physician. (The parties could 
also utilize an applicable exception in Sec.  411.355 to protect 
individual referrals for designated health services or the exception at 
Sec.  411.357(p) to protect the indirect compensation arrangement 
between the hospital and the physician, but it is unlikely that all 
requirements of Sec.  411.357(p) would be satisfied in this 
hypothetical fact pattern.)
    In the alternative, we are proposing to define ``indirect value-
based arrangement'' and specify in regulation that the exceptions 
proposed at Sec.  411.357(aa) would be available to protect the 
arrangement. Under this alternate proposal, an indirect value-based 
arrangement would exist if: (1) Between the physician and the entity 
there exists an unbroken chain of any number (but not fewer than one) 
of persons (including but not limited to natural persons, corporations, 
and municipal organizations) that have financial relationships (as 
defined at Sec.  411.354(a)) between them (that is, each person in the 
unbroken chain is linked to the preceding person by either an ownership 
or investment interest or a compensation arrangement); (2) the 
financial relationship between the physician and the person with which 
he or she is directly linked is a value-based arrangement; and (3) the 
entity has actual knowledge of the value-based arrangement in 
subparagraph (2). Under our alternative proposal, if an unbroken chain 
of financial relationships between a physician and an entity qualifies 
as an ``indirect value-based arrangement,'' the three exceptions 
proposed at Sec.  411.357(aa) would be applicable and the requirements 
of at least one of the applicable exceptions must be satisfied in order 
for the physician to refer patients to the hospital for designated 
health services and for the hospital to submit claims to Medicare for 
the referred designated health services. For purposes of determining 
whether the indirect value-based arrangement satisfies the requirements 
of an applicable exception at proposed Sec.  411.357(aa), we would look 
at the value-based arrangement to which the physician is a party. (The 
parties could also utilize an applicable exception in Sec.  411.355 to 
protect individual referrals for designated health services or the 
exception at Sec.  411.357(p) to protect the indirect compensation 
arrangement between the hospital and the physician, but it is unlikely 
that all requirements of Sec.  411.357(p) would be satisfied in this 
hypothetical fact pattern.)
    To illustrate this alternative proposal, assume the same unbroken 
chain of financial relationships. The first step in the analysis would 
be to determine whether the compensation arrangement between the 
physician practice and the physician is a value-based arrangement 
(irrespective of whether the compensation to the physician varies with 
the volume or value of her referrals to the hospital). If so, and the 
hospital has actual knowledge of the value-based arrangement, the 
unbroken chain of financial relationships would constitute an indirect 
value-based arrangement that must satisfy the requirements of an 
applicable exception at proposed Sec.  411.357(aa) in order for the 
physician to refer patients to the hospital for designated health 
services and for the hospital to submit claims to Medicare for the 
referred designated health services. (The parties could also utilize an 
applicable exception in Sec.  411.355 to protect individual referrals 
for designated health services.)
    We seek comment on the best approach to address value-based 
arrangements that are part of an unbroken chain of financial 
relationships between a physician and an entity to which he or she 
refers patients for designated health services. Specifically, we are 
interested in whether one of the approaches described here is 
preferable. We are also soliciting comments on whether it is necessary 
to establish new regulations at all; that is, whether we should simply 
apply our existing regulations at Sec.  411.354(c) to determine whether 
an unbroken chain of financial relationships that includes a value-
based arrangement establishes an indirect compensation arrangement. If 
so, the parties could rely on the exception at current Sec.  411.357(p) 
for

[[Page 55788]]

indirect compensation arrangements or any applicable exception in Sec.  
411.355 to protect individual referrals from the physician to the 
entity and claims for the referred designated health services.
(5) Price Transparency
    Price transparency is a critical component of a health care system 
that pays for value and aligns with our desire to reinforce and support 
patient freedom of choice. We believe that transparency in pricing can 
empower consumers of health care services to make more informed 
decisions about their care and lower the rate of growth in health care 
costs. Health care consumers today lack meaningful and timely access to 
pricing information that could, if available, help them choose a lower-
cost setting or a higher-value provider. Patients are often unaware of 
site-of-care cost differentials until it is too late (see Aparna 
Higgins & German Veselovskiy, Does the Cite of Care Change the Cost of 
Care, Health Affairs (June 2, 2016), https://www.healthaffairs.org/do/10.1377/hblog20160602.055132/full/). Multiple surveys and studies have 
revealed that patients want their health care providers to engage in 
cost discussions, and one recent national survey found that a majority 
of physicians want to have cost of care discussions with their patients 
(see Caroline E. Sloan, MD & Peter A. Ubel, MD, The 7 Habits of Highly 
Effective Cost-of-Care Conversations, Annals of Internal Medicine (May 
7, 2019), https://annals.org/aim/issue/937992, and Let's Talk About 
Money, The University of Utah (2018), https://uofuhealth.utah.edu/value/lets-talk-about-money.php). The point of referral presents an 
ideal opportunity to have such cost-of-care discussions.
    In the CMS RFI, we solicited comment on the role of transparency in 
the context of the physician self-referral law. In particular, we 
solicited comment on whether, if provided by the referring physician to 
a beneficiary, transparency about a physician's financial 
relationships, price transparency, or the availability of other data 
necessary for informed consumer purchasing (such as data about quality 
of services provided) would reduce or eliminate the harms to the 
Medicare program and its beneficiaries that the physician self-referral 
law is intended to address. Many commenters replied that making a 
physician's financial relationships and cost of care information 
available could be useful. One commenter suggested that providing clear 
and transparent information was vital in the health care industry where 
patients are often vulnerable, confused, and unsure of their options. 
This commenter further opined that informed patients are empowered to 
take charge of their health care and better assist their providers in 
fulfilling their health care needs. Several commenters shared similar 
support for transparency efforts. Another commenter stated that 
transparency of a physician's financial relationships along with price 
and quality of care information would be valuable to patients in 
choosing providers and care pathways. This commenter maintained that 
these actions would also engage patients in protecting against possible 
unintended consequences of value-based arrangements. Other commenters 
raised concerns that information on price transparency and a 
physician's financial relationships with other health care providers, 
in combination with already-required disclosures under HIPAA, informed 
consent information and forms, insurance payment authorization forms, 
and other paperwork that patients receive or must complete would serve 
only to inundate patients with paperwork that they will find confusing 
or simply not read. These commenters contended that, although 
transparency is an appealing concept, requiring additional disclosures 
would result in more burden than benefit.
    The June 24, 2019 Executive Order on Improving Price and Quality 
Transparency in American Healthcare to Put Patients First recognizes 
the importance of price transparency. The Executive Order directs 
Federal agencies to take historic steps toward getting patients the 
information they need and when they need it to make well-informed 
decisions about their health care. CMS has already acted on the 
Executive Order through its proposals in the CY 2020 OPPS proposed rule 
to improve the availability of meaningful pricing information to the 
public. We believe that all consumers need price and quality 
information in advance to make an informed decision when they choose a 
good or service, including at the point of a referral for such goods or 
services. By making meaningful price and quality information more 
broadly available, we can protect patients and increase competition, 
innovation, and value in the health care system.
    As discussed elsewhere in this section of the proposed rule, we are 
committed to ensuring that physician self-referral law policies do not 
infringe on patient choice and the ability of physicians and patients 
to make health care decisions that are in the patient's best interest. 
We believe it is important for patients to have timely access to 
information about all aspects of their care, including information 
about the factors that may affect the cost of services for which they 
are referred. A patient who is made aware, for example, that costs may 
differ based on the site of service where the referred services are 
furnished, may become a more conscious consumer of health care 
services. Access to such information may also spark important 
conversations between patients and their physicians, promoting patient 
choice and the ability of physicians and patients to make health care 
decisions that are in the patient's best interest. In conjunction with 
their physicians' determination of the need for recommended health care 
services and the urgency of that need, information on the factors that 
may affect the cost of such services could ensure that patients have 
the information they need to shop and seek out high-quality care at the 
lowest possible cost.
    We seek to establish policies that facilitate consumers' ability to 
participate actively and meaningfully in decisions relating to their 
care. At the same time, we are cognizant that including requirements 
regarding price transparency in the exceptions to the physician self-
referral law raises certain challenges for the regulated industry. We 
seek comments on how to pursue our price transparency objectives in the 
context of the physician self-referral law, both in the context of a 
value-based health care system and otherwise, and how to overcome the 
technical, operational, legal, cultural, and other challenges to 
including price transparency requirements in the physician self-
referral regulations. Specifically, we are interested in comments 
regarding the availability of pricing information and out-of-pocket 
costs to patients (including information specific to a particular 
patient's insurance, such as the satisfaction of the patient's 
applicable deductible, copayment, and coinsurance obligations); the 
appropriate timing for the dissemination of information (that is, 
whether the information should be provided at the time of the referral, 
the time the service is scheduled, or some other time); and the burden 
associated with compliance with a requirement in an exception to the 
physician self-referral law to provide information about the factors 
that may affect the cost of services for which a patient is referred. 
Finally, we seek comment whether the inclusion of a price transparency 
requirement in a value-based exception would provide additional 
protections against program or patient abuse through the active

[[Page 55789]]

participation of patients in selecting their health care providers and 
suppliers.
    In furtherance of our goal of price transparency for all patients, 
we are considering whether to include a requirement related to price 
transparency in every exception for value-based arrangements at 
proposed Sec.  411.357(aa). For instance, we are considering whether to 
require that a physician provide a notice or have a policy regarding 
the provision of a public notice that alerts patients that their out of 
pocket costs for items and services for which they are referred by the 
physician may vary based on the site where the services are furnished 
and based on the type of insurance that they have. Because of limits on 
currently available pricing data, we believe such a requirement could 
be an important first step in breaking down barriers to cost-of-care 
discussions that play a beneficial role in a value-based health care 
system. The public notice provided or reflected in the policy could be 
made in any form or manner that is accessible to patients. For example, 
a notice on the physician's website, a poster on the wall in the 
physician's office, or a notice in a patient portal used by the 
physician's patients would all be acceptable. We expect that any notice 
would be written in plain language that would be understood by the 
general public. We refer readers to the Plain Writing Act of 2010 (Pub. 
L. 111-274, enacted on October 13, 2010) for further information. We 
seek comment on whether, if we finalize such a requirement, it would be 
helpful for CMS to provide a sample notice and, if we provide a sample 
notice, whether we should deem such a notice to satisfy the requirement 
described. We note that we would not require public notice in advance 
of referrals for emergency hospital services to avoid delays in 
urgently needed care. We seek comment on other options for price 
transparency requirements in the value-based exceptions to the 
physician self-referral law that we are proposing in this proposed 
rule, as well as whether we should consider for a future rulemaking the 
inclusion of price transparency requirements in exceptions to the 
physician self-referral law included in our existing regulations.

B. Fundamental Terminology and Requirements

1. Background
    As described in greater detail in this section of the proposed 
rule, many of the statutory and regulatory exceptions to the physician 
self-referral law include one, two, or all of the following 
requirements: The compensation arrangement itself is commercially 
reasonable; the amount of the compensation is fair market value; and 
the compensation paid under the arrangement is not determined in a 
manner that takes into account the volume or value of referrals (or, in 
some cases, other business generated between the parties). These 
requirements are presented in various ways within the statutory and 
regulatory exceptions, but it is clear that they are separate and 
distinct requirements, each of which must be satisfied when present in 
an exception. Nonetheless, the regulated industry and its complementary 
parts, such as the health care valuation community, continue to seek 
additional guidance from CMS. For example, many CMS RFI commenters 
shared a common belief that, if compensation is not fair market value, 
CMS would automatically consider it to take into account the volume or 
value of referrals. Or, under the current definition of fair market 
value at Sec.  411.351, if compensation takes into account the volume 
or value of referrals, it cannot be fair market value. (Although this 
is not the case, we note that failure to meet even a single requirement 
of an applicable exception leaves a compensation arrangement subject to 
the physician self-referral law's referral and claims submission 
prohibitions; failure to satisfy multiple requirements of an exception 
does not result in ``additional'' noncompliance with the law's 
prohibitions.) We provide examples of such guidance below in sections 
II.B.3 and II.B.5. Moreover, although commercial reasonableness is a 
core requirement of many exceptions to the physician self-referral law, 
the only guidance we have provided to date is in a proposed rule (63 FR 
1700). False Claims Act case law has exacerbated the challenge of 
complying with these three fundamental requirements, according to 
commenters.
    Over the years, stakeholders have approached CMS with requests for 
clarification on our policy with respect to when an arrangement is 
considered commercially reasonable, under what circumstances 
compensation is considered to take into account the volume or value of 
referrals or other business generated between the parties, and how to 
determine the fair market value of compensation. In light of the 
current Regulatory Sprint, we included in the CMS RFI specific 
questions regarding these issues. A large number of commenters 
responded to these specific requests. Although the commenters suggested 
varying ways we could provide clearer guidance, uniformly, they 
requested that we establish bright-line, objective regulations for each 
of these fundamental requirements. Our overall intention in this 
proposed rule is to reduce the burden of compliance with the physician 
self-referral law, provide clarification where possible, and revise 
regulations as necessary to achieve these goals and the goals of the 
Regulatory Sprint. We reviewed the statute and our regulations in a 
fresh light, and believe that clear, bright-line rules would enhance 
both stakeholder compliance efforts and our enforcement capability. We 
have endeavored here to provide the clarity that will benefit the 
regulated industry, CMS, and our law enforcement partners.
    In developing our proposals for guidance on the fundamental 
terminology and requirements described previously, we considered three 
basic questions--
     Does the arrangement make sense as a means to accomplish 
the parties' goals?
     How did the parties calculate the remuneration?
     Did the calculation result in compensation that is fair 
market value for the asset, item, service, or rental property?
    These questions relate, respectively, to the definition of 
commercial reasonableness, the volume or value standard and the other 
business generated standard, and the definition of fair market value. 
In this section of the proposed rule, we provide detailed descriptions 
of our proposed definitions and special rules. Importantly, our 
proposals relate only to the application of section 1877 of the Act and 
our physician self-referral regulations. Although other laws and 
regulations, including the anti-kickback statute and CMP law, may 
utilize the same or similar terminology, the interpretations proposed 
here would not affect OIG's (or any other governmental agency's) 
interpretation or ability to interpret such terms for purposes of laws 
or regulations other than the physician self-referral law. In addition, 
our interpretation of these key terms does not relate to and in no way 
binds the Internal Revenue Service with respect to its rulings and 
interpretation of the Internal Revenue Code or State agencies with 
respect to any State law or regulation that may utilize the same or 
similar terminology. We note further that, to the extent terminology is 
the same as or similar to terminology used in the Quality Payment 
Program within the PFS, our proposals would not affect

[[Page 55790]]

or apply to the Quality Payment Program.
2. Commercially Reasonable (Sec.  411.351)
    We are proposing to include at Sec.  411.351 a definition for the 
term ``commercially reasonable.'' As described previously, many of the 
statutory and regulatory exceptions to the physician self-referral law 
include a requirement that the compensation arrangement is commercially 
reasonable. For example, the exception at section 1877(e)(2) of the Act 
for bona fide employment relationships requires that the remuneration 
provided to the physician is pursuant to an arrangement that would be 
commercially reasonable (even if no referrals were made to the 
employer). The exception at section 1877(e)(3)(A) of the Act for 
personal service arrangements uses slightly different language to 
describe this general concept, and requires that the aggregate services 
contracted for do not exceed those that are reasonable and necessary 
for the legitimate business purposes of the arrangement. The exception 
at Sec.  411.357(l) for fair market value compensation, which the 
Secretary established in regulation using his authority at section 
1877(b)(4) of the Act, requires that the arrangement is commercially 
reasonable (taking into account the nature and scope of the 
transaction) and furthers the legitimate business purposes of the 
parties. Despite the prevalence of this requirement (in one form or 
another), we addressed the concept of commercial reasonableness only 
once--in our 1998 proposed rule--where we stated that we are 
interpreting ``commercially reasonable'' to mean that an arrangement 
appears to be a sensible, prudent business agreement, from the 
perspective of the particular parties involved, even in the absence of 
any potential referrals (63 FR 1700). The physician self-referral 
regulations themselves lack a codified definition for the term 
commercially reasonable.
    As discussed previously, we believe that the key question to ask 
when determining whether an arrangement is commercially reasonable is 
simply whether the arrangement makes sense as a means to accomplish the 
parties' goals. We continue to believe that this determination should 
be made from the perspective of the particular parties involved in the 
arrangement. The determination of commercial reasonableness is not one 
of valuation. Nor does the determination that an arrangement is 
commercially reasonable turn on whether the arrangement is profitable. 
It is apparent from our review of the CMS RFI comments that there is a 
widespread misconception about our position on the nexus between the 
commercial reasonableness of an arrangement and its profitability. We 
wish to clarify that compensation arrangements that do not result in 
profit for one or more of the parties may nonetheless be commercially 
reasonable.
    CMS RFI commenters shared numerous examples of compensation 
arrangements that they believed would be commercially reasonable 
despite the fact that the party paying the remuneration does not 
recognize an equivalent or greater financial benefit from the items or 
services purchased in the transaction, or that the party receiving the 
remuneration incurs costs in furnishing the items or services that are 
greater than the amount of the remuneration received. Commenters also 
explained that, even knowing in advance that an arrangement may result 
in losses to one or more parties, it may be reasonable, if not 
necessary, to nevertheless enter into the arrangement. These commenters 
explained some of the reasons why parties would enter into such 
transactions, such as community need, timely access to health care 
services, fulfillment of licensure or regulatory obligations, including 
those under the Emergency Medical Treatment and Labor Act (EMTALA), the 
provision of charity care, and the improvement of quality and health 
outcomes. One commenter suggested that entire hospital service lines, 
with their needed management and other physician-provided services, are 
illustrative for operating at a loss and identified psychiatric and 
burn units as examples of such service lines. According to this 
commenter, with changes in reimbursement, more service lines will 
operate at a loss in the future. The commenter urged that these 
services are of vital need to communities and, unless CMS addresses the 
definition of ``commercial reasonableness,'' health care providers may 
be prohibited from providing these services to their communities as a 
result of a fear of violating the commercial reasonableness standard. 
We find these comments and the concerns they highlight compelling.
    We are proposing two alternative definitions for the term 
``commercially reasonable.'' First, we are proposing to define 
``commercially reasonable'' to mean that the particular arrangement 
furthers a legitimate business purpose of the parties and is on similar 
terms and conditions as like arrangements. In the alternative, we are 
proposing to define ``commercially reasonable'' to mean that the 
arrangement makes commercial sense and is entered into by a reasonable 
entity of similar type and size and a reasonable physician of similar 
scope and specialty. We seek comment on each of these proposed 
definitions as well as input from stakeholders regarding other possible 
definitions that would provide clear guidance to enable parties to 
structure their arrangements in a manner that ensures compliance with 
the requirement that their particular arrangement is commercially 
reasonable. We are also proposing to clarify in regulation text that an 
arrangement may be commercially reasonable even if it does not result 
in profit for one or more of the parties.
    In developing our proposals, we reviewed the Internal Revenue 
Service (IRS) Revenue Ruling 97-21, which considered whether a hospital 
violates the requirements for exemption from federal income tax as an 
organization described in section 501(c)(3) of the Internal Revenue 
Code (Title 26 of the United States Code) when it provides incentives 
to recruit private practice physicians to join its medical staff or to 
provide medical services in the community. The IRS identified several 
activities that would support a hospital's charitable purposes, all of 
which were mentioned in the CMS RFI comments. As described previously, 
the arrangements identified by commenters on the CMS RFI may further a 
legitimate business purpose of the parties or make commercial sense as 
well. However, arrangements that, on their face, appear to further a 
legitimate business purpose of the parties may not be commercially 
reasonable if they merely duplicate other facially legitimate 
arrangements. For example, a hospital may enter into an arrangement for 
the personal services of a physician to oversee its oncology 
department. If the hospital needs only one medical director for the 
oncology department, but later enters into a second arrangement with 
another physician for oversight of the department, the second 
arrangement merely duplicates the already-obtained medical directorship 
services and may not be commercially reasonable. Although the 
evaluation of compliance with the physician self-referral law always 
requires a review of the facts and circumstances of the financial 
relationship between the parties, the commercial reasonableness of 
multiple arrangements for the same services is questionable.
    Also important to our consideration of the best way to define and 
interpret ``commercially reasonable'' was the IRS's conclusion that a 
hospital may not engage in substantial unlawful activities and maintain 
its tax-exempt status

[[Page 55791]]

because the conduct of an unlawful activity is inconsistent with 
charitable purposes. The IRS explained that an organization conducts an 
activity that is unlawful, and therefore not in furtherance of a 
charitable purpose, if the organization's property is to be used for an 
objective that is in violation of the criminal law. We are similarly 
taking the position that an activity that is in violation of criminal 
law would not be a legitimate business purpose of the parties, nor 
would it make commercial sense, and, therefore, would not be 
commercially reasonable for purposes of the physician self-referral 
law. We note that the absence of a criminal violation would not, in and 
of itself, establish that an arrangement is commercially reasonable. We 
seek comment on our alternate proposals for the definition of 
``commercially reasonable'' and its interpretation, including how 
parties could determine whether an arrangement is on similar terms and 
conditions as like arrangements.
    We note that many of the exceptions to the physician self-referral 
law require that an arrangement is commercially reasonable ``even if no 
referrals were made between the parties'' or ``even if no referrals 
were made to the employer.'' The exceptions use varying phrasing to 
describe this requirement and we do not repeat each iteration here. We 
are not proposing to eliminate this requirement from the exceptions 
where it appears. For example, under our first alternative proposal, an 
employment arrangement must further a legitimate business purpose of 
the parties and be on similar terms and conditions as like 
arrangements, even if no referrals were made to the employer, as well 
as satisfy the other requirements of the exception, in order for the 
physician to refer patients to the employing entity for designated 
health services and for the employing entity to submit claims to 
Medicare for the referred designated health services. Under our second 
alternative proposal, an employment arrangement must make commercial 
sense and be entered into by a reasonable entity of similar type and 
size and a reasonable physician of similar scope and specialty, even if 
no referrals were made to the employer, as well as satisfy the other 
requirements of the exception. To emphasize, a compensation arrangement 
must satisfy the ``even if no referrals were made'' requirement if it 
is included as a requirement of the relevant exception under which the 
parties seek protection from the physician self-referral law's referral 
and claims submission prohibitions.
3. The Volume or Value Standard and the Other Business Generated 
Standard (Sec.  411.354(d)(5) and (6))
    Many of the exceptions at section 1877(e) of the Act (``Exceptions 
Relating to Other Compensation Arrangements'') and in our regulations 
include a requirement that the compensation paid under the arrangement 
is not determined in a manner that takes into account the volume or 
value of referrals by the physician who is a party to the arrangement, 
and some exceptions also include a requirement that the compensation is 
not determined in a manner that takes into account other business 
generated between the parties. We refer to these as the ``volume or 
value standard'' and the ``other business generated standard,'' 
respectively. Throughout the regulatory history of the physician self-
referral law, we have shared our interpretation of these standards and 
responded to comments as they arose. Despite our attempt at 
establishing clear guidance regarding the application of the volume or 
value standard and the other business generated standard, commenters to 
several requests for information, including the CMS RFI, identified 
their lack of a clear understanding as to when compensation will be 
considered to take into account the volume or value of referrals or 
other business generated by the physician as one of the greatest risks 
they face when structuring arrangements between entities furnishing 
designated health services and the physicians who refer to them. They 
stated that, not only do they face the risk of penalties under the 
physician self-referral law, but, because a violation of the physician 
self-referral law may be the predicate for liability under the Federal 
False Claims Act (31 U.S.C. 3729 through 3733), entities are 
susceptible to both government and whistleblower actions that can 
result in significant penalties through litigation or settlement. 
Commenters and other stakeholders have long expressed frustration that, 
from their perspective, the guidance from CMS has been too limited and 
left them without an objective standard against which to judge their 
financial relationships. Our proposals here are intended to provide 
objective tests for determining whether compensation takes into account 
the volume or value of referrals or the volume or value of other 
business generated by the physician. Before describing our proposals, 
we provide a brief history of the guidance to date on the volume or 
value standard and the other business generated standard.
    In the 1998 proposed rule, we discussed the volume or value 
standard as it pertains to the criteria that a physician practice must 
meet to qualify as a ``group practice'' (63 FR 1690). We also stated 
that we would apply this interpretation of the volume or value standard 
throughout our regulations (63 FR 1699). In the discussion of group 
practices, we stated that we believe that the volume or value standard 
precludes a group practice from paying physician members for each 
referral they personally make or based on the volume or value of the 
referred services (63 FR 1690). We went on to state that the most 
straightforward way for a physician practice to demonstrate that it is 
meeting the requirements for group practices would be for the practice 
to avoid a link between physician compensation and the volume or value 
of any referrals, regardless of whether the referrals involve Medicare 
or Medicaid patients (63 FR 1690). However, because our definition of 
``referral'' at Sec.  411.351 includes only referrals for designated 
health services, we also noted that a physician practice that wants to 
compensate its members on the basis of non-Medicare and non-Medicaid 
referrals would be required to separately account for revenues and 
distributions related to referrals for designated health services for 
Medicare and Medicaid patients (63 FR 1690). (See section II.C. of this 
proposed rule for a discussion of the inclusion of Medicaid referrals 
in the existing regulation and our proposed revisions to the group 
practice rules.) Outside of the group practice context, these 
principles apply generally to compensation from an entity to a 
physician. We also addressed the other business generated standard in 
the 1998 proposed rule, stating that we believe that the Congress may 
not have wished to except arrangements that include additional 
compensation for other business dealings and that, if a party's 
compensation contains payment for other business generated between the 
parties, we would expect the parties to separately determine if this 
extra payment falls within one of the exceptions (63 FR 1700).
    In Phase I, we finalized our policy regarding the volume or value 
standard and the other business generated standard, responding to 
comments on our proposals in the 1998 proposed rule. Most importantly, 
we revised the scope of the volume or value standard to permit time-
based or unit of service-based compensation formulas (66 FR 876). We 
also stated that the phrase ``does not take into account other

[[Page 55792]]

business generated between the parties'' means that the fixed, fair 
market value payment cannot take into account, or vary with, referrals 
of designated health services payable by Medicare or Medicaid or any 
other business generated by the referring physician, including other 
Federal and private pay business (66 FR 877), noting that the phrase 
``generated between the parties'' means business generated by the 
referring physician for purposes of the physician self-referral law (66 
FR 876). We stated that section 1877 of the Act establishes a 
straightforward test that compensation should be at fair market value 
for the work or service performed or the equipment or [office] space 
leased--not inflated to compensate for the physician's ability to 
generate other revenue (66 FR 877). Finally, in response to an inquiry 
about whether the compensation paid to a physician for the purchase of 
his or her practice could include the value of the physician's 
referrals of designated health services to the practice, we stated that 
compensation may include the value of designated health services made 
by the physician to his or her practice if the designated health 
services referred by the selling physician satisfied the requirements 
of an applicable exception, such as the in-office ancillary services 
exception, and the purchase arrangement is not contingent on future 
referrals (66 FR 877). This policy would apply also to the value of the 
physician's referrals of designated health services to his or her 
practice if the compensation arrangement between the physician and the 
practice satisfied the requirements of an applicable exception.
    Also in Phase I, we established special rules on compensation at 
Sec.  411.354(d)(2) and (3) that deem compensation not to take into 
account the volume or value of referrals or other business generated 
between the parties if certain conditions are met (66 FR 876 through 
877). These rules state that compensation will be deemed not to take 
into account the volume or value of referrals if the compensation is 
fair market value for services or items actually provided and does not 
vary during the course of the compensation arrangement in any manner 
that takes into account referrals of designated health services. 
Compensation will be deemed not to take into account the volume or 
value of other business generated between the parties to a compensation 
arrangement if the compensation is fair market value and does not vary 
during the term 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. Both 
special rules apply to time-based or per-unit of service-based (``per-
click'') compensation formulas. However, as we noted later in Phase II, 
the special rules on compensation are intended to be safe harbors, and 
there may be some situations not described in Sec.  411.354(d)(2) or 
(3) where an arrangement does not take into account the volume or value 
of referrals or other business generated between the parties (69 FR 
16070).
    In Phase II, we clarified that personally performed services are 
not considered other business generated by the referring physician (69 
FR 16068). We also 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). We noted that 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. (We note that the language 
``otherwise reflects'' was considered superfluous and removed from our 
regulation text in Phase III (72 FR 51027).)
    To date, we have not codified any regulations defining or otherwise 
interpreting the volume or value standard or the other business 
generated standard. In this proposed rule, we are proposing to do so. 
The proposed special rules at Sec.  411.354(d)(5) and (6), if 
finalized, will supersede our previous guidance, including guidance 
with which they may be (or appear to be) inconsistent. We note that, 
unless finalized, the proposed special rules and the policies they 
effect are not applicable to the determination of whether compensation 
takes into account the volume or value of referrals or the volume or 
value of other business generated between the parties (that is, by the 
physician).
    In the CMS RFI, we solicited comments on when, in the context of 
the physician self-referral law and, specifically, within the context 
of alternative payment models and other novel financial arrangements, 
compensation should be considered to ``take into account the volume or 
value of referrals'' by a physician or ``take into account other 
business generated'' between parties to an arrangement (83 FR 29526). 
We requested that commenters share with us, by way of example or 
otherwise, compensation formulas that do not take into account the 
volume or value of referrals by a physician or other business generated 
between the parties. We discussed the comments related to the inclusion 
of the volume or value standard or the other business generated 
standard in new exceptions for value-based arrangements in section 
II.A.2.b. of this proposed rule. Our discussion in this section II.B.3. 
of this proposed rule relates only to these standards as they apply 
outside of the context of value-based arrangements; specifically, as 
they apply to the definition of remuneration at section 1877(h)(1)(C) 
of the Act and Sec.  411.351 of our regulations, the definition of 
indirect compensation arrangement at Sec.  411.354(c)(2), the special 
rule on compensation that is considered set in advance at Sec.  
411.354(d)(1), the special rules for per-unit compensation at Sec.  
411.354(d)(2) and (3), the exception for academic medical centers at 
Sec.  411.355(e)(1)(ii), and various exceptions for compensation 
arrangements at section 1877(e) of the Act and in Sec.  411.357 of our 
regulations (including the proposed exceptions for limited remuneration 
to a physician at Sec.  411.357(z) and cybersecurity technology and 
related services at Sec.  411.357(bb), if finalized). As discussed 
previously, the proposed exceptions for value-based arrangements do not 
include the volume or value standards as requirements for the 
remuneration between the parties.
    CMS RFI commenters uniformly requested that we provide objective 
benchmarks for determining when compensation is considered to take into 
account the volume or value of referrals or take into account other 
business generated between the parties. Many commenters stated their 
belief that a provider's subjective intent is potentially relevant in 
determining whether the manner in which the compensation was 
established took into account the volume or value of referrals or other 
business generated. These and many other commenters requested that the 
regulations make clear that the volume or value standard and the other 
business generated standard are bright-line, objective tests; that is, 
by the plain terms of an arrangement, the test is whether the 
methodology used to set physician compensation utilizes as a variable 
the volume or value of the physician's referrals or the volume or value 
of other business generated by the physician. Other commenters shared 
their concerns that, under the current guidance and the position taken 
by the

[[Page 55793]]

government in certain of its enforcement actions, parties can never be 
sure that their determination of the compensation to be paid under an 
arrangement with a referring physician will be insulated from scrutiny.
    We believe there is great value in having an objective test for 
determining whether the compensation is determined in any manner that 
takes into account the volume or value of referrals or takes into 
account other business generated between the parties. Our proposals are 
intended to establish such a test. We are proposing an approach that, 
rather than deeming compensation under certain circumstances not to 
have been determined in a manner that takes into account the volume or 
value of referrals or takes into account other business generated 
between the parties, defines exactly when compensation will be 
considered to take into account the volume or value of referrals or 
take into account other business generated between the parties. Under 
our proposed approach, which we believe creates the bright-line rule 
sought by commenters and other stakeholders, outside of the 
circumstances at proposed Sec.  411.354(d)(5) and (6), compensation 
would not be considered to take into account the volume or value of 
referrals or take into account other business generated between the 
parties, respectively. In other words, only when the mathematical 
formula used to calculate the amount of the compensation includes as a 
variable referrals or other business generated, and the amount of the 
compensation correlates with the number or value of the physician's 
referrals to or the physician's generation of other business for the 
entity, is the compensation considered to take into account the volume 
or value of referrals or take into account the volume or value of other 
business generated. We believe our proposed approach is consistent with 
the position we articulated in Phase I where we stated that, in 
general, we believe that a compensation structure does not directly 
take into account the volume or value of referrals if there is no 
direct correlation between the total amount of a physician's 
compensation and the volume or value of the physician's referrals of 
designated health services (66 FR 908).
    Although we are proposing nonsubstantive changes to standardize 
where possible the language used to describe the volume or value 
standard and the other business generated standard in our regulations, 
due to the varying language used throughout the statutory scheme and 
the language that will remain in the regulatory scheme even if our 
proposed changes are finalized, we find it impossible to establish a 
single definition for each standard. Therefore, instead of a definition 
at Sec.  411.351, we are proposing special rules for compensation 
arrangements that will apply regardless of the exact language used to 
describe the standards. Also, because section 1877 of the Act defines a 
compensation arrangement as any arrangement involving any remuneration 
between a physician (or an immediate family member of such physician) 
and an entity, we believe it is necessary that the tests address 
circumstances where the compensation is from the entity to the 
physician, as well as where the compensation is from the physician to 
the entity. Therefore, we are proposing two separate special rules for 
the volume or value standard (proposed Sec.  411.354(d)(5)(i) and 
(6)(i)) and two special rules for the other business generated standard 
(proposed Sec.  411.354(d)(5)(ii) and (6)(ii)). Our proposals apply 
only for purposes of section 1877 of the Act and the physician self-
referral regulations.
    Under the policy proposed at Sec.  411.354(d)(5)(i)(A), 
compensation from an entity to a physician (or immediate family member 
of the physician) takes into account the volume or value of referrals 
only if the formula used to calculate the physician's (or immediate 
family member's) compensation includes the physician's referrals to the 
entity as a variable, resulting in an increase or decrease in the 
physician's (or immediate family member's) compensation that positively 
correlates with the number or value of the physician's referrals to the 
entity. For example, if the physician (or immediate family member) 
receives additional compensation as the number or value of the 
physician's referrals to the entity increase, the physician's (or 
immediate family member's) compensation would positively correlate with 
the number or value of the physician's referrals. Unless the special 
rule at Sec.  411.354(d)(2) for unit-based compensation applies and its 
conditions are met, the physician's (or immediate family member's) 
compensation would take into account the volume or value of referrals. 
To illustrate, assume that a physician practice does not qualify as a 
group practice under Sec.  411.352 of the physician self-referral 
regulations. The practice pays its physicians a percentage of 
collections attributed to the physician, including personally performed 
services and services furnished by the practice (the physician's 
``pool''). If the physician's pool includes amounts collected for 
designated health services furnished by the practice that he ordered 
but did not personally perform, under proposed Sec.  411.354(d)(5)(i), 
the physician's compensation would take into account the volume or 
value of his referrals to the practice. Assuming the physician is paid 
50 percent of the amount in his pool, the mathematical formula that 
illustrates the physician's compensation would be: Compensation = (.50 
x collections from personally performed services) + (.50 x collections 
from referred designated health services) + (.50 x collections from 
non-designated health services referrals). The policy proposed at Sec.  
411.354(d)(5)(ii)(A) with respect to when compensation from an entity 
to a physician (or immediate family member of the physician) takes into 
account other business generated would operate in the same manner.
    Analogously, under the policy proposed at Sec.  
411.354(d)(6)(i)(A), compensation from a physician (or immediate family 
member of the physician) to an entity takes into account the volume or 
value of referrals only if the formula used to calculate the 
compensation paid by the physician includes the physician's referrals 
to the entity as a variable, resulting in an increase or decrease in 
the compensation that negatively correlates with the number or value of 
the physician's referrals to the entity. For example, if the physician 
(or immediate family member) pays less compensation as the number or 
value of the physician's referrals to the entity increase, the 
compensation from the physician to the entity would negatively 
correlate with the number or value of the physician's referrals. Unless 
the special rule at Sec.  411.354(d)(2) for unit-based compensation 
applies and its requirements are met (which seems unlikely), the 
compensation would take into account the volume or value of referrals. 
To illustrate, assume a physician leases medical office space from a 
hospital. Assume also that the rental charges are $5000 per month and 
the arrangement provides that the monthly rental charges will be 
reduced by $5 for each diagnostic test ordered by the physician and 
furnished in one of the hospital's outpatient departments. Under 
proposed Sec.  411.354(d)(6)(i), the compensation (that is, the rental 
charges) would take into account the volume or value of the physician's 
referrals to the hospital. The mathematical formula that illustrates 
the rental charges paid by the physician

[[Page 55794]]

to the hospital would be: Compensation = $5000-($5 x the number of 
designated health services referrals). The policy proposed at Sec.  
411.354(d)(6)(ii)(A) with respect to when compensation from a physician 
(or immediate family member of the physician) to an entity takes into 
account other business generated would operate in the same manner.
    We are also proposing at Sec.  411.354(d)(5)(i)(B) and (ii)(B), and 
at Sec.  411.354(d)(6)(i)(B) and (ii)(B), additional policies outlining 
the narrowly-defined circumstances under which we would consider fixed-
rate compensation (for example, a fixed annual salary or an unvarying 
per-unit rate of compensation) to be determined in a manner that takes 
into account the volume or value of referrals or other business 
generated by a physician for the entity paying the compensation. Under 
this approach, compensation would take into account the volume or value 
of referrals where the parties utilize a predetermined tiered approach 
to compensation under which the volume or value of a physician's prior 
referrals is the basis for determining the unvarying rate of 
compensation from an entity to a physician (or an immediate family 
member of a physician) or the unvarying rate of compensation that a 
physician (or an immediate family member of a physician) must pay an 
entity over the entire duration of the arrangement. The policy would 
operate analogously with respect to other business previously generated 
by the physician for the entity. Under this approach, the compensation 
need not be determined based on a mathematical formula, but there must 
be a predetermined, direct positive or negative correlation between the 
volume or value of the physician's prior referrals (or other business 
previously generated for the entity) and the exact rate of compensation 
paid to or by the physician (or an immediate family member of the 
physician) in order for the compensation to violate the volume or value 
standard or the other business generated standard. Put another way, 
there must be a predetermined, direct, and meaningful ``if X, then Y'' 
correlation between the volume or value of the physician's prior 
referrals (or the other business previously generated by the physician 
for the entity) and the prospective rate of compensation to be paid 
over the entire duration of the arrangement for which the compensation 
is determined. Merely hoping for or even anticipating future referrals 
or other business is not enough to show that compensation is determined 
in a manner that takes into account the volume or value of referrals or 
the other business generated by the physician for the entity.
    We note that an ``if X, then Y'' compensation methodology is 
capable of reproduction in a mathematical formula that positively or 
negatively correlates with the number or value of the physicians' 
referrals to the entity. (In Boolean algebra, the formula p[rarr]q 
represents this type of compensation methodology.) To illustrate, 
assume that a hospital-employed physician is paid on the basis of her 
personally performed professional services (in this example, the 
physician is paid a predetermined rate per physician work relative 
value unit (wRVU)). The hospital has a predetermined tiered system for 
determining physician compensation when entering into renewal 
employment arrangements under which a physician is paid $30 per wRVU if 
she ordered 300 or fewer outpatient diagnostic tests per year during 
the prior term of employment and $35 per wRVU if she ordered more than 
300 outpatient diagnostic tests per year during the prior term of 
employment. Because the physician ordered 250 outpatient diagnostic 
tests per year during the prior term of her employment, her 
compensation for the duration of the renewal arrangement is $30 per 
wRVU. Even though the physician is paid an unvarying rate of $30 per 
wRVU regardless of whether she makes zero, 10, or 1,000 referrals to 
the entity during the term of the renewal arrangement, her compensation 
would nonetheless take into account the volume or value of her 
referrals and other business generated for the entity. As another 
example, assume that a physician leases medical office space from a 
hospital and the rental charges are as follows: $2000 per month if the 
physician is in the top 25 percent of admitting physicians at the 
hospital (measured by the gross charges per inpatient admission); $2500 
per month if the physician is in the second quartile of admitting 
physicians on the hospital's medical staff (measured by the gross 
charges per inpatient admission); and $3500 per month if the physician 
is in the bottom half of admitting physicians at the hospital (measured 
by the gross charges per inpatient admission). Under our proposed 
additional approach to the volume or value standard and other business 
generated standard, the compensation (that is, the rental charges) 
would be determined in a manner that takes into account the value of 
the physician's referrals and other business generated for the 
hospital. We seek comment on this additional proposal.
    We are particularly interested in comments regarding whether this 
approach would achieve our goal of establishing sufficiently objective 
tests for determining whether the compensation is determined in any 
manner that takes into account the volume or value of referrals or 
takes into account other business generated between the parties.
    Although our proposals would establish ``special rules'' on 
compensation, we would interpret them in the same manner as 
definitions. That is, the special rules are intended to define the 
universe of circumstances under which compensation is considered to 
take into account the volume or value of referrals or other business 
generated by the physician. If the methodology used to determine the 
physician's compensation or the payment from the physician does not 
fall squarely within the defined circumstances, the compensation would 
not take into account the volume or value of the physician's referrals 
or the other business generated by the physician, as appropriate, for 
purposes of applying the exceptions to the physician self-referral law.
    We do not believe that it is necessary to include the modifier 
``directly or indirectly'' in the proposed special rules interpreting 
the volume or value standard and the other business generated standard 
or in the definitions and exceptions where these standards appear. We 
believe that the modifier ``directly or indirectly'' is implicit in the 
requirements that compensation is not determined in any manner that 
takes into account the volume or value of referrals or the volume or 
value of other business generated. For this reason, and in the interest 
of having uniform language throughout our regulations that describes 
the volume or value standard and the other business generated standard, 
we are proposing to remove the modifier from the regulations where it 
appears in connection with the standards and the related requirements. 
We also believe that leaving the modifying language in the regulations 
might create confusion if the proposed special rules interpreting the 
volume or value standard and other business generated standard are 
finalized. Where the statute or regulations specifically allow parties 
to determine compensation in a manner that only indirectly takes into 
account the volume or value of referrals (for example, in the exception 
for EHR items and services at Sec.  411.357(w)(6) and the rules for a 
group practice's distribution

[[Page 55795]]

of profit shares and payment of productivity bonuses at section 
1877(h)(4)(B) of the Act and Sec.  411.352(i)), our regulations include 
guidance regarding direct versus indirect manners of determining 
compensation. We solicit comment on whether additional guidance is 
necessary in light of our proposed interpretation of the volume or 
value standard and the other business generated standard included in 
this proposed rule. We note that the proposed exception for donations 
of cybersecurity technology and related services discussed in section 
II.E.2. of this proposed rule would also permit certain remuneration 
that indirectly takes into account the volume or value of referrals but 
does not include specific deeming provisions or other guidance 
regarding direct versus indirect manners of determining remuneration. 
We seek comment in section II.E.2. regarding the need for additional 
guidance or regulation text that includes deeming provisions related to 
the volume or value standard in the proposed exception.
    Finally, a large number of the CMS RFI commenters that addressed 
the volume or value and other business generated standards requested 
that we confirm, if not codify, related guidance in our Phase II 
regulation (69 FR 16088 through 16089). In Phase II, a commenter 
presented a scenario under which a hospital employs a physician at an 
outpatient clinic and pays the physician for each patient seen at the 
clinic; the physician reassigns his or her right to payment to the 
hospital, and the hospital bills for the Part B physician service (with 
a site-of-service reduction); and the hospital also bills for the 
hospital outpatient services, which may include some procedures 
furnished as ``incident to'' services in a hospital setting. The Phase 
II commenter's concern was that the payment to the physician is 
inevitably linked to a facility fee, which is a designated health 
service (that is, a hospital service). Accordingly, the commenter 
wondered whether the payment to the physician would be considered an 
improper productivity bonus based on a referral of designated health 
services (that is, the facility fee). In response, we stated that the 
fact that corresponding hospital services are billed would not 
invalidate an employed physician's personally performed work, for which 
the physician may be paid a productivity bonus (subject to the fair 
market value requirement). The CMS RFI commenters expressed concern 
that, following the July 2, 2015 opinion of the United States Court of 
Appeals for the Fourth Circuit in United States ex rel. Drakeford v. 
Tuomey Healthcare System, Inc., CMS may no longer endorse this policy.
    We believe that the proposed objective tests for determining when 
compensation takes into account the volume or value of referrals or the 
volume or value of other business generated may address the CMS RFI 
commenters' concerns. However, for clarity, we reaffirm the position we 
took in the Phase II regulation. With respect to employed physicians, a 
productivity bonus will not take into account the volume or value of 
the physician's referrals solely because corresponding hospital 
services (that is, designated health services) are billed each time the 
employed physician personally performs a service. We are also 
clarifying that our guidance extends to compensation arrangements that 
do not rely on the exception for bona fide employment relationships at 
Sec.  411.357(c), and under which a physician is paid using a unit-
based compensation formula for his or her personally performed 
services, provided that the compensation meets the conditions in the 
special rule at Sec.  411.354(d)(2). That is, under a personal service 
arrangement, an entity may compensate a physician for his or her 
personally performed services using a unit-based compensation formula--
even when the entity bills for designated health services that 
correspond to such personally performed services--and the compensation 
will not take into account the volume or value of the physician's 
referrals if the compensation meets the conditions of the special rule 
at Sec.  411.354(d)(2) (see 69 FR 16067).
4. Patient Choice and Directed Referrals (Sec.  411.354(d)(4))
    When the conditions of the special rule at existing Sec.  
411.354(d)(4) are met, compensation from a bona fide employer, under a 
managed care contract, or under a personal services arrangement is 
deemed not to take into account the volume or value of referrals, even 
if the physician's compensation was predicated, either expressly or 
otherwise, on the physician making referrals to a particular provider, 
practitioner, or supplier. This special rule was established in Phase I 
after many commenters objected to our statement in the 1998 proposed 
rule that fixed payments to a physician could be considered to take 
into account the volume or value of referrals if a condition or 
requirement for receiving the payment was that the physician refer 
designated health services to a given entity, such as an employer or an 
affiliated entity (63 FR 1700). In Phase I, we acknowledged that the 
proposed interpretation could have had far-reaching effects, especially 
for managed care arrangements and group practices. We determined to 
permit directed referrals without considering the physician's 
compensation to take into account the volume or value of his or her 
referrals, but only if the referral requirement does not apply if a 
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. In addition, the 
referral requirement must be set out in writing and signed by the 
parties, and the compensation to the physician must be: (1) Set in 
advance for the term of the compensation arrangement; and (2) 
consistent with fair market value for the services performed. Finally, 
the compensation arrangement must otherwise comply with an applicable 
exception in Sec.  411.355 or Sec.  411.357 (66 FR 878).
    We continue to believe in the importance of preserving patient 
choice, protecting the physician's professional medical judgment, and 
avoiding interference in the operations of a managed care organization. 
However, given our proposed interpretation of the volume or value 
standard, we are concerned that current Sec.  411.354(d)(4) may apply 
in fewer instances, if at all, to serve these important goals. 
Therefore, to reiterate how critical these protections are, we are 
proposing to include in the exceptions applicable to the types of 
contracts or arrangements to which the special rule has historically 
applied an affirmative requirement that the compensation arrangement 
meet the conditions of the special rule at Sec.  411.354(d)(4) (as 
modified in accordance with the proposal set forth in this section of 
the proposed rule). To that end, we are proposing to include in the 
exceptions at Sec.  411.355(e) for academic medical centers, Sec.  
411.357(c) for bona fide employment relationships, Sec.  411.357(d)(1) 
for personal service arrangements, Sec.  411.357(d)(2) for physician 
incentive plans, Sec.  411.357(h) for group practice arrangements with 
a hospital, Sec.  411.357(l) for fair market value compensation, and 
Sec.  411.357(p) for indirect compensation arrangements, a requirement 
that, in addition to satisfying the other requirements of the 
exception, the relevant arrangement must comply with the revised 
special

[[Page 55796]]

rule at Sec.  411.354(d)(4). In making this proposal, we are relying on 
the authority granted to the Secretary under sections 1877(b)(4), 
(e)(2)(D), (e)(3)(A)(vii), (e)(3)(B)(i)(II), and (e)(7)(vii) of the 
Act. We solicit comment as to whether, given the nature of academic 
medical centers, the proposed requirement at revised Sec.  
411.354(d)(4) is necessary.
    We are also proposing to revise Sec.  411.354(d)(4) to eliminate 
certain language regarding: (1) Whether the ``set in advance'' and 
``fair market value'' conditions of the special rule apply to the 
compensation arrangement (as stated in the regulation) or to the 
compensation itself; and (2) when compensation is considered fair 
market value. Under proposed Sec.  411.354(d)(4), we are clarifying 
that the physician's compensation must be set in advance. Any changes 
to the compensation (or the formula for determining the compensation) 
must also be set in advance (that is, made prospectively). We are also 
clarifying that the physician's compensation must be consistent with 
the fair market value of the services performed. In addition, we are 
proposing to eliminate the parenthetical language in existing Sec.  
411.354(d)(4) as it conflates the concept of fair market value and the 
volume or value standard. As noted previously, these are separate 
standards, and compliance with one is not contingent on compliance with 
the other. We are taking the opportunity to also propose nonsubstantive 
revisions for clarity. Although, as proposed, revised Sec.  
411.354(d)(4) sets forth protections that apply to both the 
compensation arrangement that includes a directed referral requirement 
and also specifically to the compensation itself, for continuity in the 
application of the protections of the regulation, we are proposing to 
leave the regulation in Sec.  411.354(d) (special rules on 
compensation) rather than include it in Sec.  411.354(e), which 
includes special rules for compensation arrangements. We seek comment 
on this approach.
5. Fair Market Value (Sec.  411.351)
    The term ``fair market value,'' as it is defined at section 
1877(h)(3) of the Act, consists of three basic components. Fair market 
value is defined generally as ``the value in arms length [sic] 
transactions, consistent with the general market value.'' The statutory 
definition includes additional qualifications for leases generally, 
providing that fair market value with respect to rentals or leases also 
means ``the value of rental property for general commercial purposes 
(not taking into account its intended use).'' Finally, with respect to 
the lease of office space, in particular, the statutory definition 
further stipulates that fair market value also means that that value of 
the rental property is ``not adjusted to reflect the additional value 
the prospective lessee or lessor would attribute to the proximity or 
convenience to the lessor where the lessor is a potential source of 
patient referrals to the lessee.'' Most of the statutory exceptions at 
section 1877(e) of the Act relating to compensation arrangements 
include requirements pertaining to fair market value compensation, 
including the exceptions for the rental of office space, the rental of 
equipment, bona fide employment relationships, personal service 
arrangements, isolated transactions, and payments by a physician. Many 
of the regulatory exceptions created using the Secretary's authority 
under section 1877(b)(4) of the Act also include requirements 
pertaining to fair market value compensation, including the exceptions 
for academic medical centers, fair market value compensation, indirect 
compensation arrangements, EHR items and services, and assistance to 
compensate a nonphysician practitioner.
    The term ``fair market value'' is defined in our regulations in 
Sec.  411.351. In the 1992 proposed rule (57 FR 8602) and the 1995 
final rule (60 FR 41978), we incorporated the statutory definition of 
``fair market value'' into our regulations without modification. In the 
1998 proposed rule (63 FR 1686), we proposed to include in our 
definition of ``fair market value'' a definition of ``general market 
value,'' to explain what it means for a value to be ``consistent with 
the general market value.'' In an attempt to ensure consistency across 
our regulations, we proposed to adopt the definition of ``general 
market value'' from part 413 of our regulations, which pertains to 
reasonable cost reimbursement for end stage renal disease services. In 
the context of determining the cost incurred by a present owner in 
acquiring an asset, Sec.  413.134(b)(2) defined ``fair market value'' 
as ``the price that the asset would bring by bona fide bargaining 
between well-informed buyers and sellers at the date of acquisition. 
Usually the fair market price is the price that bona fide sales have 
been consummated for assets of like type, quality, and quantity in a 
particular market at the time of acquisition.'' We modified the 
definition drawn from Sec.  413.134(b)(2) to include analogous 
provisions for determining the fair market value of any items or 
services, including personal services, employment relationships, and 
rental arrangements. As proposed in the 1998 proposed rule, ``general 
market value'' would mean:

    The price that an asset would bring, as the result of bona fide 
bargaining between well-informed buyers and sellers, or the 
compensation that would be included in a service agreement, as the 
result of bona fide bargaining between well-informed parties to the 
agreement, on the date of acquisition of the asset or at the time of 
the service agreement. Usually the fair market price is the price at 
which bona fide sales have been consummated for assets of like type, 
quality, and quantity in a particular market at the time of 
acquisition, or the compensation that has been included in bona fide 
service agreements with comparable terms at the time of the 
agreement.

    The proposed definition of ``fair market value'' in the 1998 
proposed rule did not substantively modify the provisions of the fair 
market value definition pertaining to leases in general and office 
space leases in particular. In Phase I, we finalized the definition of 
``fair market value'' from the 1998 proposed rule with one modification 
(66 FR 944 through 945). The definition of ``fair market'' value 
finalized in Phase I clarified that 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.'' In Phase I we also responded to 
commenters who requested guidance on how to determine fair market value 
in a variety of circumstances. We stated that we would accept any 
commercially reasonable method for determining fair market value. 
However, we noted that, in most exceptions, the fair market value 
requirement is further modified by language that precludes taking into 
account the volume or value of referrals, and, in some cases, other 
business generated by the referring physician. We concluded that, in 
determining whether compensation is fair market value, requirements 
pertaining to the volume or value of referrals and other business 
generated may preclude reliance on comparables that involve entities 
and physicians in a position to refer or generate business (66 FR 944). 
Elsewhere in Phase I, we suggested a similar underlying connection 
between the fair market value requirement and requirements pertaining 
to the volume or value of a physician's referrals and other business 
generated (66 FR 877). In a discussion of the requirement that 
compensation not take into account other business generated, we stated 
that--


[[Page 55797]]


    [T]he additional limiting phrase `not taking into account * * * 
other business generated between the parties' means simply that the 
fixed, fair market value payment cannot take into account, or vary 
with, referrals of Medicare or Medicaid [designated health services] 
or any other business generated by the referring physician, 
including other Federal and private pay business. Simply stated, 
section 1877 of the Act establishes a straightforward test that 
compensation arrangements should be at fair market value for the 
work or service performed or the equipment or space leased--not 
inflated to compensate for the physician's ability to generate other 
revenues.

    Despite our intimation in Phase I that the concepts of fair market 
value and the volume and value of referrals or other business generated 
were fundamentally interrelated, the definition of fair market value 
finalized in Phase I did not include any reference to the volume or 
value of a physician's referrals.
    In Phase II, we made two significant modifications to the 
definition of ``fair market value.'' First, we proposed certain ``safe 
harbors'' for determining fair market value for hourly payments made to 
physicians for physician services (69 FR 16092 and 16107). (These safe 
harbors were not finalized.) Second, and more importantly, we 
incorporated into the definition of ``fair market value'' a reference 
to the volume or value standard found in many exceptions to the 
physician self-referral law. The Phase II definition of ``fair market 
value'' provided, in relevant part, that fair market value is usually 
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. We explained our view that the determination of fair market 
value under the physician self-referral law differs in significant 
respects from standard valuation techniques and methodologies. In 
particular, we noted that the methodology must exclude valuations where 
the parties to the transactions are at arm's length but in a position 
to refer to one another. We made no substantive changes to the 
definition of ``fair market value'' in Phase III or in any of our 
subsequent rulemaking.
    In the CMS RFI, we solicited specific comments regarding possible 
approaches to modifying the definition of ``fair market value'' 
consistent with the statute and in the context of the exceptions to the 
physician self-referral law (83 FR 29526). CMS RFI commenters from 
within and outside the health care provider community, including 
independent valuators, submitted comments explaining a variety of 
concerns and challenges with applying the definition of ``fair market 
value'' in our current regulations at Sec.  411.351. After carefully 
reviewing the CMS RFI comments and the statements in our prior rules, 
we undertook a fresh review of the statutory definition of ``fair 
market value'' and the structure of the exceptions for various types of 
compensation arrangements at section 1877(e) of the Act and in our 
regulations in Sec. Sec.  411.355 and 411.357.
    As a preliminary matter and as described previously in section 
II.B.1. of this proposed rule, a careful reading of the statute shows 
that the fair market value requirement is separate and distinct from 
the volume or value standard and the other business generated standard. 
(See section II.B.3. of this proposed rule for a detailed discussion of 
the volume or value standard and the other business generated 
standard.) The volume or value and other business generated standards 
do not merely serve as ``limiting phrases'' to modify the fair market 
value requirement. In order to satisfy the requirements of the 
exceptions in which these concepts appear, compensation must both: (1) 
Be fair market value for items or services provided; and (2) not take 
into account the volume or value of referrals (or the volume or value 
of other business generated by the physician, where such standard 
appears). We believe that the appropriate reading of the statute is 
that the requirement that compensation does not take into account the 
volume or value of referrals--which is plainly set out as an 
independent requirement of the relevant exceptions--is not also part of 
the definition of ``fair market value.'' We note that the statutory 
definition of ``fair market value'' at section 1877(h)(3) of the Act 
includes no reference to the volume or value of referrals (or other 
business generated between the parties). For these reasons, we are 
proposing to revise the definition of ``fair market value'' to 
eliminate the connection to the volume or value standard.
    In proposing revisions to the definition of ``fair market value'' 
at Sec.  411.351, we undertook to establish regulations that give 
meaning to the statutory language at section 1877(h)(3) of the Act. As 
described previously, the statute states a general definition of ``fair 
market value'' and then modifies that definition for application to 
leases of equipment and office space. One of the modifications applies 
to leases of both equipment and office space; the other applies only to 
the lease of office space. To illustrate this more clearly in our 
regulations, we are proposing to modify the definition of ``fair market 
value'' to provide for a definition of general application, a 
definition applicable to the rental of equipment, and a definition 
applicable to the rental of office space. (We are proposing to use the 
terms ``rental'' of equipment and ``rental'' of office space as those 
are the titles of the statutory exceptions at section 1877(e)(1)(A) and 
(B) of the Act and our regulatory exceptions at Sec.  411.357(a) and 
(b).) We believe that this approach provides parties with ready access 
to the definition of ``fair market value,'' with the attendant 
modifiers, that is applicable to the specific type of compensation 
arrangement at issue. Therefore, we are proposing that, generally, fair 
market value means the value in an arm's-length transaction with like 
parties and under like circumstances, of assets or services, consistent 
with the general market value of the subject transaction. We are also 
proposing that, with respect to the rental of equipment, fair market 
value means the value, in an arm's-length transaction with like parties 
and under like circumstances, of rental property for general commercial 
purposes (not taking into account its intended use), consistent with 
the general market value of the subject transaction. And, with respect 
to the rental of office space, we are proposing that fair market value 
means the value in an arm's length transaction, with like parties and 
under like circumstances, of rental property for general commercial 
purposes (not taking into account its intended use), without adjustment 
to reflect the additional value the prospective lessee or lessor would 
attribute to the proximity or convenience to the lessor where the 
lessor is a potential source of patient referrals to the lessee, and 
consistent with the general market value of the subject transaction. We 
note that the proposed structure of the definition merely reorganizes 
for clarity, but does not significantly differ from, the statutory 
language at section 1877(h)(3) of the Act. We seek comment on our 
approach.
    Second, we are proposing changes to the definition of ``general 
market value,'' currently included within the definition of fair market 
value at Sec.  411.351. The current definition of ``fair market value'' 
states the following, some of which relates to fair market value and 
some of which relates to the included term,

[[Page 55798]]

``general market value.'' Numerical references are added here for ease 
but do not appear in our current regulations:
    (1) Fair market value means the value in arm's-length transactions, 
consistent with the general market value.
    (2) 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.
    (3) 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.
    (4) 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).
    (5) 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.
    (6) 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.

Items one, four, and five essentially restate the language at section 
1877(h)(3) of the Act, albeit with the intervening language in items 
two and three, and item six was added in Phase I in response to a 
comment for the purpose of interpreting the modifier ``(not taking into 
account its intended use)'' in item four and at section 1877(h)(3) of 
the Act. We stated in the 1998 proposed rule that items two and three 
were our attempt to give meaning to the statutory requirement that the 
fair market value of compensation must be ``consistent with the general 
market value.'' In doing so, we relied on a regulation that relates to 
the circumstances under which an appropriate allowance for depreciation 
on buildings and equipment used in furnishing patient care can be an 
allowable cost. We see no benefit at this time to connect the 
definition of ``general market value'' to principles of reasonable cost 
reimbursement for end stage renal disease services in order to explain 
what it means for a value to be consistent with general market value, 
as required by the statute. Moreover, the definition at Sec.  
413.134(b)(2) upon which we relied states that fair market value 
(emphasis added) is defined as the price that the asset would bring by 
bona fide bargaining between well-informed buyers and sellers at the 
date of acquisition. The regulation goes on to state that, usually the 
fair market price is the price that bona fide sales have been 
consummated for assets of like type, quality, and quantity in a 
particular market at the time of acquisition. This definition more 
closely ties to the widely accepted IRS definition of ``fair market 
value,'' \2\ not general market value. Therefore, we considered whether 
current Sec.  411.351 includes an appropriate definition for ``general 
market value.''
---------------------------------------------------------------------------

    \2\ Fair Market Value is defined as ``the price at which the 
property would change hands between a willing buyer and a willing 
seller when the former is not under any compulsion to buy and the 
latter is not under any compulsion to sell, both parties having 
reasonable knowledge of relevant facts.'' (IRS Rev. Ruling 59-60).
---------------------------------------------------------------------------

    We see no indication in the legislative history or the statutory 
language itself that the Congress intended that the definition of 
``general market value'' for purposes of the physician self-referral 
law should deviate from general concepts and principles in the 
valuation community. Yet, our current definition of ``general market 
value'' is unconnected to the recognized valuation principle of 
``market value'' and itself may be the driver of valuation industry 
policy and procedure. After revisiting the legislative history of 
section 1877 of the Act and our prior preamble language related to the 
term ``general market value,'' we believe that the Congress used the 
term ``general market value'' to ensure that the fair market value of 
the remuneration (that is, as described below, the hypothetical value) 
is generally consistent with the valuation that would result using 
accepted market valuation principles. Therefore, we equate ``general 
market value'' as that term appears in the statute and our regulations 
with ``market value,'' the term uniformly used in the valuation 
industry. Our own research indicates that, in the valuation industry, 
the term ``market value'' refers to the valuation of a planned 
transaction between two identified parties for identified assets or 
services, and intended to be consummated within a specified timeframe. 
Market value is based solely on consideration of the economics of the 
subject transaction and should not include any consideration of other 
business the parties may have with one another. Thus, when parties to a 
potential personal service arrangement determine the (general) market 
value of the physician's compensation, they must not consider that the 
physician could also refer patients to the entity when not acting as 
its medical director.
    We are aware that our regulatory definition is likely at odds with 
general valuation principles, which do not use the term ``general 
market value.'' For this reason, we are proposing to establish a 
definition of ``general market value'' that is consistent with the 
recognized principle of ``market'' valuation to address this 
discrepancy and ease the burden on parties attempting to ensure 
compliance with the fair market value requirement in many of the 
compensation exceptions to the physician self-referral law. We are 
proposing to define ``general market value'' at Sec.  411.351 to mean 
the price that assets or services would bring as the result of bona 
fide bargaining between the buyer and seller in the subject transaction 
on the date of acquisition of the assets or at the time the parties 
enter into the service arrangement; or, in the case of the rental of 
equipment or office space, the price that rental property would bring 
as the result of bona fide bargaining between the lessor and the lessee 
in the subject transaction at the time the parties enter into the 
rental arrangement. We note that many CMS RFI commenters requested that 
we simply return to the statutory language. We disagree that would be 
the best approach. Generally, in the absence of agency guidance, a 
reasonable interpretation of a statutory or regulatory requirement of 
the physician self-referral law is satisfactory when asserting 
compliance with the requirement. We believe it is important to provide 
guidance with respect to the requirement that compensation is fair 
market value in order not to stymy our enforcement efforts (or those of 
our law enforcement partners). This guidance is also crucial to support 
the compliance efforts of the regulated industry.
    It is our view that the concept of fair market value relates to the 
value of an asset or service to hypothetical parties in a hypothetical 
transaction (that is,

[[Page 55799]]

typical transactions for like assets or services, with like buyers and 
sellers, and under like circumstances), while general market value (or 
market value) relates to the value of an asset or service to the actual 
parties to a transaction that is set to occur within a specified 
timeframe. Some of the CMS RFI comments included similar information 
regarding the definition of general market value. Thus, under the 
statute, the hypothetical value of a transaction must be consistent 
with the value of the actual transaction transpiring between the 
particular buyer and seller. We are cognizant that the hypothetical 
value of a transaction may not always be identical to the market value 
of the actual transaction being considered. Extenuating circumstances 
may dictate that parties to an arm's length transaction veer from 
values identified in salary surveys and other hypothetical valuation 
data that is not specific to the actual parties to the subject the 
transaction. By way of example, assume a hospital is engaged in 
negotiations to employ an orthopedic surgeon. Independent salary 
surveys indicate that compensation of $450,000 per year would be 
appropriate for an orthopedic surgeon in the geographic location of the 
hospital. However, the orthopedic surgeon with whom the hospital is 
negotiating is one of the top orthopedic surgeons in the entire country 
and is highly sought after by professional athletes with knee injuries 
due to his specialized techniques and success rate. Thus, although the 
employee compensation of a hypothetical orthopedic surgeon may be 
$450,000 per year, this particular physician commands a significantly 
higher salary and the general market value (or market value) of the 
transaction may, therefore, be well above $450,000. The statute 
requires that the compensation is the value in an arm's length 
transaction, but that value must also be consistent with the general 
market value (or market value) of the subject transaction. In this 
example, compensation substantially above $450,000 per year may be fair 
market value.
    Some CMS RFI commenters pointed out that failure to consider the 
general market value (or market value) of a transaction, as we have 
proposed to define it here, results in hospitals and other entities 
paying more than they believe appropriate for physician services. By 
way of example, assume a hospital is engaged in negotiations to employ 
a family physician. Independent salary surveys indicate that 
compensation of $250,000 per year would be appropriate for a family 
physician nationally; no local salary surveys are available. However, 
the cost of living in the geographic location of the hospital is very 
low despite its proximity to good schools and desirable recreation 
opportunities. Yet, due to declining reimbursement rates and a somewhat 
poor payor mix, the hospital's economic position is tenuous. According 
to a CMS RFI commenter, the physician may request the $250,000 that the 
hypothetical physician would earn, and the hospital may believe that it 
is compelled to pay the physician this amount, because our current 
definition of ``fair market value'' does not recognize the appropriate 
definition for the ``general market value'' (or market value) with 
which the physician's compensation must be consistent under the 
statute. In this example, the fair market value of the physician's 
compensation may be less than $250,000 per year.
    Finally, we are proposing to remove from the regulation text at 
Sec.  411.351 in the definition of ``fair market value'' the existing 
statement that, for purposes of the definition of ``fair market 
value,'' 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. 
This language was added to the regulation text as a result of our 
response in Phase I to a commenter to the 1998 proposed rule, where we 
stated that a rental payment does not violate the requirement that the 
fair market value of rental property is the value of the property for 
general commercial purposes, not taking into account its intended use, 
merely because it reflects any costs that were incurred by the lessor 
in developing or upgrading the property, or maintaining the property or 
its improvements, regardless of why the improvements were added (66 FR 
945). That is, the rental payment may reflect the value of any similar 
commercial property with improvements or amenities of a similar value, 
regardless of why the property was improved. We do not believe it is 
necessary to include this policy in regulation text. Moreover, based on 
some of the comments to the CMS RFI, this regulation text appears to 
have caused confusion among stakeholders. For this reason, we are 
proposing to remove the language from the definition of ``fair market 
value'' at Sec.  411.351.

C. Group Practices (Sec.  411.352)

    In the CMS RFI, we sought specific comments regarding whether and, 
if so, what barriers exist to qualifying as a ``group practice'' under 
the regulations at 42 CFR 411.352 (83 FR 29526). In response, 
commenters identified several areas where policy clarification could 
enhance certainty of compliance with the rules for qualifying as a 
group practice, such as the definition of ``single legal entity'' at 
Sec.  411.352(a), the ``full range of care'' and ``substantially all'' 
tests at Sec.  411.352(c) and (d), respectively, and the special rules 
regarding the distribution of profits shares and productivity bonuses 
at Sec.  411.352(i). Many commenters expressed frustration that certain 
methodologies that they viewed as equitable for distributing revenues 
earned through the participation of practice physicians in alternative 
payment models could prohibit a physician practice from qualifying as a 
group practice. Although we acknowledge the commenter's views that 
clarification of many parts of the group practice rules would be 
useful, we are limiting our proposals to those that relate to the main 
purposes of this proposed rule: (1) The proposed definitions and 
special rules for ``commercially reasonable'' compensation 
arrangements, ``fair market value'' compensation, and the volume or 
value standard applicable throughout the physician self-referral law 
and regulations; or (2) the transition from a volume-based to a value-
based health care system. We may consider additional clarifications or 
revisions in a future rulemaking.
1. The ``Volume or Value Standard'' (Sec.  411.352(g))
    In section II.B. of this proposed rule, we are proposing new 
special rules for compensation that would codify in regulation our 
interpretation regarding when compensation will be considered to take 
into account the volume or value of referrals or other business 
generated (the ``volume or value standard''). In connection with those 
proposals, we reviewed the physician self-referral regulations to 
ensure that the volume or value standard is expressed using 
standardized terminology and identified several occurrences of 
inconsistent expression of the volume or value standard. Although 
section 1877 of the Act uses more than one phrase to describe the 
volume or value standard, which may be one reason for variations in the 
regulation text, we believe that the references are all to the same 
underlying prohibition on compensation that fluctuates with the volume 
or value of referrals or other business generated. Therefore, as noted 
previously, we are proposing to make certain conforming changes 
throughout our regulations to delineate the volume

[[Page 55800]]

or value standard as a prohibition on compensation that ``takes into 
account the volume or value'' of referrals or other business generated. 
Because the language in Sec.  411.352(g) and (i) mirrors the statutory 
language at section 1877(h)(4)(iv) of the Act, we are not proposing 
changes to the ``volume or value'' regulation text in either of those 
paragraphs. The terms ``based on'' and ``related to'' would remain in 
the regulation text at Sec.  411.352(g) and (i). However, we are taking 
the opportunity to remind readers that we interpret the requirements of 
Sec.  411.352(g) and (i) to incorporate the volume or value standard; 
that is, compensation to a physician who is a member of a group 
practice may not take into account the volume or value of the 
physician's referrals (except as provided in Sec.  411.352(i)), and 
profit shares and productivity bonuses paid to a physician in the group 
may not be determined in any manner that takes into account the volume 
or value of the physician's referrals (except that a productivity bonus 
may directly take into account the volume or value of the physician's 
referrals if the referrals are for services ``incident to'' the 
physician's personally performed services).
    Our current regulation at Sec.  411.352(i) states that a physician 
in a group practice may be paid a share of overall profits of the group 
practice, provided that the share is not determined in any manner that 
is directly related to the volume or value of referrals by the 
physician. We have long interpreted ``is directly related to'' the 
volume or value of referrals to mean ``takes into account'' the volume 
or value of referrals. In Phase I, we discussed this provision and 
stated that the Congress expressly limited profit shares for group 
practice members to methodologies that do not directly take into 
account the member's [designated health services] referrals, and that, 
under the statutory scheme, revenues generated by designated health 
services may be distributed to group practice members and physicians in 
the group in accordance with methods that indirectly take into account 
referrals (emphasis added) (66 FR 862 and 908).
    Our current regulation at Sec.  411.352(g) states that ``[n]o 
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)'' (emphasis added). 
We interpret this to mean that, in order to satisfy this requirement 
for qualification as a ``group practice,'' no physician who is a member 
of the group practice receives compensation that directly or indirectly 
takes into account the volume or value of his or her referrals (unless 
permitted under Sec.  411.352(i)). Our interpretation is consistent 
with the interpretation of ``related to'' set forth in Phase I. For the 
most part, we used the terms ``based on,'' ``related to,'' and ``takes 
into account'' interchangeably when describing the final Phase I group 
practice regulations (66 FR 908 through 910).
2. Special Rules for Profit Shares and Productivity Bonuses (Sec.  
411.352(i))
a. Distribution of Revenue Related to Participation in a Value-Based 
Enterprise
    We are proposing new Sec.  411.352(i)(3) to address downstream 
compensation that derives from payments made to a group practice, 
rather than directly to a physician in the group, that relate to the 
physician's participation in a value-based arrangement. Certain 
downstream distribution arrangements are currently protected under 
waivers in the Shared Savings Program and certain Innovation Center 
models. However, outside of the Shared Savings Program or an Innovation 
Center model, as the commenters correctly point out, profit shares or 
productivity bonuses paid to a physician in a group practice that 
directly take into account the volume or value of his or her referrals 
to the group practice are strictly prohibited by the physician self-
referral statute and regulations.
    Our current special rules for the profit shares and productivity 
bonuses paid to physicians in a group practice prohibit calculation 
methodologies that directly take into account the volume or value of 
the recipient physician's referrals to the group practice. Thus, by way 
of example, in a 100-physician group practice where only two of the 
physicians participate with a hospital in a commercial payor-sponsored 
alternative payment model, the profits from the designated health 
services ordered by the physicians and furnished by the group practice 
to beneficiaries assigned to the model participants may not be 
allocated directly to the two physicians. Commenters interpreted this 
to mean that the special rules at Sec.  411.352(i) would restrict the 
group practice to allocating alternative payment model-derived income 
that includes revenues from designated health services among all 
physicians in the group (or a component of at least five physicians in 
the group) in order to ensure that such income is allocated in a manner 
that only indirectly takes into account the volume or value of the two 
physicians' referrals. The commenters suggested that this restriction 
discourages physician participation in alternative payment or other 
value-based care models because physicians cannot be suitably rewarded 
for their accomplishments in advancing the goals of the model, which is 
at odds with the Secretary's vision for achieving value-based 
transformation by pioneering bold new payment models. Another commenter 
asserted that, because physician decisions drive the overwhelming 
majority of all health care spending and patient outcomes, it is not 
possible to transform health care without the participation of 
physicians in value-based health care delivery and payment models with 
other health care providers. We share the commenters' concerns 
regarding physician participation in value-based health care delivery 
and payment models and are also concerned that our current regulations 
could undermine the success of the Regulatory Sprint or the larger 
transition to a value-based health care system. Therefore, we are 
proposing changes to Sec.  411.352(i) with respect to the payment of 
profit shares.
    For the reasons described elsewhere in this proposed rule, in the 
exceptions for value-based arrangements at proposed new Sec.  
411.357(aa), we are not proposing to prohibit remuneration that takes 
into account the volume or value of a physician's referrals. The 
proposed changes to Sec.  411.352(i) are an extension of this policy.
    Specifically, we are proposing to add regulation text at Sec.  
411.352(i)(3) (see discussion in section II.A.2.b of this proposed 
rule) a deeming provision related to the distribution of profits from 
designated health services that are directly attributable to a 
physician's participation in a value-based enterprise. Under our 
proposal, when such profits are distributed to the participating 
physician, they would be deemed not to directly take into account the 
volume or value of the physician's referrals. In other words, a group 
practice could distribute directly to a physician in the group the 
profits from designated health services furnished by the group that are 
derived from the physician's participation in a value-based enterprise, 
including profits from designated health services referred by the 
physician, and such remuneration would be deemed not to directly take 
into account the volume or value of the physician's referrals. Revised 
Sec.  411.352(i) would permit the 100-physician group practice in the 
previous example to distribute the profits from designated health 
services derived from the two physicians' participation in the 
alternative payment model directly to

[[Page 55801]]

those physicians. Physician #1 could receive a profit distribution that 
considers his or her referrals to the group that are directly 
attributable to his or her participation in the model, and Physician #2 
could receive a profit distribution that considers his or her referrals 
to the group that are directly attributable to his or her participation 
in the model. Neither distribution would jeopardize the group's ability 
to qualify as a ``group practice'' under Sec.  411.352. We seek comment 
regarding whether we should permit the distribution of ``revenue'' from 
designated health services or ``profits'' from designated health 
services (as proposed) in order to effectuate the goals described 
elsewhere in this proposed rule.
b. Clarifying Revisions
    We are proposing to restructure and renumber Sec.  411.352(i) as 
well as clarify several provisions of the regulation. We believe that 
these revisions would enable groups to determine with more certainty 
whether compensation paid to a physician in the group as profit shares 
or productivity bonuses takes into account the volume or value of 
referrals and, if it does, whether there is a direct or indirect 
connection to the volume or value of the physician's referrals. Our 
purpose in restructuring the regulation is to more closely adhere to 
the structure of section 1877(h)(4)(B) of the Act and to express in 
affirmative language which profit shares and productivity bonuses are 
permissible; that is, permitting the payment of a profit share or 
productivity bonus that indirectly takes into account the volume or 
value of referrals is the affirmative and more simple way of saying, as 
our current regulations do, that the profit share or productivity bonus 
is permissible but only if it does not directly take into account the 
volume or value of referrals. In addition, as proposed, the special 
rules for profit shares and productivity bonuses would follow the 
format of our special rules on compensation at Sec.  411.354(d) and our 
special rules for compensation arrangements at Sec.  411.354(e). We do 
not intend that our proposed addition of introductory language at Sec.  
411.352(i) and proposed revised language at Sec.  411.352(i)(1) and 
411.352(i)(2) would be a substantive change to the noted provisions, 
but seek comment regarding the impact of these restructuring and 
rewording proposals.
    We are also proposing revisions to clarify our interpretation of 
the overall profits of a group that can be distributed to physicians in 
the group. In current Sec.  411.352(i)(2), the term ``overall profits'' 
is defined to mean two different things: (1) The group's entire profits 
derived from designated health services; and (2) the profits derived 
from designated health services of any component of the group practice 
that consists of at least five physicians. Although we believe our 
intent when establishing this definition was clear, stakeholders have 
informed us that they are confused about the definition. For example, 
stakeholders have informally inquired whether the profits of a group 
practice that has only two, three or four physicians may be distributed 
at all. In response to these types of inquiries, we are proposing to 
revise the definition of ``overall profits'' to state that this term 
means the profits derived from all the designated health services of 
any component of the group that consists of at least five physicians, 
which may include all physicians in the group. To further clarify this 
definition, we are proposing regulation text at revised Sec.  
411.352(i)(1)(ii) stating that, if there are fewer than five physicians 
in the group, ``overall profits'' means the profits derived from all 
the designated health services of the group. We believe that this more 
precisely states the policy articulated in Phase I (66 FR 909 through 
910).
    The proposed revision at Sec.  411.352(i)(1)(ii) includes the words 
``all the'' before ``designated health services'' to codify in 
regulation our intent when finalizing the group practice rules in Phase 
I. Stakeholders' informal inquiries regarding the permissible methods 
of distributing profits from designated health services have 
highlighted that the current regulation text may not precisely evidence 
our intent. Stakeholders have inquired whether it is permissible to 
distribute profit shares of only some types of designated health 
services provided by a group practice, without distributing the profits 
from the other types of designated health services provided by the 
group practice. Stakeholders also inquired whether a group practice may 
share the profits from each of the types of designated health services 
independently; that is, whether it is permissible under our current 
regulations to share profits from one type of designated health service 
with a subset of physicians in a group practice and the profits from 
another type of designated health service with a different (possibly 
overlapping) subset of physicians in the group practice.
    In response to these inquiries and to provide a clear expression of 
our policy, we are proposing that ``the profits derived from all the 
designated health services'' in proposed Sec.  411.352(i)(1)(ii) would 
mean that the profits from all the designated health services of the 
practice (or a component of at least five physicians in the practice) 
must be aggregated and distributed, with profit shares not determined 
in any manner that directly takes into account (that is, in any manner 
that is directly related to) the volume or value of a physician's 
referrals. Under our proposal, a physician practice that wishes to 
qualify as a group practice could not distribute profits from 
designated health services on a service-by-service basis. To 
illustrate, suppose a physician practice provides both clinical 
laboratory services and diagnostic imaging services--both designated 
health services--to its patients in a location that qualifies as a 
``same building'' under Sec.  411.351 and meets the requirements at 
Sec.  411.355(b)(2)(i). If the practice wishes to qualify as a group 
practice, it may not distribute the profits from clinical laboratory 
services to one subset of its physicians or using a particular 
methodology and distribute the profits from diagnostic imaging to a 
different subset of its physicians (or the same subset of its 
physicians but using a different methodology). We seek comment on our 
proposal to modify the renumbered regulation text at Sec.  
411.352(i)(1)(ii) to clarify the guidelines for the distribution of 
``overall profits'' from designated health services.
    We are also proposing to remove the reference to Medicaid from the 
definition of overall profits. We believe the inclusion of this 
reference unnecessarily complicates the regulation. It is possible that 
the reference to designated health services payable by Medicaid is 
related to the proposed definition of ``referral'' in the 1998 proposed 
rule (63 FR 1692). There, with respect to the definition of group 
practice, we stated that, because of our interpretation of what 
constitutes a ``referral,'' an entity wishing to be considered a group 
practice in order to use the in-office ancillary services exception 
cannot compensate its members based on the volume or value of referrals 
for designated health services for Medicare or Medicaid patients but 
could do so in the case of other patients (63 FR 1690). However, when 
finalized, the definition of ``referral'' omitted all references to 
Medicaid. Nonetheless, the reference to Medicaid in final Sec.  
411.352(i)(2), which was also proposed in the 1998 proposed rule (as a 
definition in Sec.  411.351), was not likewise omitted when finalized. 
Moreover, under our current definition of ``designated health 
services'' at Sec.  411.351, ``designated health services

[[Page 55802]]

payable by . . . Medicaid'' would not include any services. This is 
because the definition of ``designated health services'' includes only 
those services payable in whole or in part by Medicare. Although the 
qualifying language in this definition potentially allows for a 
different definition ``as otherwise noted in this subpart,'' the 
regulations at Sec.  411.352(i)(2) do not expressly articulate an 
alternative definition for ``designated health services.'' Rather, they 
simply state that the overall profits of a group include designated 
health services payable by Medicaid. For consistency with the final 
definitions and regulations, we are updating the group practice rules 
at Sec.  411.352 by eliminating the references to Medicaid in the 
definition of overall profits.
    Proposed Sec.  411.352(i)(1)(iii) articulates the general rule that 
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 designated health services. The prefatory language of this 
subparagraph is simply moved from existing Sec.  411.352(i)(2) without 
substantive change. Proposed Sec.  411.352(i)(1)(iii) also makes 
revisions to the language introducing the methods for distributing 
profit shares that are deemed permissible under the physician self-
referral law (the deeming provisions) by substituting ``and would not 
be considered designated health services if they were payable by 
Medicare'' for ``are not [designated health services] payable by any 
Federal health care program or private [payor].'' Current Sec.  
411.352(i)(2)(ii) provides that a share of overall profits will be 
deemed not to directly take into account the volume or value of 
referrals if revenues derived from designated health services are 
distributed based on the distribution of the group practice's revenues 
attributed to services that are not designated health services payable 
by ``any Federal health care program or private payer.'' As we noted, 
the definition of designated health services includes only those 
specified services that are payable by Medicare. Thus, we believe it 
better reflects our policy that overall profits may be distributed 
based on the distribution of the group practice's revenues from 
services other than those in the categories of services that are 
``designated health services'' to deem the payment of a profit share 
not to directly take into account the volume or value of a physician's 
referrals if the revenues derived from designated health services are 
distributed based on the distribution of the group's revenues 
attributed to services that are not designated health services and 
would not be considered designated health services if they were payable 
by Medicare. We are proposing to revise the regulation in this manner 
and renumber current Sec.  411.352(i)(2)(ii) to Sec.  
411.352(i)(1)(iii)(B). We note that the regulation that deems a 
productivity bonus not to directly take into account the volume or 
value of a physician's referrals under certain circumstances includes a 
provision similar to Sec.  411.352(i)(1)(iii)(B) for overall profits. 
Therefore, we are proposing corresponding revisions at proposed Sec.  
411.352(i)(2)(ii)(B) (renumbered from current Sec.  411.352(i)(3)(ii)) 
that would deem the payment of a productivity bonus not to directly 
take into account the volume or value of a physician's referrals if the 
services on which the productivity bonus is based are not revenues 
derived from designated health services and would not be considered 
designated health services if they were payable by Medicare. Finally, 
we are proposing to replace the term ``allocated'' with ``distributed'' 
at proposed (redesignated) Sec.  411.352(i)(1)(iii)(C) as the latter 
term reflects the actual payment of the profit share.
    We are also proposing to renumber the regulation that lists the 
deeming provisions related to the payment of productivity bonuses from 
Sec.  411.352(i)(3) to Sec.  411.352(i)(2) and are proposing minor 
changes to the deeming provisions themselves. In addition to the 
proposal removing the language referencing Federal health care programs 
and private payers, we are proposing to update the language of existing 
Sec.  411.352(i)(1) (relocated to proposed Sec.  411.352(i)(2)(i)) to 
remove ``or both'' as unnecessary because the word ``or'' is 
interpreted to mean the conjunctive ``and'' as well as the disjunctive 
``or.'' Groups may continue to pay 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 only indirectly takes into account the volume or value 
of the physician's referrals (except that the bonus may directly take 
into account the volume or value of referrals by the physician if the 
referrals are for services ``incident to'' the physician's personally 
performed services).
    For consistency with the regulations related to the payment of a 
share of overall profits, we are proposing to revise the introductory 
language in the deeming provisions for productivity bonuses at 
renumbered Sec.  411.352(i)(2)(ii) to state that a productivity bonus 
must be calculated in a reasonable and verifiable manner. To correct a 
misstatement about the nature of Sec.  414.22 of this chapter included 
in existing Sec.  411.352(i)(3)(i), we are proposing to revise the 
deeming provision related to the physician's total patient encounters 
or relative value units to state that a productivity bonus will be 
deemed not to take into account the volume or value of a physician's 
referrals if it is based on the physician's total patient encounters or 
the relative value units (as described in Sec.  414.22 of this chapter) 
personally performed by the physician. We seek comment regarding 
whether this provision should limit the methodology to physician work 
relative value units as defined at Sec.  414.22(a) or whether any 
personally-performed relative value units should be an acceptable basis 
for calculating a productivity bonus that is deemed not to relate 
directly to (that is, directly take into account) the volume or value 
of referrals. Finally, we are proposing to replace the term 
``allocated'' with ``distributed'' at proposed (redesignated) Sec.  
411.352(i)(2)(ii)(C) as the latter term reflects the actual payment of 
the productivity bonus.

D. Recalibrating the Scope and Application of the Regulations

    As we stated previously and in our Phase I rulemaking, our intent 
in implementing section 1877 of the Act was ``to interpret the 
[referral and billing] prohibitions narrowly and the exceptions 
broadly, to the extent consistent with statutory language and intent'' 
(66 FR 860). One purpose of this proposed rule is to reexamine our 
current regulations to assess whether we have held true to that 
intention. In doing so, we have considered our own experience in 
administering the SRDP, stakeholder interactions and comments to the 
CMS RFI, and our experience working with our law enforcement partners. 
In this proposed rule, we are proposing revisions to, including 
deletions of, certain requirements in our regulatory exceptions that 
may be unnecessary at this time. We describe our specific proposals in 
this section of the proposed rule.
1. Decoupling the Physician Self-Referral Law From the Federal Anti-
Kickback Statute and Federal and State Laws or Regulations Governing 
Billing or Claims Submission
    Section 1877 of the Act established numerous exceptions to the 
statute's referral and billing prohibitions and granted the Secretary 
authority to create regulatory exceptions for other financial

[[Page 55803]]

relationships that do not pose a risk of program or patient abuse. The 
vast majority of the exceptions issued using the Secretary's authority 
at section 1877(b)(4) of the Act to establish exceptions for financial 
relationships that do not pose a risk of program or patient abuse 
(which we often call the regulatory exceptions) require that the 
arrangement does not violate the anti-kickback statute. Most of these 
exceptions also require that the arrangement does not violate any 
Federal or State law or regulation governing billing or claims 
submission.
    In Phase I, we stated that the requirements pertaining to the anti-
kickback statute and billing or claims submission are necessary in 
regulatory exceptions issued under the Secretary's authority at section 
1877(b)(4) of the Act to ensure that the excepted financial 
relationships do not pose a risk of program or patient abuse (66 FR 
863). Even though we acknowledged that the physician self-referral law 
and the anti-kickback statute are different statutes, we were concerned 
that, if the regulatory exceptions did not require compliance with the 
anti-kickback statute, unscrupulous physicians and entities could 
potentially protect intentional unlawful and abusive conduct by 
complying with the minimal requirements of a regulatory exception 
created under section 1877(b)(4) of the Act. In Phase II, we stated our 
interpretation that the statutory ``no risk'' standard is not limited 
to risks as determined under the physician self-referral law (69 FR 
16108). We added that many arrangements that might otherwise warrant an 
exception under section 1877 of the Act--a strict liability statute--
pose some degree of risk under the anti-kickback statute; these 
arrangements cannot, therefore, be said to pose no risk. Similarly, we 
stated that some arrangements that may be permissible under the 
physician self-referral law could pose a risk of violating certain laws 
pertaining to billing or claims submission. Therefore, we concluded 
that the regulatory exceptions created under the Secretary's authority 
at section 1877(b)(4) of the Act must require that the excepted 
financial relationship not violate the anti-kickback statute or any 
Federal or State law or regulation governing billing or claims 
submission.
    A substantial number of CMS RFI commenters expressed opposition to 
the continued coupling of the physician self-referral law with the 
anti-kickback statute and other billing and claims submission laws, 
explaining the significant burden associated with the inclusion of 
these requirements in regulatory exceptions to the physician self-
referral law. Commenters noted that the physician self-referral law is 
a strict liability statute and compliance with each element of an 
exception is mandatory if the entity wishes to submit a claim for 
designated health services referred by a physician with which it has a 
financial relationship, while the anti-kickback statute is an intent-
based criminal statute and compliance with a safe harbor is not 
required. The commenters asserted that the inclusion of a requirement 
for compliance with the anti-kickback statute is misplaced in an 
exception to the physician self-referral law because it introduces an 
intent-based requirement into a strict liability statute. Commenters 
further noted that this requirement can make it unreasonably difficult 
for entities to meet their burden of proof under Sec.  411.353(c)(2) 
that a referral for designated health services does not violate the 
physician self-referral law. Commenters also noted that the requirement 
for compliance with the anti-kickback statute and the requirement 
pertaining to Federal or State laws or regulations governing billing or 
claims submission are not necessary, because parties remain subject to 
these laws or regulations, regardless of whether their financial 
relationships otherwise comply with the physician self-referral law.
    Based on our experience working with our law enforcement partners 
in reviewing conduct that implicates the physician self-referral law 
and other Federal fraud and abuse laws, it is our belief that, when a 
compensation arrangement violates the intent-based criminal anti-
kickback statute, it will likely also fail to meet one or more of the 
more key requirements of an exception to the physician self-referral 
law. That is, the compensation in such cases likely is not fair market 
value or is determined in a manner that takes into account the volume 
or value of the physician's referrals or other business generated for 
the entity. Since the Phase I regulation was issued, we are unaware of 
any instances of noncompliance with the physician self-referral law 
turned solely on an underlying violation of the anti-kickback statute 
(or any other Federal or State law governing billing or claims 
submission).
    We have reconsidered our position and, based on our experience 
working with our law enforcement partners since our regulations were 
finalized, as well as comments received in response to the CMS RFI, we 
no longer believe that it is necessary or appropriate to include 
requirements pertaining to compliance with the anti-kickback statute 
and Federal and State laws or regulations governing billing or claims 
submission as requirements of the exceptions to the physician self-
referral law. We note further that the Congress did not require 
compliance with the anti-kickback statute or any other law in existence 
at the time of enactment of the statute or its subsequent revision in 
order to avoid the law's referral and billing prohibitions. Therefore, 
we are proposing to remove from the exceptions in 42 CFR part 411, 
subpart J the requirement that the arrangement does not violate the 
anti-kickback statute or any Federal or State law governing billing or 
claims submission wherever such requirements appear. Specifically, we 
are proposing to remove the following sections from our regulations: 
Sec.  411.353(f)(1)(iii); Sec.  411.355(b)(4)(v), (e)(1)(iv), (f)(3), 
(f)(4), (g)(2), (g)(3), (h)(2), (h)(3), (i)(2), (i)(3), (j)(1)(iv); 
Sec.  411.357(e)(4)(vii), (j)(3), (k)(1)(iii), (l)(5), (m)(7), (p)(3), 
(r)(2)(x), (s)(5), (t)(3)(iv), (u)(3), (w)(12), (x)(1)(viii), and 
(y)(8). We also propose to delete the following clause from Sec.  
411.357(e)(6)(i) and (n): ``, 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.'' Finally, we are proposing to remove the definition of 
``does not violate the anti-kickback statute'' in Sec.  411.351. We 
note that the exceptions for referral services at Sec.  411.357(q) and 
obstetrical malpractice subsidies at Sec.  411.357(r)(1) provide that 
arrangements satisfy the requirements of the exception if the 
arrangements comply with the requirements of certain specified anti-
kickback statute safe harbors. Our proposal would not apply to or 
affect these provisions.
    We emphasize that this proposal in no way affects parties' 
liability under the anti-kickback statute. Indeed, the Congress 
clarified when enacting section 1877 of the Act that ``any prohibition, 
exemption, or exception authorized under this provision in no way 
alters (or reflects on) the scope and application of the anti-kickback 
provisions in section 1128B of the Social Security Act'' (H. Report 
101-386, 856 (1989).) Most importantly, the fact that a financial 
relationship complies with an exception to the physician self-referral 
law does not entail that the financial relationship does not violate 
the anti-kickback statute. (See 66 FR 879.) Similarly, compliance with 
the anti-kickback statute does not entail compliance with the physician 
self-referral law. To the extent that the financial relationship is

[[Page 55804]]

governed by other laws or regulations, our proposed action does not 
affect the parties' compliance obligations under those other laws or 
regulations. Specifically, claims submitted to the Medicare program 
must comply with all laws, regulations, and other requirements 
governing billing and claims submission.
    Although we no longer believe that the Secretary must include a 
requirement that the financial relationship does not violate the anti-
kickback statute in exceptions to the physician self-referral law, we 
continue to believe that the Secretary has the authority under the 
statute to impose a requirement that the financial relationship not 
violate the anti-kickback or any other requirement if the Secretary 
determines it necessary and appropriate to ensure that an excepted 
financial relationship does not pose a risk of program or patient 
abuse. We intend to monitor excepted financial relationships, and we 
may propose in a future rulemaking to include the requirements proposed 
here for deletion in some or all of the exceptions issued pursuant to 
the Secretary's statutory authority if we determine such requirements 
are necessary or appropriate to protect against program or patient 
abuse.
2. Definitions (Sec.  411.351)
a. Designated Health Services
    Section 1877(1)(A) of the Act provides that, if a physician (or an 
immediate family member of a physician) has a financial relationship 
with an entity, the physician may not make a referral to the entity for 
the furnishing of a designated health service for which payment may 
otherwise be made under Title XVIII of the Act, unless an exception 
applies. The referral prohibition is codified in our regulations at 
Sec.  411.353(a). In the 1998 proposed rule (63 FR 1694), we 
interpreted the phrase ``designated health service for which payment 
otherwise may be made'' broadly to mean ``any designated health service 
that ordinarily `may be' covered under Medicare (that is, that could be 
a covered service under Medicare in the community in which the service 
has been provided) for a Medicare-eligible individual, regardless of 
whether Medicare would actually pay for this particular service, at the 
time, for that particular individual. . . .'' Our proposed definition 
of the term ``designated health services'' in the 1998 proposed rule 
was consistent with this broad interpretation of the referral 
prohibition. Section 1877(h)(6) of the Act defines ``designated health 
services'' by listing various categories of services that qualify as 
designated health services (for example, clinical laboratory services). 
In the 1998 proposed rule, we stated that a designated health service 
remains such ``even if it is billed as something else or is subsumed 
within another service category by being bundled with other services 
for billing purposes'' (63 FR 1673). By way of example, we stated that 
clinical laboratory services that are provided by a skilled nursing 
facility (SNF) and reimbursed as part of the SNF composite rate would 
remain designated health services for purposes of section 1877 of the 
Act, even though SNF services are not listed as designated health 
services at section 1877(h)(6) of the Act and Medicare would not 
separately pay for the clinical laboratory service furnished by the 
SNF.
    The now-deleted exception at Sec.  411.355(d), which was first 
finalized in the 1995 final rule (60 FR 41975), served as a 
counterbalance to the broad interpretation of designated health 
services that was proposed in the 1998 proposed rule. As finalized in 
the 1995 final rule (60 FR 41980), Sec.  411.355(d) provided that the 
referral prohibition in Sec.  411.353 did not apply to services 
furnished in an ambulatory surgical center (ASC) or end-stage renal 
disease (ESRD) facility, or by a hospice, if payment for those services 
was included in the ASC rate, the ESRD composite rate, or as part of 
the per diem hospice charge. We explained that the application of the 
composite rate ``constitutes a barrier to either Medicare program or 
patient abuse because the Medicare program will pay only a set amount 
to the facilities irrespective of the number and frequency of 
laboratory tests that are ordered'' (60 FR 41940). In the 1998 proposed 
rule, we proposed an amendment to Sec.  411.355(d) that would have 
allowed the Secretary to except services furnished under other payment 
rates that did not pose a risk of program or patient abuse (63 FR 
1666). However, in Phase I, instead of expanding the exception at Sec.  
411.354(d) to include services furnished under other payment rates, we 
narrowed the definition of designated health services (as explained in 
this section of the proposed rule) to exclude certain services that are 
paid as part of a composite rate, and we solicited comments on whether 
the exception at Sec.  411.355(d) was still necessary in light of the 
narrowed definition of designated health services in Phase I (66 FR 923 
through 924). We ultimately determined in Phase II that Sec.  
411.355(d) was no longer necessary, given the change to the definition 
of designated health services finalized in Phase I, and we removed the 
exception from our regulations (69 FR 16111).
    As finalized in Phase I, the definition of ``designated health 
services'' includes only designated health services payable, in whole 
or in part, by Medicare, and does not include services that would 
otherwise constitute designated health services, but that are 
reimbursed by Medicare as part of a composite rate, except to the 
extent that the services are specifically identified in Sec.  411.351 
and are themselves payable through a composite rate. SNF services paid 
for under the Part A composite rate (that is, the Skilled Nursing 
Facility Prospective Payment System), for example, are not designated 
health services, even if the bundle of services includes services that 
would otherwise be designated health services, such as clinical 
laboratory services.\3\ On the other hand, although home health and 
inpatient and outpatient hospital services are reimbursed on a 
composite rate, they remain designated health services under the 
definition finalized in Phase I because section 1877(h)(6) of the Act 
explicitly lists these services as designated health services. We 
explained in Phase I that our ultimate definition of ``designated 
health services'' was based on issues of statutory construction (66 FR 
923). In particular, commenters on the 1998 Proposed Rule asserted that 
the proposed definition of designated health services would have 
expanded the list of services that are considered to be designated 
health services beyond the services explicitly listed at section 
1877(h)(1) of the Act. For example, clinical laboratory services 
furnished by a SNF and reimbursed under the Skilled Nursing Facility 
Prospective Payment System would have been considered designated health 
services under the proposed definition, even though SNF services are 
not included in the statutory list of designated health services. The 
commenters maintained that, where the Congress intended the physician 
self-referral law to cover specific services, including services that 
are paid on a composite rate such as home health services, it did so by 
explicitly listing the services at section

[[Page 55805]]

1877(h)(6) of the Act. We ultimately agreed with this statutory 
construction and finalized the definition of ``designated health 
services'' to include only those services paid under a composite rate 
that are explicitly listed at section 1877(h)(1) of the Act; that is, 
home health services and inpatient and outpatient hospital services.
---------------------------------------------------------------------------

    \3\ ESRD services are also reimbursed on a composite rate, and 
thus are not considered to be designated health services. In this 
context, we would like to refer readers to the comment and response 
section of the CY 2018 ERSD PPS Final Rule, where we explained that, 
for purposes of the physician self-referral law, the ``composite 
rate'' for ESRD services is interpreted as the per-treatment payment 
amount (82 FR 50751). To the extent that outpatient prescription 
drugs are included in the ESRD per-treatment payment amount, they do 
not qualify as designated health services.
---------------------------------------------------------------------------

    In light of our experience with the SRDP and our review of the 
comments to our CMS RFI, we reviewed the regulatory history of our 
definition of ``designated health services'' at Sec.  411.351 to 
identify whether further clarification regarding what constitutes a 
designated health service is necessary. We are proposing here to revise 
the definition of ``designated health services'' to clarify that a 
service provided by a hospital to an inpatient does not constitute a 
designated health service payable, in whole or in part, by Medicare, if 
the furnishing of the service does not affect the amount of Medicare's 
payment to the hospital under the Acute Care Hospital Inpatient 
Prospective Payment System (IPPS).
    To illustrate, suppose that, after an inpatient has been admitted 
to a hospital under an established diagnosis-related group (DRG), the 
patient's attending physician requests a consultation with a specialist 
who was not responsible for the patient's admission, and the specialist 
orders an X-ray. By the time the specialist orders the X-ray, the rate 
of Medicare reimbursement under the IPPS has already been established 
by the DRG (diagnostic imaging is bundled into the payment for the 
inpatient admission), and, unless the X-ray results in an outlier 
payment, the hospital will not receive any additional payment for the 
service over and above the payment rate established by the DRG.
    Moreover, insofar as the provision of the X-ray does not affect the 
rate of payment, the physician has no financial incentive to over-
prescribe the service. As illustrated here, we do not believe that the 
X-ray is a designated health service that is payable, in whole or part, 
by Medicare, and our proposed definition of designated health services 
at Sec.  411.351 would exclude this service from the definition of 
designated health services, even though it falls within a category of 
services that, when billed separately, would be ``designated health 
services.'' Thus, assuming the specialist had a financial relationship 
with the hospital that failed to satisfy the requirements of an 
exception to the physician self-referral law at the time the X-ray was 
ordered, the inpatient hospital services would not be tainted by the 
unexcepted financial relationship, and the hospital would not be 
prohibited from billing Medicare for the admission. On the other hand, 
if the physician who ordered the inpatient hospital admission had a 
financial relationship with the hospital that failed to satisfy the 
requirements of an applicable exception, Sec.  411.353(b) would 
prohibit the hospital for billing for the inpatient hospital services.
    We received several comments to our CMS RFI suggesting 
modifications similar to the change we are proposing. One commenter 
requested that we clarify that a service is not a designated health 
service ``for which payment otherwise may be made'' if the physician 
making a referral for the service ``has not caused the beneficiary to 
be admitted, the patient has already been admitted, and the service 
ordered by the physician is subsumed within the DRG already established 
for the beneficiary.'' Numerous other commenters requested that we 
modify the definition of ``referral'' to clarify that a referral, for 
purposes of the physician self-referral law, must result in additional 
payments or an increase in payment. Although the change to the 
definition of ``referral'' suggested by the latter commenters would 
apply to referrals for any category of designated health services, the 
commenters provided examples drawn exclusively from the context of 
inpatient services. We do not believe it is necessary to modify the 
definition of ``referral'' to achieve the policy goals identified by 
the commenters. We believe that the situation identified by the 
commenters, where a service furnished pursuant to a physician's 
referral does not increase the reimbursement received by the entity, 
occurs primarily or exclusively in the context of inpatient hospital 
services, where the DRG is established at the time of admission and 
physicians other than the attending or admitting physician may refer a 
patient for services that will not result in additional payment to the 
hospital. For this reason, our proposed clarification of the definition 
of ``designated health services'' would apply only to inpatient 
services that do not affect the Medicare reimbursement rate under the 
IPPS. Although outpatient services are also paid on a composite rate, 
we believe that there is typically only one ordering physician for 
outpatient services, and it rarely happens that physicians other than 
the ordering physician refer outpatients for additional outpatient 
services that would not be compensated separately under the OPPS. For 
this reason, our proposed modification of the definition of 
``designated health services'' at Sec.  411.351 does not apply to 
outpatient hospital services.
    Lastly, we are aware that not all hospitals are paid under the 
IPPS. We are soliciting comments as to whether our proposal regarding 
certain hospital services that are not ``designated health services 
payable, in whole or in part, by Medicare'' should be extended to 
analogous services provided by hospitals that are not paid under the 
IPPS, and, if so, how we should effectuate this change in our 
regulation text. In addition, we are soliciting comment regarding 
whether we should extend our proposal to outpatient hospital services 
or other categories of designated health services and, if so, how we 
should effectuate this change in our regulation text.
b. Physician
    In the 1992 proposed rule, we stated that, for purposes of the 
physician self-referral law, physicians are certain professionals who 
are ``legally authorized to practice by the State in which they perform 
their professional functions or actions and when they are acting within 
the scope of their licenses.'' (57 FR 8593). We included in the 
definition a doctor of medicine or osteopathy, a doctor of dental 
surgery or dental medicine, a doctor of optometry, and a chiropractor 
who meets certain qualifications. In Phase I, we finalized our 
definition of ``physician'' at Sec.  411.351, defining the term as ``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 at section 1861(r) of the Act.'' (66 FR 955). 
Since Phase I, our definition of ``physician'' at Sec.  411.351 has 
consistently referred to the definition of ``physician'' at section 
1861(r) of the Act. However, while the definition of ``physician'' 
found at Sec.  411.351 cross-references section 1861(r) of the Act, the 
two definitions are not entirely consistent. In particular, the 
definition of ``physician'' at Sec.  411.351 does not include all the 
limitations imposed by the definition of ``physician'' at section 
1861(r) of the Act. In order to correct this discrepancy and provide 
uniformity with regard to the definition of a ``physician,'' we are 
proposing to amend the definition of ``physician'' at Sec.  411.351. 
Under the proposed definition, the types of practitioners who qualify 
as ``physicians'' for purposes of the physician self-referral law will 
be defined by cross-reference to section 1861(r) of the Act. This 
amendment will incorporate into our definition of ``physician'' at 
Sec.  411.351 the statutory limitations imposed on the

[[Page 55806]]

definition of ``physician'' by section 1861(r) of the Act. The 
definition at Sec.  411.351 would continue to provide that a physician 
is considered the same as his or her professional corporation for 
purposes of the physician self-referral law.
c. Referral
    In Phase II, we stated that the exception for fair market value 
compensation is not available to protect recruitment arrangements (69 
FR 16096). We noted that a hospital is not permitted to pay a physician 
for the benefit of receiving the physician's referrals, and that such 
payments are antithetical to the premise of the statute. We are taking 
this opportunity to reiterate that a physician's referrals are not 
items or services for which payment may be made under the physician 
self-referral law, and that neither the existing exceptions to the 
physician self-referral law nor the proposed exceptions in this 
proposed rule would protect such payments. We are proposing to revise 
the definition of ``referral'' at Sec.  411.351 to explicitly state our 
longstanding policy that a referral is not an item or service for 
purposes of section 1877 of the Act and the physician self-referral 
regulations.
d. Remuneration
    A compensation arrangement between a physician (or an immediate 
family member of such physician) and an entity furnishing designated 
health services implicates the referral and billing prohibitions of the 
physician self-referral law. Section 1877(h)(1)(A) of the Act defines 
the term ``compensation arrangement'' as any arrangement involving any 
``remuneration'' between a physician (or an immediate family member of 
such physician) and an entity. However, section 1877(h)(1)(C) of the 
Act identifies certain types of remuneration which, if provided, would 
not create a compensation arrangement subject to the referral and 
billing prohibitions of the physician self-referral law. Under section 
1877(h)(1)(C)(ii) of the Act, the provision of the following does not 
create a compensation arrangement between the parties: Items, devices, 
or supplies that are used solely to collect, transport, process, or 
store specimens for the entity providing the items, devices, or 
supplies, or to order or communicate the results of tests or procedures 
for such entity. Furthermore, under our definition of ``remuneration'' 
at Sec.  411.351, the provision of such items, devices, or supplies is 
not considered to be remuneration.
    In the 1998 proposed rule we explained our interpretation of the 
phrase ``used solely'' at section 1877(h)(1)(C)(ii) of the Act (66 FR 
1693 through 1694). We observed that some pathology laboratories had 
been furnishing physicians with materials ranging from basic collection 
and storage items to more specialized or sophisticated items, devices, 
or equipment. We clarified that, in order for these items and devices 
to meet the statutory requirement, they must be used solely to collect, 
transport, process, or store specimens for the entity that provided the 
items and devices, or to order or communicate the results of tests or 
procedures for such entity. We provided examples of items that could 
meet the ``used solely'' test, including cups used for urine collection 
or vials used to hold and transport blood to the entity that supplied 
the items or devices. We emphasized that an item or device would not 
meet the ``used solely'' requirement if it is used for any purpose 
besides the purposes listed in the statute. In particular, we noted 
that certain surgical tools which can be used to collect or store 
samples, but are also routinely used as part of a surgical or medical 
procedure, would not satisfy the ``used solely'' requirement.
    As finalized in Phase I, the definition of ``remuneration'' 
included a parenthetical stipulating that the provision of surgical 
items, devices, and supplies would not qualify for the carve-out to the 
definition of ``remuneration'' for items, devices, or supplies that are 
used solely for the purposes listed at section 1877(h)(1)(C)(ii) of the 
Act (66 FR 947).
    We explained that we did not believe that the Congress intended 
section 1877(h)(1)(C)(ii) of the Act to allow entities to supply 
physicians with surgical items for free, noting that such items may 
have independent economic value to physicians apart from the six 
statutorily permitted uses. We stated our belief that the Congress 
intended to include at section 1877(h)(1)(C)(ii) of the Act single-use 
items, devices, and supplies of low value that are primarily provided 
by laboratories to ensure proper collection of specimens. In this 
context, we explained that reusable items may have value to physicians 
unrelated to the collection of specimens, and therefore could not meet 
the ``used solely'' requirement. Lastly, we stated that the provision 
of an excessive number of collection supplies creates an inference that 
the supplies are not provided ``solely'' to collect, transport, 
process, or store specimens for the entity that furnished them.
    We made no changes to the definition of ``remuneration'' in Phase 
II and Phase III. In the CY 2016 PFS final rule, we clarified that the 
provision of an item, device, or supply that is used for one or more of 
the six purposes listed in the statute, and no other purpose, does not 
constitute remuneration (80 FR 41918). In two advisory opinions issued 
in 2013 we applied the definition of ``remuneration'' at Sec.  411.351 
to two proposed arrangements to provide certain devices to physicians 
free of charge. In CMS-AO-2013-01, we concluded that, based on the 
specific facts certified by the requestor of the opinion, the provision 
of liquid-based Pap smear specimen collection kits did not constitute 
remuneration, because the collection kits are not surgical devices, and 
because the devices are used solely in the collection of specimens. 
Among other things, our ``used solely'' analysis highlighted the 
following facts, as certified by the requestor: (1) The Pap smear 
collection kits contain only disposable items that cannot be reused 
after a specimen is collected; and (2) the entity furnishing the Pap 
smear collection kits has a system in place to ensure that physicians 
receive only the quantity of devices necessary for their practice 
needs, and to address potential instances of separation of the devices 
into their component parts for use other than to collect specimens. In 
contrast, in CMS-AO-2013-02, we concluded that, based on the specific 
facts certified by the requestor of the opinion, the furnishing of 
certain disposable biopsy brushes for use in obtaining a biopsy of 
visible exocervical lesions constituted remuneration under the 
definition at Sec.  411.351.
    We noted that, as certified by the requestor, the biopsy brush is a 
disposable, single-use, cervical biopsy device that is used to collect 
a specimen to be sent to a laboratory. After reviewing FDA rules and 
regulations and American Medical Association guidelines, and consulting 
with CMS medical officers, we concluded that the device is a ``surgical 
item, device, or supply'' for purposes of the physician self-referral 
law and, therefore, that the provision of the device constitutes 
remuneration under Sec.  411.351.
    We have further considered our interpretation of section 
1877(h)(1)((C)(ii) of the Act and the analysis set forth in the 2013 
advisory opinions, and are proposing certain modifications to the 
definition of ``remuneration'' at Sec.  411.351. Specifically, we are 
proposing to remove the parenthetical in the current definition of 
``remuneration,'' which

[[Page 55807]]

stipulates that the carve-out to the definition of ``remuneration'' 
does not apply to surgical items, devices, or supplies. We are no 
longer convinced that the mere fact that an item, device, or supply is 
routinely used as part of a surgical procedure means that the item, 
device, or supply is not used solely for one of the six purposes listed 
at section 1877(h)(1)(C)(ii) of the Act. Rather, we believe that the 
relevant inquiry for purposes of the physician self-referral law is 
whether the item, device, or supply is used solely for one or more of 
the statutory purposes, regardless of whether the device is also 
classified as a surgical device. To be clear, we continue to believe 
that the Congress intended the carve-out at section 1877(h)(1)(C)(ii) 
of the Act to cover single-use items, devices, or supplies of low value 
\4\ that are primarily provided by laboratories to ensure proper 
collection of specimens, but we are no longer convinced that the mere 
fact that an item, supply, or device is classified as a ``surgical 
device'' means that it does not fall within the carve-out.
---------------------------------------------------------------------------

    \4\ See, for example, the OBRA 1993 Conference Report, H.R. 103-
213 pp. 818 through 819, which characterized section 
1877(h)(1)(C)(ii) of the Act as an ``exception'' for ``certain minor 
remuneration.''
---------------------------------------------------------------------------

    We are also taking this opportunity to clarify the ``used solely'' 
requirement at Sec.  411.351. While the furnished item, device, or 
supply cannot be used for any purpose other than one or more of the six 
purposes listed in the statute, we recognize that in many instances the 
item, device, or supply could theoretically be used for numerous 
purposes. For example, a specimen lockbox could potentially be used for 
several purposes; it could be used to store unused specimen collection 
supplies or as a doorstop. However, if, during the course of the 
arrangement, the specimen box provided to the physician is not used for 
any of these purposes and is, in fact, used only for one or more of the 
six purposes outlined in the statute and our regulations, the 
furnishing of the specimen box would not be considered remuneration 
between parties. In other words, the mere fact that an item, device, or 
supply could be used for a purpose other than one or more of the 
permitted purposes does not automatically mean that the furnishing of 
the item, device, or supply at no cost constitutes remuneration. We are 
proposing to add the phrase ``in fact'' to the ``used solely'' 
requirement to clarify that an item, device, or supply can have several 
uses, including uses that are not among the six purposes listed in the 
statute; however, the furnishing of such items, supplies, or devices 
would not be considered remuneration if the item, device, or supply in 
question is, in fact, only used for one or more of the six purposes 
outlined in the statute. We refer readers to the guidance provided in 
the 1998 proposed rule and in Phase I on steps that a party can take to 
ensure that the furnished items, supplies, or devices are used 
appropriately (63 FR 1694 and 66 FR 947 through 948, respectively).
    Although we are proposing certain modifications to the definition 
of ``remuneration,'' our proposal would not exclude from the definition 
those items, devices, or supplies whose main function is to prevent 
contamination or infection, even if the item, device, or supply could 
potentially be used for one or more of the six statutory purposes at 
section 1877(h)(1)(C)(ii) of the Act. In Phase I, we made clear that, 
although sterile gloves are essential to the proper collection of 
specimens, we believe they are not items, devices, or supplies that are 
used solely to collect, transport, process, or store specimens (66 FR 
947). Sterile gloves are essential to the specimen collection process, 
but their primary purpose is to prevent infection or contamination. In 
addition, sterile gloves are fungible, general purpose items, and we 
continue to believe it would be impractical for parties to monitor the 
use of the gloves to ensure that they are used solely for one or more 
of the purposes listed at section 1877(h)(1)(C)(ii) of the Act. 
Likewise, although there may be certain specialized equipment 
(including surgical tools) that may be used for one or more of the 
purposes described in the statute, in order not to be considered 
remuneration, the item, device, or supply must not have a primary 
function of preventing infection or contamination, or some other 
purpose besides one of the six purposes listed in the statute.
e. Transaction
    Section 1877(e)(6) of the Act provides that an isolated financial 
transaction, such as a one-time sale of property or practice, is not a 
compensation arrangement for purposes of the physician self-referral 
law if: (1) The amount of remuneration under the transaction is 
consistent with fair market value of the transaction and is not 
determined in a manner that takes into account (directly or indirectly) 
the volume or value of referrals by the referring physician; (2) the 
remuneration is pursuant to an arrangement that would be commercially 
reasonable even if no referrals were made to the entity; and (3) the 
transaction meets any other requirements that the Secretary imposes by 
regulation as needed to protect against program or patient abuse. As 
enacted by OBRA 1989, the statutory exception identified a one-time 
sale of property as an example of an isolated financial transaction. In 
OBRA 1993, the Congress further clarified the statutory exception by 
providing an additional example of an isolated transaction, namely, a 
one-time sale of a practice. (See House Conference Report at H.R. Rep. 
No. 213, 103d Cong., 1st Sess. 813-815 (1993).)
    In our 1992 proposed rule, we proposed an exception at Sec.  
411.357(f) to mirror the statutory exception at section 1877(e)(6) of 
the Act for certain isolated financial transactions (both titled and 
together referred to as the exception for isolated transactions) (57 FR 
8588). In our proposal, we included a requirement--in addition to the 
statutory requirements--that there be no other transactions (that is, 
financial relationships) between the parties for 1 year before and 1 
year after the financial transaction to ensure that financial 
transactions excepted under section 1877(e)(6) of the Act and Sec.  
411.357(f) are truly isolated in nature (57 FR 8599). In the 1995 final 
rule, we finalized an exception for isolated financial transactions at 
Sec.  411.357(f), and we modified the proposed 1-year requirement in 
response to commenters who asserted that the requirement would create 
substantial and unnecessary problems (60 FR 41960). We stated that a 
transaction would be considered an isolated transaction for purposes of 
Sec.  411.357(f) if there were no other transactions between the 
parties for 6 months after the transaction, except those transactions 
that are specifically excepted by another provision in Sec. Sec.  
411.355 through 411.357. We further stated that individual payments 
between parties generally characterize a compensation arrangement; 
however, debt, as described in the definition of ``ownership or 
investment interest'' at section 1877(a)(2) of the Act, can constitute 
an ownership interest that continues to exist until the debt is paid 
off (60 FR 41960). The 1995 final rule also established definitions of 
``transaction'' and ``isolated transaction'' at Sec.  411.351. We 
defined a ``transaction'' as an instance or process of two or more 
persons doing business and an ``isolated transaction'' as a transaction 
involving a single payment between two or more persons. The regulation 
at Sec.  411.351 specified that a transaction involving long-term or 
installment payments is not considered an isolated transaction.

[[Page 55808]]

    In the 1998 proposed rule, we proposed to revise the definition of 
``transaction'' at Sec.  411.351 to clarify that a transaction can 
involve persons or entities, but we did not propose any substantive 
changes to the exception at Sec.  411.357(f) (63 FR 1669). This 
definition was finalized in Phase II, with modification to permit 
installment payments (and post-closing adjustments) under certain 
circumstances (69 FR 16098). In Phase II, we also responded to 
commenters who objected to the prohibition on other transactions within 
6 months of the excepted transaction. We declined to modify the 6-month 
prohibition on other transactions, and we explained that the concept of 
an isolated transaction is incompatible with the parties routinely 
engaging in multiple transactions in a year or during a short period of 
time. In Phase III, we made no changes to the exception at Sec.  
411.357(f), but updated the term ``isolated transaction'' at Sec.  
411.351 to refer to an ``isolated financial transaction,'' as that 
specific term is used in the statutory and regulatory exceptions (72 FR 
51084).
    Through our administration of the SRDP, work with our law 
enforcement partners, and interactions with stakeholders, it has come 
to our attention that certain parties may believe that CMS' policy is 
that the exceptions in section 1877(e)(6) of the Act and Sec.  
411.357(f) for isolated transactions are available to protect service 
arrangements where a party makes a single payment for multiple services 
provided over an extended period of time. To illustrate, assume that a 
hospital makes a single payment to a physician for working multiple 
call coverage shifts over the course of a month (or several months) and 
seeks to utilize the exception at Sec.  411.357(f) to avoid 
qualification of the payment as a financial relationship subject to the 
physician self-referral law's referral and billing prohibitions. That 
is, the parties wish to consider the single payment for multiple 
services an ``isolated financial transaction.'' We have observed that 
parties turn to the exception for isolated transactions to protect 
single payments for multiple services when they discover, typically 
after the services have been provided, that they failed to set forth 
the service arrangement in writing, and thus cannot rely on the 
exceptions for personal service arrangements or fair market value 
compensation. In fact, it is our policy that the exception for isolated 
transactions is not available to except payments for multiple services 
provided over an extended period of time, even if there is only a 
single payment for all the services. Elsewhere in this proposed rule, 
we are proposing regulations that will facilitate compliance with the 
physician self-referral law in general and the writing and signature 
requirements in particular, including a 90-day period to reduce 
arrangements to a signed writing and an exception for limited 
remuneration to a physician. We believe that these provisions, if 
finalized, would afford parties with sufficient flexibility to ensure 
that personal service arrangements comply with the physician self-
referral law, and see no reason to unduly stretch the meaning and 
applicability of the exception for isolated transactions beyond what 
was intended by the Congress.
    To illustrate the kind of transactions that section 1877(e)(6) of 
the Act is meant to exempt, the Congress provided as examples a one-
time sale of property and a one-time sale of a practice. In our view, a 
one-time sale of property or a practice is a unique, singular 
transaction. It is not possible for one party to repeatedly offer and 
sell the same property or medical practice to another party. In 
contrast, services can be provided and purchased on a repeated basis. 
Moreover, in a one-time sale of property or a practice, the 
consideration for the transaction (that is, the transfer of ownership 
of the property or practice) is exchanged at the time payment is made 
in a single transaction (although Sec.  411.357(f) permits installment 
payments under certain circumstances). In contrast, if a physician 
provides multiple services to an entity over an extended period of 
time, remuneration in the form of an in-kind benefit has passed 
repeatedly from the physician to the entity receiving the service prior 
to the payment date. The provision of remuneration in the form of 
services commences a compensation arrangement at the time the services 
are provided, and the compensation arrangement must satisfy the 
requirements of an applicable exception at that time if the physician 
makes referrals for designated health services and the entity wishes to 
bill Medicare for such services. The exception for isolated 
transactions is not available to retroactively cure noncompliance with 
the physician self-referral law. Finally, we note that the Congress 
created an exception for personal service arrangements at section 
1877(e)(3) of the Act and required, among other things, that the 
arrangement is set out in writing and signed by the parties, that the 
term of the arrangement is at least 1 year, and that the compensation 
is set in advance. We do not believe that the Congress would impose 
such requirements for service arrangements under this exception, and 
then permit parties to avoid these requirements as long as the parties 
made one retrospective payment for multiple services provided over an 
extended period of time relying on the exception for isolated 
transactions.
    To provide a clear expression of our policy described in this 
section II.D.2.d. of this proposed rule, we are proposing to establish 
an independent definition of ``isolated financial transaction'' at 
Sec.  411.351 and clarify that an ``isolated financial transaction'' 
does not include payment for multiple services provided over an 
extended period, even if there is only one payment for such services. 
We are not proposing further changes to the definition of 
``transaction'' at Sec.  411.351. Under our proposals, the term 
``transaction'' would mean an instance or process of two or more 
persons doing business. We are proposing corresponding revisions to the 
exception for isolated transactions at Sec.  411.357(f) to reference 
isolated financial transactions in order to align the regulation text 
with the statutory provisions at section 1877(e)(6). Even though the 
exception at Sec.  411.357(f) applies to isolated financial 
transactions, we are not proposing to change the title of the exception 
from ``isolated transactions'' to ``isolated financial transactions,'' 
as the title of the statutory exception is ``isolated transactions.''
3. Denial of Payment for Services Furnished Under a Prohibited 
Referral--Period of Disallowance (Sec.  411.353(c)(1))
    In the CY 2008 PFS proposed rule, we solicited comments on how to 
determine the period of time during which a physician may not make 
referrals for designated health services to an entity and the entity 
may not bill Medicare for the referred designated health services when 
a financial relationship between the parties failed to satisfy the 
requirements of any applicable exception (72 FR 38183). We referred to 
this time period as the ``period of disallowance.'' We stated that, as 
a general matter, the period of disallowance under the physician self-
referral law should begin on the date when a financial relationship 
fails to satisfy the requirements of any applicable exception and end 
on the date that the financial relationship ends or is brought back 
into compliance (that is, satisfies all requirements of an applicable 
exception). We noted, however, that it is not always clear

[[Page 55809]]

when a financial relationship has ended. By way of example, we stated 
that, if a physician paid less than fair market value for the rental of 
office space, the below market rental payments may have been in 
exchange for future or anticipated referrals, so it is not clear if the 
financial relationship ended on the date that the lease expires. We 
sought comments on whether we should employ a case-by-case method for 
determining when a financial relationship ends or if we should, to the 
extent practicable, create a provision that would deem certain kinds of 
financial relationships to last a prescribed period of time for 
purposes of determining the period of disallowance. Assuming we were to 
prescribe a determinate amount of time for the period of disallowance 
in certain circumstances, we sought comments on whether the period of 
disallowance could be terminated if parties returned or repaid the 
value of any problematic compensation under an arrangement.
    In the FY 2009 IPPS proposed rule, we proposed provisions 
pertaining to the period of disallowance at Sec.  411.353(c)(1) (73 FR 
23690 through 23692). Under that proposal, the period of disallowance 
would begin when the financial relationship failed to satisfy the 
requirements of any applicable exception. Where the noncompliance is 
unrelated to the payment of compensation, the period of disallowance 
would be deemed to end no later than the date that the financial 
relationship satisfies all requirements of an applicable exception. On 
the other hand, where the noncompliance is related to the payment of 
excess or insufficient compensation, the proposed rule provided that 
the period of disallowance would be deemed to end no later than the 
date on which the excess compensation was repaid or the additional 
required compensation was paid, and the arrangement satisfied all the 
elements of an applicable exception. We emphasized that the proposal 
only prescribed an outside limit on the period of disallowance. We 
acknowledged that, in certain cases, a financial relationship may end 
before the excess compensation has been returned or the insufficient 
compensation paid in full, and that the period of disallowance in such 
cases would end when the financial relationship ended. However, we did 
not issue any rules or guidance on determining when a financial 
relationship has ended in such cases, and we stated that the period of 
disallowance would have to be determined in such instances on a case-
by-case basis. Lastly, we recognized that noncompliance may also arise 
for other reasons related to compensation, such as payments that take 
into account the volume or value of a physician's referrals, but we did 
not propose any rules on how to determine the period of disallowance in 
such cases. In the FY 2009 IPPS final rule, we finalized Sec.  
411.353(c)(1) as proposed, without substantive modifications (73 FR 
48700 through 48705). We emphasized once again that the rule only 
prescribed an outside date for the period of disallowance, and that the 
rule did not prevent parties from arguing that the period of 
disallowance ended earlier than the outside date prescribed by the 
rule, on the theory that the financial relationship ended prior to this 
date. We made it clear in response to commenters that the period of 
disallowance as prescribed by Sec.  411.353(c)(1) was not intended to 
extend the period of disallowance beyond the end of a financial 
relationship. Rather, the rule was merely intended to give parties 
clear guidance on steps that could be taken to ensure that the period 
of disallowance had ended. In addition, we explained the application of 
the rules regarding excess and insufficient compensation at Sec.  
411.353(c)(1)(ii) and (iii).
    In light of our experience administering the SRDP and stakeholder 
feedback we have received over the years, we are proposing to delete 
the rules on the period of disallowance at Sec.  411.353(c)(1) in their 
entirety because we believe that, although the rules were initially 
intended merely to establish an outside, bright-line limit for the 
period of disallowance, the rules, in application, appear to be overly 
prescriptive and impractical. We emphasize that our current rulemaking 
is in no way meant to undermine parties who have relied on Sec.  
411.353(c)(1)(ii) or (iii) in the past to establish that the period of 
disallowance has ended.
    Throughout our rulemaking on the period of disallowance, we 
acknowledged that there are no definite rules for establishing in each 
and every case when a financial relationship has ended, and that the 
analysis typically must proceed on a case-by-case basis, taking into 
account the unique facts and circumstances of each financial 
relationship. The period of disallowance rules were meant to provide 
certainty in the face of this complexity, and to prescribe definite, 
practical steps that a party could take to establish that the period of 
disallowance had ended. However, we are concerned that parties may 
believe that the only way to establish that the period of disallowance 
has ended is to follow the steps outlined in Sec.  411.353(c)(1). 
Moreover, it has become clear that the steps outlined at Sec.  
411.353(c)(1)(ii) and (iii) are not always as practical or clear cut as 
we originally envisioned. Often when there is an allegation of excess 
or insufficient compensation paid under an arrangement, there is a 
dispute between the parties as to what the proper amount of 
compensation should have been under the arrangement. To settle the 
dispute, the parties may need to litigate the matter. It is not clear 
under Sec.  411.353(c)(1)(ii) and (iii) at what point in the 
litigation, if any, the period of disallowance should end. In addition, 
in some cases, the cost of litigating the matter may far outweigh the 
amount in dispute, making litigation highly impractical. Thus, in 
practice, the provisions at Sec.  411.353(c)(1)(ii) and (iii) often do 
not provide the clear, bright-line method for determining the end of 
the period of disallowance that we originally intended, and parties 
must continue to rely on a case-by-case analysis to determine when the 
period of disallowance has ended. For these reasons, we are deleting 
the period of disallowance rules at Sec.  411.353(c)(1) in their 
entirety.
    We continue to agree with the general principle stated in the CY 
2008 PFS proposed rule that the period of disallowance under the 
physician self-referral law should begin on the date when a financial 
relationship fails to satisfy all requirements of any applicable 
exception and end on the date that the financial relationship ends or 
satisfies all requirements of an applicable exception. We are aware 
that the payment of excess or insufficient compensation can complicate 
the question of when a financial relationship has ended or been brought 
back into compliance for purposes of the physician self-referral law. 
As a general matter, we agree with the FY 2009 IPPS final rule that one 
way to establish that the period of disallowance has ended in such 
circumstances is to follow the steps prescribed in Sec.  
411.353(c)(1)(ii) or (iii); for example, recover any excess 
compensation and bring the financial relationship back into compliance 
with an applicable exception. However, we note that, since the 
publication of the FY 2009 IPPS final rule, stakeholders have 
questioned whether our preamble guidance was intended to state that 
administrative or other operational failures during the course of an 
arrangement, such as the erroneous payment of ``excess'' compensation 
or the erroneous failure to pay the full amount of compensation

[[Page 55810]]

due during the timeframes established under the terms of an 
arrangement, would necessarily result in noncompliance with the 
physician self-referral law. Through submissions to the SRDP and other 
interactions with stakeholders, we are aware of questions regarding 
whether administrative errors, such as invoicing for the wrong amount 
of rental charges (that is, an amount other than the amount specified 
in the written lease arrangement) or the payment of compensation above 
what is called for under a personal service arrangement due to a 
typographical error entered into an accounting system, create the type 
of ``excess compensation'' or ``insufficient compensation'' described 
in our preamble guidance and the period of disallowance rules. This was 
never our intent. However, the failure to remedy such operational 
inconsistencies could result in a distinct basis for noncompliance with 
the physician self-referral law.
    The effect of deleting the period of disallowance rules would not 
be to permit parties to a financial relationship to make referrals for 
designated health services and to bill Medicare for the services when 
that financial relationship does not satisfy all requirements of an 
applicable exception. It is a fundamental principle of the physician 
self-referral law that a physician may not make a referral for 
designated health services to an entity with which he or she has a 
financial relationship, and the entity may not bill Medicare for the 
services, if the financial relationship between the parties does not 
satisfy all the requirements of an applicable exception. Nothing in 
this proposed rule affects the billing and referral prohibitions at 
Sec.  411.353(a) and (b). Our intent in deleting Sec.  411.353(c)(1) is 
merely to no longer prescribe the particular steps or manner for 
bringing the period of noncompliance to a close. At the same time, we 
are taking this opportunity to provide general guidance on how to 
remedy compensation problems that occur during the course of an 
arrangement and, when a remedy is not available, how to determine when 
the period of disallowance ends. Consistent with our intent in deleting 
the period of disallowance rules at Sec.  411.353(c)(1), we emphasize 
that the analysis to determine when a financial relationship has ended 
is dependent in each case on the unique facts and circumstances of the 
financial relationship, including the operation of the financial 
relationship as negotiated between the parties, and it is not possible 
for us to provide definitive rules that would be valid in all cases.
    For purposes of this analysis, assume there is a 1-year arrangement 
beginning January 1 for personal services between an entity and a 
physician; the arrangement is memorialized at the outset in a written 
agreement between the parties; the amount of compensation provided for 
in the writing does not exceed fair market value; and the arrangement 
otherwise fully complies with the requirements of an applicable 
exception. Assume further that the entity provides compensation to the 
physician in months 1 through 6 in an amount other than what is 
stipulated in the written agreement, and the parties discover the 
payment discrepancy in early July. For purposes of this illustration, 
assume that a hospital pays a physician $150 per hour for medical 
director services when the written agreement between the parties 
identifies $140 per hour as the physician's rate of pay. If the $150 
per hour payment is due to an administrative or other operational 
error--that is, the discrepancy was unintended--the parties may, while 
the arrangement is ongoing during the term initially anticipated (in 
this example, during the year of the arrangement), correct the error by 
collecting the overage (or making up the underpayment, if that is the 
case). We expect entities and the physicians who refer designated 
health services to them to operate effective compliance programs that 
identify these types of errors and rectify them promptly. However, if 
the parties fail to identify the error during the term of the 
arrangement as anticipated (that is, the ``live'' or ongoing 
arrangement), they cannot simply ``unring the bell'' by correcting it 
at some date after the termination of the arrangement. Rather, the 
failure to timely identify and rectify the error through an effective 
compliance program would expose the parties to the referral and billing 
prohibitions of the physician self-referral law during the entirety of 
the arrangement.
    In analyzing the compensation arrangement in this example--assuming 
that the operational error was not timely discovered and rectified--as 
we would with any financial relationship under the physician self-
referral law, we consider the actual arrangement between the parties, 
which does not always coincide with the terms described in the written 
documentation. Thus, to properly characterize the potential 
noncompliance, it is important to determine whether the actual amount 
of compensation paid under the arrangement--that is, the amount the 
physician actually received, as opposed to the amount stipulated in the 
written agreement--exceeded fair market value for the services actually 
provided. Assuming that the actual amount paid did not exceed fair 
market value and was not determined in a manner that took into account 
the volume or value of the physician's referrals or other business 
generated, then the potential noncompliance may relate primarily to the 
failure to properly document the actual arrangement in writing 
(assuming the arrangement otherwise satisfied the requirements of an 
applicable exception). Various provisions in this proposed rule and in 
our current regulations may offer parties a means of limiting the scope 
of potential noncompliance in such circumstances. For example, the 
parties could rely on the proposed special rule for writing and 
signature requirements at Sec.  411.354(e)(3), coupled with the 
clarification of the writing requirement at Sec.  411.354(e)(2), to 
establish that the actual amount of compensation provided under the 
arrangement was set forth in writing within 90 days of the commencement 
of the arrangement via a collection of documents, including documents 
evidencing the course of conduct between the parties. In addition, the 
proposed exception for limited remuneration to a physician may also be 
available to protect some or all of the payments made during months 1 
through 6. In this manner, depending on the facts and circumstances, 
the parties may be able to establish that the arrangement complied with 
the physician self-referral law for some or all of months 1 through 6 
of the arrangement.
    In certain instances, the failure to collect money that is legally 
owed under an arrangement may potentially give rise to a secondary 
financial relationship between the parties. In such circumstances, the 
parties may conclude that the only means to remedy the noncompliance 
with the physician self-referral law is to recoup the amount owed under 
the arrangement. This issue is especially acute if the actual amount of 
compensation paid under the arrangement for months 1 through 6 was not 
consistent with fair market value or took into account the volume or 
value of referrals. In such circumstances, parties cannot establish 
compliance by showing that the actual amount of compensation was 
documented in various writings, because the compensation itself is the 
reason for the potential noncompliance. Nevertheless, depending on the 
facts and circumstances, the parties may be able

[[Page 55811]]

to remedy the noncompliance. Returning to the previous example, if the 
entity discovers the payment errors during the course of the 
arrangement, corrects the errors going forward, and collects any amount 
to which it is legally entitled as a result of the erroneous payments 
during months 1 through 6, then the arrangement may comply with the 
physician self-referral law for its duration, including months 1 
through 6. The relevant inquiry is whether the payment errors during 
months 1 through 6 gave rise to a secondary financial relationship (for 
example, an interest free loan) which must satisfy the requirements of 
an applicable exception, or, on the other hand, whether the payment 
errors arose from operational or administrative problems that were 
detected and corrected during the course of the arrangement as part of 
a normal business practice. In this context, we are taking this 
opportunity to clarify statements in the FY 2009 IPPS final rule 
regarding whether parties can ``turn back the clock'' or retroactively 
``cure'' noncompliance. We believe that parties who detect and correct 
administrative or operational errors or discrepancies during the course 
of the arrangement are not necessarily ``turning back the clock'' to 
address past noncompliance. Rather, it is a normal business practice, 
and a key element of an effective compliance program, to actively 
monitor active ongoing, live financial relationships, and to correct 
problems that such monitoring uncovers. An entity that detects a 
problem in an active financial relationship and corrects the problem 
while the financial relationship is still active is addressing a 
current problem and is not ``turning back the clock'' to fix past 
noncompliance. On the other hand, once a financial relationship has 
ended, we believe that parties cannot retroactively ``cure'' previous 
noncompliance by recovering or repaying problematic compensation. Of 
course, to the extent that the financial relationship has ended, the 
period of disallowance has ended as well. We believe this policy 
encourages active, ongoing review of arrangements for compliance with 
the physician self-referral law.
4. Ownership or Investment Interests (Sec.  411.354(b))
a. Titular Ownership or Investment Interest (Sec.  411.354(b)(3)(vi))
    In the FY 2009 IPPS final rule, we introduced the concept of 
titular ownership or investment interests in the context of our 
rulemaking pertaining the physician ``stand in the shoes'' provisions 
at Sec.  411.354(c) (73 FR 48693 through 48699). Under the rules 
finalized in the FY 2009 IPPS final rule, for purposes of determining 
whether a compensation arrangement between an entity and a physician 
organization is deemed to be a compensation arrangement between the 
entity and the physicians associated with the organization, a physician 
whose ownership or investment interest in the physician organization is 
merely titular in nature is not required to stand in the shoes of the 
physician organization (73 FR 48694). We explained that an ownership or 
investment interest is considered to be ``titular'' if the physician is 
not able or entitled to receive any of the financial benefits of 
ownership or investment, including, but not limited to, the 
distribution of profits, dividends, proceeds of sale, or similar 
returns on investment (73 FR 48694). The concept of titular ownership 
or investment interests set forth in the FY 2009 IPPS final rule 
applied only to the stand in the shoes rules at Sec.  411.354(c) 
pertaining to compensation arrangements. Because we were responding to 
a comment to the 1998 proposed rule (and the Phase I comments 
thereafter) regarding the application of the exceptions for 
compensation arrangements, we did not propose to extend the concept of 
titular ownership or investment interests to the provisions at Sec.  
411.354(b) pertaining to ownership or investment interests, although we 
had previously concluded in a 2005 Advisory Opinion (CMS-AO-2005-08-01) 
that, for purposes of section 1877(a) of the Act, physician-
shareholders of a group practice who did not receive any of the 
purchase and ownership rights or financial risks and benefits typically 
associated with stock ownership would not be considered to have an 
ownership or investment interest in the group practice.
    We are now proposing to extend the concept of titular ownership or 
investment interests to our rules governing ownership or investment 
interests at Sec.  411.354(b). In particular, under proposed Sec.  
411.354(b)(3)(vi), ownership and investment interests would not include 
titular ownership or investment interests. Consistent with the FY 2009 
IPPS final rule, a ``titular ownership or investment interest'' would 
be an interest that excludes the ability or right to receive the 
financial benefits of ownership or investment, including, but not 
limited to, the distribution of profits, dividends, proceeds of sale, 
or similar returns on investment. As noted in the FY 2009 IPPS final 
rule, whether an ownership or investment interest is titular is 
determined by whether the physician has any right to the financial 
benefits through ownership or investment (73 FR 48694). We believe that 
proposed Sec.  411.354(b)(3)(vi) would afford providers and suppliers 
with greater flexibility and certainty under our regulations, 
especially in states where the corporate practice of medicine is 
prohibited. For the reasons similar to those stated in CMS-AO-2005-08-
01, namely that a physician with a titular ownership in an entity does 
not have a right to the distribution of profits or the proceeds of sale 
and, therefore, does not have a financial incentive to make referrals 
to the entity in which the titular ownership or investment interest 
exists, we believe that our proposed interpretation and revised 
definition of ``ownership or investment interest'' does not pose a risk 
of program or patient abuse.
b. Employee Stock Ownership Program
    We stated in the preamble of the 1998 proposed rule that an 
interest in an entity arising through a retirement fund constitutes an 
ownership or investment interest in the entity for purposes of section 
1877 of the Act (63 FR 1708). Our interpretation was based on the 
premise that a retirement interest in an entity creates a financial 
incentive to make referrals to the entity. In Phase I, we reconsidered 
the issue and withdrew the statement regarding retirement interests 
made in the 1998 proposed rule (66 FR 870). As finalized in Phase I, 
Sec.  411.354(b)(3)(i) excluded an interest in a retirement plan from 
the definition of ``ownership or investment interest.'' We stated that 
retirement contributions, including contributions from an employer, 
would instead be considered to be part of an employee's overall 
compensation.
    We made no changes to Sec.  411.354(b)(3)(i) in Phase II. However, 
after publishing Phase II, we received a comment stating that, contrary 
to our intent, some physicians were using their retirement plans to 
purchase or invest in other entities (that is, entities other than the 
entity that sponsored the retirement plan) to which the physicians were 
making referrals for designated health services. We made no changes to 
Sec.  411.354(b)(3)(i) in Phase III, but proposed in the CY 2008 PFS 
proposed rule to address the potential abuse described by the commenter 
to Phase II (72 FR 38183). After reviewing the comments received in 
response to that proposal, in the FY 2009 IPPS final rule, we finalized 
changes to Sec.  411.354(b)(3)(i) that restricted the retirement 
interest carve-out to an

[[Page 55812]]

interest in an entity that arises from a retirement plan offered by the 
entity to the physician (or an immediate family member) through the 
physician's (or immediate family member's) employment with that entity 
(73 FR 48737 through 48738). Under the current regulation at Sec.  
411.354(b)(3)(i), if, through his or her employment by Entity A, a 
physician has an interest in a retirement plan offered by Entity A, any 
interest the physician may have in Entity A by virtue of his or her 
interest in the retirement plan would not be considered to be an 
ownership or investment interest for purposes of section 1877 of the 
Act. On the other hand, if the retirement plan sponsored by Entity A 
purchased or invested in Entity B, the physician would have an interest 
in Entity B that would not be excluded from the definition of 
``ownership or investment interest'' for purposes of the physician 
self-referral law. For the physician to make referrals for designated 
health services to Entity B, the ownership or investment interest in 
Entity B would have to satisfy the requirements of an applicable 
exception. We explained in the FY 2009 IPPS final rule that it would 
pose a risk of program or patient abuse to permit a physician to own 
another entity that furnishes designated health services (other than 
the entity which employs the physician) through his or her retirement 
plan, because the physician could then use the retirement interest 
carve-out to skirt the prohibitions of the physician self-referral law.
    Since we published the 2009 IPPS final rule, stakeholders have 
informed us that, in certain cases, employers seeking to offer 
retirement plans to physician employees may find it necessary or 
practical, for reasons of Federal law, State law, or taxation, to 
structure a retirement plan using a holding company. By way of example, 
assume a home health agency desires to sponsor a retirement plan for 
its employees and elects to establish such plan using a holding company 
whose primary asset will be the home health agency. To effectuate the 
retirement plan, the home health agency's assets are transferred to or 
purchased by the holding company, which then employs the physicians and 
other staff of the home health agency. The holding company sponsors the 
retirement plan for its employees, offering the employees (including 
physician employees) an interest in the holding company. Under our 
current regulations, the physician's interest in the holding company 
would not be considered an ownership or investment interest under Sec.  
411.354(b)(3)(i), because the physician is employed by the holding 
company, the holding company sponsors the retirement plan, and the 
physician's ownership interest in the holding company arises through 
the retirement plan sponsored by the holding company. However, because 
the retirement plan owns the holding company, and the holding company 
owns the home health agency, the physician has an indirect ownership or 
investment interest in the home health agency that would not be carved 
out under Sec.  411.354(b)(3)(i) and may not satisfy the requirements 
of an applicable exception at Sec.  411.356.
    It is our understanding that a retirement plan structure involving 
ownership of a holding company and indirect ownership of a legally 
separate entity furnishing designated health services may be 
particularly advantageous or necessary in certain circumstances for the 
establishment of an employee stock ownership plan (ESOP). An ESOP is an 
individually designed stock bonus plan, which is qualified under 
Internal Revenue Code (IRC) section 401(a), or a stock bonus and a 
money purchase plan, both of which are qualified under IRC section 
401(a), and which are designed to invest primarily in qualifying 
employer securities. It is our understanding that ESOPs must be 
structured to comply with certain safeguards under the Employee 
Retirement Income Security Act of 1974 (ERISA) (Pub. L. 93-406), 
including certain nondiscrimination rules and vesting rules that, among 
other things, do not allow an employee to receive the value of his or 
her employer stocks held through the retirement plan until at least 1 
year after separation from the employer. Given the statutory and 
regulatory safeguards that exist for ESOPs, we believe that an interest 
in an entity arising through participation in an ESOP merits the same 
protection from the physician self-referral law's prohibitions as an 
interest in an entity that arises from a retirement plan offered by 
that entity to the physician through the physician's employment with 
the entity. We do not believe that excluding from the definition of 
``ownership or investment interest'' an interest in an entity that 
arises through participation in an ESOP qualified under IRC section 
401(a) poses a risk of program or patient abuse, and we are proposing 
at Sec.  411.354(b)(3)(vii) to remove such interests from the 
definition of ``ownership or investment interest'' for purposes of 
section 1877 of the Act. To provide regulatory flexibility in 
structuring retirement plans, proposed Sec.  411.354(b)(3)(vii) is not 
restricted to an interest in an entity that both employs the physician 
and sponsors the retirement plan.
    To illustrate our proposal, assume that a holding company is owned 
by its employees, including physician employees, through an ESOP, and 
that the holding company owns a separate legal entity that furnishes 
designated health services (an ``entity'' for purposes of section 1877 
of the Act). Under proposed Sec.  411.354(b)(3)(vii), for purposes of 
the physician self-referral law, the physician's interest in the ESOP 
would not constitute an ownership or investment interest in the holding 
company or the legally separate entity the holding company owns. As 
with the current retirement interest carve-out at Sec.  
411.354(b)(3)(i), employer contributions to the ESOP on behalf of an 
employed physician would be considered part of the physician's overall 
compensation and would have to meet the requirements of an applicable 
exception for compensation arrangements at Sec.  411.357.
    We are seeking comments on whether the safeguards on ESOPs that are 
imposed by ERISA are sufficient for purposes of the physician self-
referral to ensure that they do not pose a risk of program or patient 
abuse and, if not, what additional safeguards we should include to 
ensure that such interests do not pose a risk of program or patient 
abuse. To prevent the kind of abuses of retirement plans identified by 
the commenter on Phase II, we seek comment as to whether it is 
necessary to restrict the number or scope of entities owned by an ESOP 
that would not be considered an ownership or investment interest of its 
physician employees. It is our understanding that an ESOP is designed 
to invest primarily in ``qualifying employer securities,'' but the ESOP 
may also invest in other securities. Further, we seek comment whether 
the exclusion from the definition of ``ownership or investment 
interest'' should apply only to an interest in an entity arising from 
an interest in ``qualifying employer securities'' that are offered to a 
physician as part of an ESOP. We are also seeking comment on whether 
the proposed revision to Sec.  411.354(b)(3)(vii) is necessary; that 
is, whether existing Sec.  411.354(b)(3)(i) affords entities furnishing 
designated health services sufficient regulatory flexibility to 
structure nonabusive retirement plans, including ESOPs or other plans 
that involve holding companies.

[[Page 55813]]

5. Special Rules on Compensation Arrangements (Sec.  411.354(e))
    In the CY 2008 PFS proposed rule (72 FR 38184 through 38186), we 
proposed an alternative method for satisfying certain requirements of 
some of the exceptions in Sec. Sec.  411.355 through 411.357. We 
explained that, although we do not have the authority to waive 
violations of the physician self-referral law, we do have the authority 
under section 1877(b)(4) of the Act to implement an alternative method 
for satisfying the requirements of an exception. The proposed method 
would have required, among other things, that an entity self-disclose 
the facts and circumstances of the arrangement at issue and that CMS 
make a determination that the arrangement satisfied all but the 
``procedural or `form' requirements'' of an exception (72 FR 38185). We 
cited the signature requirement of the exception for personal service 
arrangements at Sec.  411.357(d)(1) as an example of a procedural or 
``form'' requirement, and explained that the alternative method would 
not be available for violations of requirements such as compensation 
that is fair market value, set in advance, and not determined in a 
manner that takes into account the volume or value of referrals.
    In the FY 2009 IPPS final rule, we did not finalize the alternative 
method proposed in the CY 2008 PFS proposed rule. Instead, relying on 
our authority under section 1877(b)(4) of the Act, we finalized a rule 
for temporary noncompliance with signature requirements at Sec.  
411.353(g) (73 FR 48705 through 48709). As finalized in the FY 2009 
IPPS final rule, Sec.  411.353(g) applied only to the signature 
requirement of an applicable exception at Sec.  411.357. We declined to 
extend the special rule for temporary noncompliance to any other 
procedural or ``form'' requirement of an exception (73 FR 48706) or to 
noncompliance arising from ``minor payment errors'' (73 FR 48703). The 
special rule at Sec.  411.353(g) permitted an entity to submit a bill 
and receive payment for a designated health service if the compensation 
arrangement between the referring physician and the entity fully 
complied with the requirements of an applicable exception at Sec.  
411.357, except with respect to the signature requirement, and the 
parties obtained the required signatures within 90 days if the failure 
to obtain the signatures was inadvertent, or within 30 days if the 
failure to obtain the signatures was not inadvertent (73 FR 48706). 
Entities were allowed to use the special rule at Sec.  411.353(g) only 
once every 3 years with respect to the same physician. We stated that 
we would evaluate our experience with the special rule at Sec.  
411.353(g) and that we may propose modifications, either more or less 
restrictive, at a later date (73 FR 48707). Subsequently, in the CY 
2016 PFS final rule, we removed the distinction between failures to 
obtain missing signatures that were inadvertent and not inadvertent, 
thereby allowing all parties up to 90 days to obtain the missing 
signatures (80 FR 71333). As discussed in further detail in this 
section of the proposed rule, in the FY 2019 PFS final rule, we removed 
the provision limiting the use of the special rule at Sec.  411.353(g) 
to once every 3 years with respect to the same physician (83 FR 59715 
through 59717).
    In the CY 2016 PFS final rule, we clarified that the writing 
requirement of various exceptions in Sec.  411.357 can be satisfied 
with a collection of documents, including contemporaneous documents 
evidencing the course of conduct between the parties (80 FR 71314 
through 71317).\5\ A commenter requested that CMS permit a 60- or 90-
day grace period for satisfying the writing requirement of an 
applicable exception, stating that such a grace period is needed for 
last minute arrangements between physicians and entities to which they 
refer patient for designated health services (80 FR 71316 through 
71317). In response, we noted that the special rule at Sec.  411.353(g) 
applied only to temporary noncompliance with the signature requirement 
of an applicable exception, and we declined to extend the special rule 
to the writing requirement of various exceptions at Sec.  411.357. We 
stated our belief that a ``grace period'' for satisfying the writing 
requirement poses a risk of program or patient abuse; for example, if 
the rate of compensation is not documented before a physician provides 
services to an entity, the entity could adjust the rate of compensation 
during the proposed grace period in a manner that takes into account 
the volume or value of the physician's referrals (80 FR 71317). We 
added that an entity could not satisfy the ``set in advance'' 
requirement at the outset of an arrangement if the only documents 
stating the compensation term of an arrangement were generated after 
the arrangement began. Finally, we reminded parties that, even if an 
arrangement is not sufficiently documented at the outset, depending on 
the facts and circumstances, contemporaneous documents created during 
the course of an arrangement may allow parties to satisfy the writing 
requirement and the ``set in advance'' requirement for referrals made 
after the contemporaneous documents were created.
---------------------------------------------------------------------------

    \5\ Our guidance on the writing requirement was subsequently 
codified in statute at section 1877(h)(1)(D) of the Act and 
incorporated into our regulations at Sec.  411.354(e). See CY 2019 
PFS final rule (83 FR 59715 through 59717).
---------------------------------------------------------------------------

    Section 50404 of the Bipartisan Budget Act of 2018 (Pub. L. 115-
123, enacted February 9, 2018) added provisions to section 1877(h)(1) 
of the Act pertaining to the writing and signature requirements in 
certain compensation arrangement exceptions. As amended, section 
1877(h)(1)(D) of the Act provides that the writing requirement in 
various compensation arrangement exceptions ``shall be satisfied by 
such means as determined by the Secretary,'' including by a collection 
of documents, including contemporaneous documents evidencing the course 
of conduct between the parties. Section 1877(h)(1)(E) of the Act 
created a statutory special rule for temporary noncompliance with 
signature requirements, providing that the signature requirement of an 
applicable compensation arrangement exception shall be satisfied if the 
arrangement otherwise complies with all the requirements of the 
exception and the parties obtain the required signatures no later than 
90 consecutive calendar days immediately following the date on which 
the compensation arrangement became noncompliant. In the CY 2019 PFS 
final rule, we finalized at Sec.  411.354(e) a special rule on 
compensation arrangements, which codified in our regulations the 
clarification of the writing requirement found at section 1877(h)(1)(D) 
of the Act (83 FR 59715 through 59717). In addition, we removed the 3-
year limitation on the special rule on temporary noncompliance with 
signature requirements at Sec.  411.353(g)(2) in order to align the 
regulatory provision at Sec.  411.353(g) with section 1877(h)(1)(E) of 
the Act. We proposed, in the alternative, to delete Sec.  411.353(g) in 
its entirety and to codify section 1877(h)(1)(E) of the Act in the 
newly created special rules on compensation arrangements at Sec.  
411.354(e). However, we declined to finalize the alternative proposal 
in the CY 2019 PFS final rule, because we believed it would be less 
disruptive to stakeholder compliance efforts to amend the already-
existing Sec.  411.353(g).
    We have reconsidered our policy on temporary noncompliance with the 
signature and writing requirements of

[[Page 55814]]

various compensation arrangement exceptions. In our administration of 
the SRDP, we have reviewed numerous compensation arrangements that 
fully satisfied all the requirements of an applicable exception, 
including requirements pertaining to fair market value compensation and 
the volume or value of referrals, except for the writing or signature 
requirements. In many cases, there are short periods of noncompliance 
with the physician self-referral law at the outset of a compensation 
arrangement, because the parties begin performance under the 
arrangement before reducing the key terms and conditions of the 
arrangement to writing. As long as the arrangement otherwise meets all 
the requirements of an applicable exception, and the parties 
memorialize the arrangement in writing and sign the written 
documentation within 90 days, we do not believe that the arrangement 
poses a risk of program or patient abuse. Therefore, we believe that 
entities and physicians should be provided flexibility under our rules 
to satisfy the writing or signature requirement of an applicable 
exception within 90 calendar days of the inception of a compensation 
arrangement.
    Relying on our authority at section 1877(h)(1)(D) of the Act, which 
grants the Secretary the authority to determine the means by which the 
writing requirement of a compensation arrangement exception may be 
satisfied, and section 1877(h)(1)(E) of the Act, which establishes a 
statutory rule for temporary noncompliance with signature requirements, 
we are proposing to create a special rule for noncompliance with the 
writing or signature requirement of an applicable compensation 
arrangement exception. Specifically, we are proposing to delete Sec.  
411.353(g) in its entirety, codify the statutory rule for noncompliance 
with signature requirements at section 1877(h)(1)(E) of the Act in a 
special rule on compensation arrangements at Sec.  411.354(e)(3), and 
incorporate a special rule for noncompliance with the writing 
requirement into the new special rule at Sec.  411.354(e)(3). Under 
this proposal, the writing requirement or the signature requirement 
would be deemed to be satisfied if: (1) The compensation arrangement 
satisfies all requirements of an applicable exception other than the 
writing or signature requirement(s); and (2) the parties obtain the 
required writing or signature(s) within 90 consecutive calendar days 
immediately after the date on which the arrangement failed to satisfy 
the requirement(s) of the applicable exception. We note that the 
writing and signature requirements would not be mutually exclusive 
under the proposal; that is, a party could rely on proposed Sec.  
411.354(e)(3) if an arrangement was neither in writing nor signed at 
the outset, provided both the required writing and signature(s) were 
obtained within 90 days and the arrangement otherwise satisfied all the 
requirements of an applicable exception. For arrangements that are 90 
days or less, such as short term arrangements as permitted under the 
exception for fair market value compensation at Sec.  411.357(l), if 
the parties never obtain the required writing or signature(s), the 
arrangement could never have complied with an exception in Sec.  
411.357 that includes a writing or signature requirement; therefore, 
the special rule at Sec.  411.354(e)(3) is not available to protect 
such arrangements. However, depending on the facts and circumstances, 
the proposed exception for limited remuneration at Sec.  411.357(z), 
which does not include a writing or signature requirement, if 
finalized, might be available to protect the short term arrangement.
    We remind readers that, as we explained in the CY 2016 PFS final 
rule and subsequently codified at Sec.  411.354(e)(2), a single formal 
written contract is not necessary to satisfy the writing requirement 
(80 FR 71314 through 71317). Depending on the facts and circumstances, 
the writing requirement can be satisfied by a collection of documents, 
including contemporaneous documents evidencing the course of conduct 
between the parties. In this context, parties may rely on the special 
rule at Sec.  411.354(e)(3) like a safe harbor to be sure that they 
have met the writing or signature requirements of an applicable 
exception. The special rule would not be the only way to show 
compliance with the writing or signature requirements.
    The proposal to permit parties up to 90 days to satisfy the writing 
requirement of an applicable exception does not amend, nor does it 
affect, the requirement under various exceptions in Sec.  411.357 that 
compensation be set in advance, including the special rule on 
compensation that is considered to be set in advance at Sec.  
411.354(d)(1). For an arrangement to be protected by proposed Sec.  
411.354(e)(3), the amount of or formula for calculating the 
compensation must be set in advance and the arrangement must satisfy 
all other requirements of an applicable exception, other than the 
writing or signature requirements. Section 1877(h)(1)(D) of the Act 
provides the Secretary with the authority to determine the means by 
which the writing requirement of various compensation arrangement 
exceptions may be satisfied, but it does not provide the Secretary 
similar authority with respect to the set in advance requirement. 
Moreover, we believe the ``set in advance'' requirement is necessary to 
prevent the amount of compensation paid under an arrangement from 
fluctuating in a manner that takes into account the volume or value of 
a physician's referrals over the course of the arrangement, including 
the first 90 days.
    While we are not proposing to amend the special rule on 
compensation that is considered to be set in advance at Sec.  
411.354(d)(1), we are taking this opportunity to reiterate that the 
special rule is merely a deeming provision (see Phase II, 69 FR 16070). 
That is, while compensation is considered to be set in advance under 
Sec.  411.354(d)(1) if the compensation is ``set out in writing before 
the furnishing of items or services'' and the other requirements of 
Sec.  411.354(d)(1) are met, in order to satisfy the ``set in advance'' 
requirement included in various exceptions in Sec.  411.357, it is not 
necessary that the parties reduce the compensation to writing before 
the furnishing of items or services. For example, assume that the 
parties to an arrangement agree on the rate of compensation before the 
furnishing of items or services, but do not reduce the compensation 
rate to writing at that point in time. Assume further that the first 
payment under the arrangement is documented and that, under proposed 
Sec.  411.354(e)(3), during the 90-day period after the items or 
services are initially furnished, the parties compile sufficient 
documentation of the arrangement to satisfy the writing requirement of 
an applicable exception. Finally, assume that the written documentation 
compiled during the 90-day period provides for a rate of compensation 
that is consistent with the documented amount of the first payment, 
that is, the rate of compensation did not change during the 90-day 
period. Under these specific circumstances, we would consider the 
compensation to be set in advance. More broadly speaking, records of a 
consistent rate of payment over the course of an arrangement, from the 
first payment to the last, typically support the inference that the 
rate of compensation was set in advance. To the extent that our 
preamble discussion in the CY 2016 PFS final rule suggested that the 
rate of compensation must be set out in writing before the furnishing 
of items or services in order to meet the

[[Page 55815]]

``set in advance'' requirement of an applicable exception, we are 
retracting that statement (80 FR 71317).
    We also note that there are many ways in which the amount of or a 
formula for calculating the compensation under an arrangement can be 
documented before the furnishing of items or services. It is not 
necessary that the document stating the amount of or a formula for 
calculating the compensation, taken by itself, satisfies the writing 
requirement at Sec.  411.354(e)(2); the document stating the amount of 
or a formula for calculating the compensation may be one document among 
many which, taken together, constitute a collection of documents 
sufficient to satisfy the writing requirement at Sec.  411.354(e)(2). 
For example, depending on the facts and circumstances, informal 
communications via email or text, internal notes to file, similar 
payments between the parties from prior arrangements, generally 
applicable fee schedules, or other documents recording similar payments 
to or from other similarly situated physicians for similar items or 
services, may be sufficient to establish that the amount of or a 
formula for calculating the compensation was set in advance before the 
furnishing of items or services. Even if the amount of or a formula for 
calculating the compensation is not set in advance, depending on the 
facts and circumstances, the parties may be able to rely on the newly 
proposed exception for limited remuneration to a physician at Sec.  
411.357(z), if finalized. If proposed Sec.  411.357(z) is finalized, 
and an entity initially pays a physician for services relying on the 
exception for limited remuneration to a physician, if the parties 
subsequently decide to continue the arrangement relying on an exception 
that requires the compensation to be set in advance, such as the 
exception for personal services arrangements at Sec.  411.357(d)(1), 
depending on the facts and circumstances, the parties may be able to 
use documentation of the initial payments made while relying on Sec.  
411.357(z) to establish that the amount of or a formula for calculating 
the compensation was set in advance before the furnishing of services 
under the personal service arrangement.
    Finally, we are taking this opportunity to clarify our longstanding 
policy that an electronic signature that is legally valid under Federal 
or State law is sufficient to satisfy the signature requirement of 
various exceptions in our regulations. We also note that the collection 
of writings that parties may rely on under Sec.  411.354(e)(2) to 
satisfy the writing requirement of our exceptions can include documents 
and records that are stored electronically. We are soliciting comments 
on whether we should include specific regulation text at Sec.  
411.354(e) to reflect our policy on electronic signatures and 
documents.
6. Exceptions for Rental of Office Space and Rental of Equipment (Sec.  
411.357(a) and (b))
    Section 1877(e)(1) of the Act establishes an exception to the 
physician self-referral law's referral and billing prohibitions for 
certain arrangements involving the rental of office space or equipment. 
Among other things, sections 1877(e)(1)(A)(ii) and (e)(1)(B)(ii) of the 
Act require the office space or equipment to be used exclusively by the 
lessee when being used by the lessee. The exclusive use requirements 
are incorporated into our regulations at Sec.  411.357(a)(3) and 
(b)(2).
    In the 1998 proposed rule, we stated our belief that the exclusive 
use requirement in the statute was meant to prevent ``paper leases,'' 
where payment passes from a lessee to a lessor, even though the lessee 
is not actually using the office space or equipment (63 FR 1714). In 
Phase II, we further explained our interpretation of the exclusive use 
requirement (69 FR 16086). We stated that, after reviewing the 
statutory scheme, we believe that the purpose of the exclusive use 
requirement was to ensure that the rented office space or equipment 
cannot be shared with the lessor when it is being used or rented by the 
lessee (or any subsequent sublessee). In other words, a lessee (or 
sublessee) cannot ``rent'' office space or equipment that the lessor 
will be using concurrently with, or in lieu of, the lessee (or 
sublessee). We added that we were concerned that unscrupulous 
physicians or physicians groups might attempt to skirt the exclusive 
use requirement by establishing holding companies to act as lessors. To 
foreclose this possibility, we modified the exclusive use requirements 
at Sec.  411.357(a)(3) and (b)(2), to stipulate that the rented office 
space or equipment may not be ``shared with or used by the lessor or 
any person or entity related to the lessor'' when the lessee is using 
the office space or equipment.
    Disclosures to the SRDP have included several arrangements where 
multiple lessees use the same rented office space or equipment either 
contemporaneously or in close succession to one another, while the 
lessor is excluded from using the premises or equipment. At least one 
entity disclosed that it had invited a physician who was not the lessor 
into its office space to treat a mutual patient for the patient's 
convenience. The disclosing parties assumed that the arrangements 
violated the physician self-referral law, because, based on their 
understanding of the exceptions at Sec.  411.357(a) and (b), the 
arrangements did not satisfy the exclusive use requirement of the 
applicable exception. As noted in the 1998 proposed rule and in Phase 
II, the purpose of the exclusive use rule is to prevent sham leases 
where a lessor ``rents'' space or equipment to a lessee, but continues 
to use the space or equipment during the time period ostensibly 
reserved for the lessee. We do not interpret sections 1877(e)(1)(A)(ii) 
and (B)(ii) of the Act to prevent multiple lessees from using the 
rented space or equipment at the same time, so long as the lessor is 
excluded, nor do we interpret sections 1877(e)(1)(A)(ii) and (B)(ii) of 
the Act to prohibit a lessee from inviting a party other than the 
lessor (or any person or entity related to the lessor) to use the 
office space or equipment rented by the lessee. Moreover, we do not 
believe it would pose a risk of program or patient abuse for multiple 
lessees (and their invitees) to use the space or equipment to the 
exclusion of the lessor, provided that the arrangements satisfy all 
requirements of the applicable exception for the rental of office space 
or equipment, and any financial relationships between the lessees (or 
their invitees) that implicate the physician self-referral law likewise 
satisfy the requirements of an applicable exception. Therefore, relying 
on the Secretary's authority under section 1877(b)(4) of the Act, we 
are proposing to clarify our longstanding policy that the lessor (or 
any person or entity related to the lessor) is the only party that must 
be excluded from using the space or equipment under Sec.  411.357(a)(3) 
and 411.357(b)(2). Specifically, we are proposing to add the following 
clarification to the regulation text: For purposes of this exception, 
exclusive use means that the lessee (and any other lessees of the same 
office space or equipment) uses the office space or equipment to the 
exclusion of the lessor (or any person or entity related to the 
lessor). The lessor (or any person or entity related to the lessor) may 
not be an invitee of the lessee to use the office space or the 
equipment.
7. Exception for Physician Recruitment (Sec.  411.357(e))
    Section 1877(e)(5) of the Act established an exception for 
remuneration provided by a hospital to a physician to induce the 
physician to relocate to the geographic area served by

[[Page 55816]]

the hospital in order to be a member of the hospital's medical staff. 
The exception at section 1877(e)(5) of the Act authorizes the Secretary 
to impose additional requirements on recruitment arrangements as needed 
to protect against program or patient abuse. The 1995 final rule 
incorporated the provisions of section 1877(e)(5) of the Act into our 
regulations at Sec.  411.357(e). As finalized in the 1995 final rule, 
Sec.  411.357(e) requires the recruitment arrangement to be in writing 
and signed by both parties, that is, the recruited physician and the 
hospital.
    In Phase II, we substantially modified Sec.  411.357(e). Relying on 
our authority under section 1877(b)(4) of the Act, we expanded the 
exception at Sec.  411.357(e)(4) to address remuneration from a 
hospital (or a federally qualified health center (FQHC), which was 
added as a permissible recruiting entity under Phase II) to a physician 
who joins a physician practice. There, we established requirements for 
recruitment arrangements under which remuneration is provided by a 
hospital or FQHC indirectly to a physician through payments made to his 
or her physician practice as well as directly to the physician who 
joins a physician practice (69 FR 16094 through 16095). When payment is 
made to a physician indirectly through a physician practice that the 
recruited physician joins, the practice is permitted to retain actual 
costs incurred by the practice in recruiting the physician under Sec.  
411.357(e)(4)(ii), and, in the case of an income guarantee made by the 
hospital or FQHC to the recruited physician, the practice may also 
retain the actual additional incremental costs attributable to the 
recruited physician under Sec.  411.357(e)(4)(iii). Under the Phase II 
regulation, if a recruited physician joined a physician practice, Sec.  
411.357(e)(4)(i) required the party to whom the payments are directly 
made (that is, the physician practice that the recruited physician 
joins) to sign the written recruitment agreement (69 FR 16139).
    In Phase III, we responded to a commenter who requested 
clarification with respect to who must sign the writing documenting the 
physician recruitment arrangement (72 FR 51012). The commenter's 
concern was that Sec.  411.357(e)(4)(i) could be interpreted to require 
that the recruiting entity (in the commenter's example, a 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 to the transaction costs of the recruitment. The commenter 
suggested that we require a written agreement between the hospital and 
either the recruited physician or the physician practice to which the 
payments would be made or, in the alternative, that we should permit 
the hospital and the physician practice receiving the payments to sign 
a written recruitment agreement and require the recruited physician to 
sign a one-page acknowledgment agreeing to be bound by the terms and 
conditions set forth in that agreement. We responded that the exception 
for physician recruitment requires a writing that is signed by all 
parties, including the recruiting hospital (or FQHC or rural health 
clinic, which was added as a permissible recruiting entity under Phase 
III), the recruited physician, and the physician practice that the 
physician will be joining, if any, and explained that nothing in the 
regulations precluded execution of the agreement in counterparts.
    We have reconsidered our position regarding the signature 
requirement at Sec.  411.357(e)(4)(i). In the SRDP, we have seen 
arrangements in which a physician practice that hired a physician who 
was recruited by a hospital (or FQHC or rural health clinic) did not 
receive any financial benefit as a result of the hospital and 
physician's recruitment arrangement. Examples of such arrangements 
include arrangements under which: (1) The recruited physician joined a 
physician practice but the hospital paid the recruitment remuneration 
to the recruited physician directly; (2) remuneration was transferred 
from the hospital to the physician practice, but the practice passed 
all of the remuneration from the hospital to the recruited physician 
(that is, the practice served merely as an intermediary for the 
hospital's payments to the recruited physician and did not retain any 
actual costs for recruitment, actual additional incremental costs 
attributable to the recruited physician, or any other remuneration); 
and (3) the recruited physician joined the physician practice after the 
period of the income guarantee but before the physician's ``community 
service'' repayment obligation was completed. In each of the 
arrangements disclosed to the SRDP, the arrangement was determined by 
the disclosing party not to satisfy the requirements of the exception 
at Sec.  411.357(e) solely because the physician practice that the 
recruited physician joined had not signed the writing evidencing the 
arrangement. We do not believe, however, that, under the circumstances 
described by parties disclosing to the SRDP, there exists a 
compensation arrangement between the physician practice and the 
hospital (or FQHC or rural health clinic) of the type against which the 
statute is intended to protect; that is, the type of financial self-
interest that impacts a physician's medical decision making. Because 
the physician practice is not receiving a financial benefit from the 
recruitment arrangement, we do not believe it is necessary for the 
physician practice to also sign the writing documenting the recruitment 
arrangement between the recruited physician and the hospital (or FQHC 
or rural health clinic) in order to protect against program or patient 
abuse. We also believe that eliminating the signature requirement for a 
physician practice that receives no financial benefit under the 
recruitment arrangement would reduce undue burden without posing a risk 
of program and patient abuse. For these reasons, we are proposing to 
modify the signature requirement at Sec.  411.357(e)(4)(i). We are 
proposing to require the physician practice to sign the writing 
documenting the recruitment arrangement, if the remuneration is 
provided indirectly to the physician through payments made to the 
physician practice and the physician practice does not pass directly 
through to the physician all of the remuneration from the hospital.
8. Exception for Remuneration Unrelated to the Provision of Designated 
Health Services (Sec.  411.357(g))
    Under section 1877(e)(4) of the Act, remuneration provided by a 
hospital to a physician does not create a compensation arrangement for 
purposes of the physician self-referral law, if the remuneration does 
not relate to the provision of designated health services. The 
statutory exception is codified in our regulations at Sec.  411.357(g). 
Our prior rulemaking regarding Sec.  411.357(g) has been based in part 
on an interpretation of the legislative history of section 1877(e)(4) 
of the Act. In order to explain the changes we are currently proposing 
to Sec.  411.357(g), it is necessary to examine the legislative history 
of section 1877(e)(4) of the Act and certain provisions that preceded 
it.
    As originally enacted by OBRA 1989, the referral and billing 
prohibitions of the physician self-referral law applied only to 
clinical laboratory services. OBRA 1989 created three general 
exceptions for both ownership and compensation arrangements at sections 
1877(b)(1) through (3) of the Act, and granted the Secretary the 
authority at section 1877(b)(4) of the Act to create additional 
exceptions. Section 42017(e) of OBRA 1990 (Pub. L. 101-508) 
redesignated section 1877(b)(4) as 1877(b)(5) of the Act, and added an 
exception at section 1877(b)(4) of the

[[Page 55817]]

Act for financial relationships with hospitals that are unrelated to 
the provision of clinical laboratory services. (To avoid confusion 
between the exception added by OBRA 1990 at section 1877(b)(4) of the 
Act and section 1877(b)(4) of the Act as it currently exists, the 
exception for financial relationships unrelated to the provision of 
clinical laboratory services enacted by OBRA 1990 is referred to herein 
as the ``OBRA 1990 exception.'') The OBRA 1990 exception applied to 
both ownership or investment interests and compensation arrangements, 
and excepted financial relationships between physicians (or immediate 
family members of physicians) and hospitals that did not relate to the 
provision of clinical laboratory services. OBRA 1993 eliminated the 
OBRA 1990 exception, but the Social Security Act Amendments of 1994 
(Pub. L. 103-432) (SSA 1994) reinstated the exception through January 
1, 1995.
    In place of the OBRA 1990 exception, OBRA 1993 added a new 
exception at section 1877(e)(4) of the Act. Under section 1877(e)(4) of 
the Act, remuneration provided by a hospital to a physician that does 
not relate to the provision of designated health services is not 
considered a compensation arrangement for purposes of the referral and 
billing prohibitions. Although there are certain similarities between 
section 1877(e)(4) of the Act and the OBRA 1990 exception, the 
exception at section 1877(e)(4) of the Act is narrower than the OBRA 
1990 exception in several important respects: (1) The OBRA 1990 
exception excepts both ownership interests and compensation 
arrangements between hospitals and physicians, whereas section 
1877(e)(4) of the Act applies only to compensation arrangements under 
which remuneration passes from the hospital to the physician; (2) the 
OBRA 1990 exception protects a broad range of financial relationships 
that are unrelated to the provision of clinical laboratory services, 
whereas section 1877(e)(4) of the Act has a narrower application, 
applying only to remuneration unrelated to the provision of designated 
health services; and (3) the OBRA 1990 exception applies to financial 
relationships between entities and physicians or their immediate family 
members, whereas section 1877(e)(4) of the Act applies only to 
compensation arrangements with physicians.
    In the 1998 proposed rule, we proposed to revise our regulation at 
Sec.  411.357(g) to reflect our interpretation of section 1877(e)(4) of 
the Act (63 FR 1702). (The prior regulation at Sec.  411.357(g) was 
based on former sections 1877(b)(4) and (e)(4) of the Act as they were 
effective on January 1, 1992 (63 FR 1669).) We stated that, for 
remuneration from a hospital to a physician to be excepted under Sec.  
411.357(g), the remuneration must be ``completely unrelated'' to the 
furnishing of designated health services. We clarified that the 
remuneration could not in any direct or indirect way involve designated 
health services, and further that the exception would not apply in any 
situation involving remuneration that might have a nexus with the 
provision of, or referrals for, a designated health service (63 FR 
1702). We further stated that the remuneration could in no way reflect 
the volume or value of a physician's referrals, and that payments to 
physicians that were ``inordinately high'' or above fair market value 
would be presumed to be related to the furnishing of designated health 
services. We provided the following examples of remuneration that might 
be completely unrelated to the furnishing of designated health services 
and excepted under Sec.  411.357(g): (1) Fair market value rental 
payments made by a teaching hospital to a physician to rent his or her 
house in order to use the house as a residence for a visiting faculty 
member; and (2) compensation for teaching, general utilization review, 
or administrative services.
    In Phase II, we finalized the exception at Sec.  411.357(g) with 
modifications (69 FR 16093 through 16094). As finalized, in addition to 
requiring that the remuneration does not in any way take into account 
the volume or value of the physician's referrals, Sec.  411.357(g) 
requires that the remuneration is wholly unrelated (that is, neither 
directly nor indirectly related) to the furnishing of designated health 
services. The regulation stipulates that remuneration relates to the 
furnishing of designated health services 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. We stated that we incorporated 
cost reporting principles in the regulation in order to provide the 
industry with bright-line rules to determine whether remuneration is 
related to the furnishing of designated health services (69 FR 16093). 
At the same time, we retracted the statement from the 1998 proposed 
rule that general utilization review or administrative services might 
not be related to the furnishing of designated health services. We 
justified our narrow interpretation of section 1877(e)(4) of the Act on 
the legislative history of the exception, noting that, initially, under 
the original statute, the exception was necessary to insulate a 
hospital's relationships with physicians that were unrelated to the 
provision of clinical laboratory services, a very small element of a 
hospital's practice. We continued that, since 1995, however, all 
hospital services are designated health services and a narrower 
interpretation of the exception is required to prevent abuse (69 FR 
16093). We have made no changes to Sec.  411.357(g) since Phase II. 
Commenters on Phase II stated that the Congress intended hospitals to 
be able to provide any amount of remuneration to physicians, provided 
that the remuneration did not directly relate to designated health 
services. In Phase III, based on our interpretation of the legislative 
history at that time, we reaffirmed our narrow interpretation of 
section 1877(e)(4) of the Act (72 FR 51056).
    Based on our review of the statutory history of the OBRA 1990 
exception and section 1877(e)(4) of the Act, and comments we received 
on our CMS RFI, we are proposing certain modifications to the exception 
at Sec.  411.357(g) to broaden the application of the exception. As a 
preliminary matter, we agree with the statement in Phase II that the 
exception at section 1877(e)(4) of the Act is significantly narrower 
than the OBRA 1990 exception. There are many financial relationships 
between hospitals and physicians that would be permissible under the 
OBRA 1990 exception because they do not relate, directly or indirectly, 
to the provision of clinical laboratory services. On the other hand, 
insofar as the exception at section 1877(e)(4) of the Act requires the 
remuneration to be unrelated to the provision of designated health 
services, and OBRA 1993 defines this term to include inpatient and 
outpatient services, the scope of protected compensation arrangements 
under section 1877(e)(4) of the Act is much narrower than that of the 
OBRA 1990 exception. Generally speaking, most financial relationships 
between hospitals and physicians relate to the furnishing of designated 
health services, in particular, inpatient or outpatient hospital 
services. That being said, we must also consider that OBRA 1993 did not 
merely strike the term ``clinical

[[Page 55818]]

laboratory services'' in the OBRA 1990 exception and substitute the 
term ``designated health services.'' Rather, OBRA 1993 eliminated the 
OBRA 1990 exception and created a new (albeit somewhat similar) 
exception at section 1877(e)(4) of the Act. In light of this statutory 
history, we believe that the most accurate interpretation of section 
1877(e)(4) of the Act is not as a carryover of the 1990 OBRA exception 
into the significantly revised statutory regime established by OBRA 
1993. Rather, we believe that section 1877(e)(4) of the Act should be 
interpreted as a new exception that was intentionally created by the 
Congress in OBRA 1993, the very same legislation in which the Congress 
expanded the referral and billing prohibition of the physician self-
referral law to inpatient and outpatient hospital services. In creating 
a new exception for remuneration unrelated to the provision of 
designated health services and expanding the definition of ``designated 
health services'' to include inpatient and outpatient hospital 
services, we believe that the Congress intended the exception to apply 
to a narrow--but not empty--subset of compensation arrangements between 
hospitals and physicians.
    According to commenters that responded to the CMS RFI, current 
Sec.  411.357(g) has an extremely limited application. Several 
commenters stated that it is not clear what remuneration, if any, is 
permissible under the exception, if the exception does not apply to any 
item, cost, or service that could be allocated to Medicare or Medicaid 
under cost reporting principles, or to remuneration that is offered in 
any preferential or selective manner whatsoever. After reconsidering 
the matter, we agree with the commenters that the current exception is 
too restrictive.
    To give appropriate meaning to the statutory exception at section 
1877(e)(4) of the Act, we are proposing to delete the current 
provisions at Sec.  411.357(g)(1) and (2) in their entirety and to 
remove the phrase ``directly or indirectly'' from the regulation text. 
In place of existing Sec.  411.357(g)(1) and (2), we are proposing 
language that incorporates the concept of patient care services as the 
touchstone for determining when remuneration for an item or service is 
related to the provision of designated health services. In particular, 
we are proposing regulation text to clarify that remuneration from a 
hospital to a physician does not relate to the provision of designated 
health services if the remuneration is for items or services that are 
not related to patient care services. Section 1877(e)(4) of the Act 
specifically excepts remuneration unrelated to the provision of 
designated health services. For purposes of applying the exception at 
section Sec.  411.357(g), we are interpreting section 1877(e)(4) of the 
Act to except remuneration unrelated to the act or process of providing 
designated health services, a concept which is not as all-encompassing 
as remuneration that is unrelated in any manner whatsoever to 
designated health services. We believe that patient care services 
provided by a physician, when the physician is acting in his or her 
capacity as a medical professional, are integrally related to the act 
or process of providing designated health services, regardless of 
whether such services are provided to patients of the hospital; thus, 
payment for such services relates to the provision of designated health 
services. Likewise, we believe that items that are used in the act or 
process of furnishing patient care services are integrally related to 
the provision of designated health services, and payments for such 
items relate to the provision of designated health services. On the 
other hand, we believe that remuneration from a hospital to a physician 
for services that are not patient care services or items that are not 
used in the act or process of providing designated health services does 
not relate to the provision of designated health services and would, 
therefore, not be prohibited under section 1877(e)(4) of the Act or our 
regulations at proposed Sec.  411.357(g) (provided that the 
remuneration is not determined in any manner that takes into account 
the volume or value of the physician's referrals).
    We believe that the concept of patient care services, as further 
specified in the proposed regulation text and as explained in this 
section of the proposed rule, provides a determinant and practicable 
principle for applying Sec.  411.357(g) to compensation arrangements 
between hospitals and physicians. We note that the proposed regulation 
at Sec.  411.357(g) retains the requirement that the remuneration is 
not determined in any manner that takes into account the volume or 
value of the physician's referrals. Remuneration that is determined in 
a manner that takes into account the volume or value of a physician's 
referrals clearly relates to the provision of designated health 
services, regardless of the nature of the item or service for which the 
physician receives remuneration. Thus, the proposed provisions at Sec.  
411.357(g)(2) and (g)(3), which are intended to clarify when 
remuneration does not relate to the provision of designated health 
services, do not apply to any remuneration that is determined in a 
manner that takes into account the volume or value of a physician's 
referrals.
    We believe that remuneration from a hospital to a physician that 
pertains to the physician's patient care services is the paradigm of 
remuneration that relates to the provision of designated health 
services. Most obviously, when a physician provides patient care 
services to hospital patients, the physician's patient care services 
are directly correlated with the provision of designated health 
services. Thus, remuneration from the hospital to the physician for 
such services is clearly related to designated health services. 
However, there does not have to be a direct one-to-one correlation 
between a physician's services and the provision of designated health 
services in order for payments for the service to be related to the 
provision designated health services. For example, payment for 
emergency department call coverage relates to the furnishing of 
designated health services, even if the physician is not as a matter of 
fact called to the hospital to provide patient care services, because 
the hospital is paying the physician to be available to provide patient 
care services at the hospital. Similarly, medical director services 
typically include, among other things, establishing clinical pathways 
and overseeing the provision of designated health services in a 
hospital. It is our policy that payments for such services are related 
to the furnishing of designated health services for purposes of 
applying the exception at proposed Sec.  411.357(g). We also believe 
that utilization review services are closely related to patient care 
services, and for this reason, we consider remuneration for such 
services to be related to the furnishing of designated health services.
    In contrast to the services described above, we do not believe that 
the administrative services of a physician pertaining solely to the 
business operations of a hospital relate to patient care services. 
Thus, if a physician is a member of a governing board along with 
persons who are not licensed medical professionals, and the physician 
receives stipends or meals that are available to the other board 
members, it is our policy that this remuneration would not relate to 
the provision of designated health services under proposed Sec.  
411.357(g), provided the physician's compensation for the 
administrative services is not determined in a manner that takes into 
account the volume or value of his or

[[Page 55819]]

her referrals. In this instance, we believe that the dispositive factor 
in determining that a physician's services are not related to the 
provision of designated health services is that the services are also 
provided by persons who are not licensed medical professionals, and the 
physician is compensated on the same terms and conditions as the non-
medical professionals. Insofar as services may be provided by persons 
who are not licensed medical professionals, we do not believe that they 
are patient care services. To provide clarity for stakeholders, we are 
proposing a general principle at Sec.  411.357(g)(3) for determining 
when remuneration for a particular service, when provided by a 
physician, is related to the provision of designated health services. 
We believe that, if a service can be provided legally by a person who 
is not a licensed medical professional and the service is of the type 
that is typically provided by such persons, then payment for such a 
service is unrelated to the provision of designated health services and 
may be protected under proposed Sec.  411.357(g), provided that it is 
not determined in a manner that takes into account the volume or value 
of the physician's referrals. We note in this context that ``licensed 
medical professional'' includes, but is not limited to, a licensed 
physician. That is, if a service can be provided legally by both a 
physician and a medical professional who is not a physician, such as a 
registered nurse, but the service cannot be provided by a person who is 
not a licensed medical professional, it is still considered to be a 
patient care service for purposes of Sec.  411.357(g)(3). Thus, 
remuneration provided by a hospital to a physician for the service 
would not be excepted under proposed Sec.  411.357(g), notwithstanding 
the fact that the service does not have to be performed by a physician.
    With respect to remuneration from a hospital for items provided by 
a physician, typical examples of remuneration that is related to the 
provision of designated health services include rental of medical 
equipment and purchasing of medical devices from physicians. Because 
these items are used in the provision of patient care services, and the 
patient care services may be designated health services or be directly 
correlated with the provision of designated health services, 
remuneration for such items clearly relates to the provision of 
designated health services. We also believe that rental of office space 
where patient care services are provided, including patient services 
that are not necessarily designated health services, is remuneration 
related to the provision of designated health services. However, if a 
physician who joins another practice sells the furniture from his or 
her medical office to a hospital, and the hospital places the furniture 
in the hospital's facilities, as long as the payment is not determined 
in a manner that takes into account the physician's referrals, we do 
not believe that the remuneration is related to the provision of 
designated health services. Also, we continue to believe that, as first 
stated in the 1998 proposed rule, Sec.  411.357(g) (including proposed 
Sec.  411.357(g)) applies to rental payments made by a teaching 
hospital to a physician to rent his or her house in order to use the 
house as a residence for a visiting faculty member. To provide 
stakeholders with greater clarity, we are proposing to stipulate in 
regulation that remuneration provided in exchange for any item, supply, 
device, equipment, or office space that is used in the diagnosis or 
treatment of patients, or any technology that is used to communicate 
with patients regarding patient care services, is presumed to be 
related to the provision of designated health services for purposes of 
Sec.  411.357(g).
    We believe that proposed Sec.  411.357(g)(2) and (3) provide 
clarity regarding when payments for items and services relate to the 
provision of designated health services, and also give the meaning to 
the statutory exception. We believe that the requirement pertaining to 
the volume or value of a physician's referrals at Sec.  411.357(g)(1) 
will ensure that payments to a physician for items or services that are 
ostensibly not related to patient care services are not in fact 
disguised payments for the physician's referrals. We seek comments on 
our proposals, as well as other possible ways for distinguishing 
between remuneration that is related to the provision of designated 
health services and remuneration that is unrelated to the provision of 
designated health services. Specifically, we seek comment as to whether 
we should limit what we consider to be ``remuneration related to the 
provision of designated health services'' to remuneration paid 
explicitly for a physician's provision of designated health services to 
a hospital's patients.
9. Exception for Payments by a Physician (Sec.  411.357(i))
    Section 1877(e)(8) of the Act excepts payments made by a physician 
to a laboratory in exchange for the provision of clinical laboratory 
services, or to an entity as compensation for other items or services 
if the items or services are furnished at a price that is consistent 
with fair market value. The 1995 final rule (60 FR 41929) incorporated 
the provisions of section 1877(e)(8) of the Act into our regulations at 
Sec.  411.357(i). In the 1998 proposed rule, we proposed to interpret 
``other items and services'' to mean any kind of item or service that a 
physician might purchase (that is, not limited to ``services'' for 
purposes of the Medicare program in Sec.  400.202 of this Chapter), but 
not including clinical laboratory services or those items or services 
that are specifically excepted by another provision in Sec. Sec.  
411.355 through 411.357 (63 FR 1703). We stated that we did not believe 
that the Congress meant the exception for payments by a physician to 
protect financial relationships that were covered by more specific 
exceptions with specific requirements, such as the exceptions for 
rental arrangements at section 1877(e)(1) of the Act.
    In Phase II, we responded to commenters who disagreed with our 
position that the exception for payments by a physician is not 
available for arrangements involving any items or services excepted by 
another exception (69 FR 16099). We reiterated the statutory 
interpretation from the 1998 proposed rule, explaining that the 
determination that items and services addressed by another exception 
should not be covered in this exception is consistent with the overall 
statutory scheme and purpose and is necessary to prevent the exception 
for payments by a physician from negating the statute (69 FR 16099; see 
also 72 FR 51057). As a result, we made no changes to the regulation at 
Sec.  411.357(i) in Phase II. Thus, as finalized in Phase II, the 
exception for payments by a physician at Sec.  411.357(i) stated that 
the exception could not be used for items or services that are 
specifically excepted by another exception in Sec. Sec.  411.355 
through 411.357, with a parenthetical clarifying that this included the 
exception for fair market value compensation at Sec.  411.357(l). 
However, at that time, the exception for fair market value compensation 
applied only to the provision of items or services by physicians to 
entities; the exception did not apply to items or services provided by 
entities to physicians.
    Following the publication of Phase II, commenters complained that 
neither Sec.  411.357(i) nor Sec.  411.357(l) were available to protect 
many legitimate arrangements wherein physicians purchased items and 
services from entities, because: (1) The exception for payments by a 
physician was limited to the purchase of items and services not

[[Page 55820]]

specifically excepted by another exception in Sec. Sec.  411.355 
through 411.357 (including Sec.  411.357(l)); and (2) the exception for 
fair market value compensation did not apply to items or services 
provided by an entity to a physician (72 FR 51057). In response to the 
commenters, we expanded Sec.  411.357(l) in Phase III to include both 
items and services furnished by physicians to entities and items and 
services furnished by entities to physicians (72 FR 51094 through 
51095). However, Phase III did not modify the exception for payments by 
a physician,\6\ including the parenthetical indicating that Sec.  
411.357(i) could not be used for items or services specifically 
excepted under Sec.  411.357(l). We acknowledged that the expansion of 
the exception for fair market value compensation to items or services 
furnished by entities to physicians would require parties in some 
instances to rely on Sec.  411.357(l) instead of Sec.  411.357(i). We 
concluded, however, that 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 (72 FR 51057). We also emphasized in Phase 
III that the exception for payments by a physician could not be used to 
protect office space leases (72 FR 51044 through 51045). We explained 
that we did not believe that the lease of office space is an ``item or 
service'' and that parties seeking to protect arrangements for the 
rental of office space must rely on Sec.  411.357(a) (72 FR 51059). In 
2015, when we finalized the exception at Sec.  411.357(y) for timeshare 
arrangements, we reaffirmed our position that the exception for 
payments by a physician is not available for arrangements involving the 
rental of office space (80 FR 71325 through 71327).
---------------------------------------------------------------------------

    \6\ In the September 5, 2007 Federal Register, the regulation 
text of the exception for payments by a physician was modified in 
error. Phase II stated that Sec.  411.357(i) is limited to payments 
for items or services that are ``not specifically excepted by 
another provision in Sec. Sec.  411.355 through 411.357'' (69 FR 
16140). The September 5, 2007 Federal Register replaced ``excepted'' 
with ``addressed'' (72 FR 51094). The original language of the 
exception was restored in a correction notice to Phase III and 
published in the December 4, 2007 Federal Register (72 FR 68076).
---------------------------------------------------------------------------

    Commenters on the CMS RFI stated that our interpretation of the 
exception for payments by a physician, especially our determination 
that the exception is not available if any other exception would apply 
to an arrangement, unreasonably narrowed the scope of the statutory 
exception. Commenters also noted that compliance with other exceptions 
is generally more burdensome than compliance with the statutory 
exception for payments by a physician, and urged us to conform the 
language of the exception at Sec.  411.357(i) to the statutory language 
at section 1877(e)(8) of the Act. We find the CMS RFI comments 
regarding the narrowing of the statutory exception persuasive and, as a 
result, have reconsidered our position regarding the availability of 
the exception for payments by a physician for certain compensation 
arrangements.
    To explain the policies we set forth in this proposed rule 
regarding the availability of the exception at Sec.  411.357(i), it is 
important to distinguish between the statutory exceptions found at 
section 1877(e) of the Act (codified at Sec.  411.357(a) through Sec.  
411.357(i) of our regulations) and the regulatory exceptions (codified 
at Sec.  411.357(j) et seq.) issued using the Secretary's authority 
under section 1877(b)(4) of the Act.\7\ We continue to believe that the 
exception for payments by a physician at section 1877(e)(8) of the Act 
was not meant to apply to compensation arrangements that are 
specifically excepted by other statutory exceptions in section 1877 of 
the Act. Given the placement of the exception for payments by a 
physician as the final statutory exception at section 1877(e) of the 
Act, we believe that this exception functions as a catch-all to protect 
certain legitimate arrangements that are not covered by the exceptions 
at sections 1877(e)(1) through (7) of the Act. As a matter of statutory 
construction, the catch-all exception at section 1877(e)(8) of the Act 
does not supersede the previous exceptions. With respect to 
arrangements for the rental of office space or the rental of equipment, 
in particular, we note that the statutory exceptions for such 
arrangements at section 1877(e)(1) of the Act include requirements that 
are specific to rental arrangements, as well as general requirements 
that the arrangements are commercially reasonable, that rental charges 
are fair market value, and that compensation is not determined in a 
manner that takes into account the volume or value of referrals or 
other business generated between the parties. We do not believe that 
the Congress would have imposed these particularized requirements at 
section 1877(e)(1) of the Act, but also allowed parties to sidestep 
them by relying on the exception for payments by a physician to protect 
rental arrangements.
---------------------------------------------------------------------------

    \7\ Section 1877(b)(5) of the Act directs the Secretary to 
establish a regulatory exception for electronic prescribing, but 
does not provide any statutory text or specific requirements for the 
exception. Pursuant to this authority, we established an exception 
for electronic prescribing items and services at Sec.  411.357(v). 
Although Sec.  411.357(v), unlike all the other exceptions at Sec.  
411.357(j) et seq., was not issued using the Secretary's authority 
under section 1877(b)(4) of the Act, for purposes of our 
interpretation of the exception for payments by a physician, we 
treat Sec.  411.357(v) as a regulatory exception. In particular, we 
interpret section 1877(b)(5) of the Act as a grant of authority for 
the Secretary to issue a regulatory exception; it is not itself a 
statutory exception, just as section 1877(b)(4) of the Act grants 
the Secretary authority to create exceptions, but is not an 
exception in its own right.
---------------------------------------------------------------------------

    Although we maintain our policy with respect to the statutory 
exceptions, we no longer believe that the regulatory exceptions should 
limit the scope of the exception for payments by a physician. Thus, we 
are proposing to remove from Sec.  411.357(i)(2) the reference to the 
regulatory exceptions, including the parenthetical referencing the 
exception for fair market value compensation. We are also proposing 
that the exception at Sec.  411.357(i) would not be available to 
protect compensation arrangements specifically addressed by one of the 
statutory exceptions, codified in our regulations at Sec.  411.357(a) 
through (h). Under the proposal, parties would generally be able to 
rely on the exception at Sec.  411.357(i) to protect fair market value 
payments by a physician to an entity for items or services furnished by 
the entity, even if a regulatory exception at Sec.  411.357(j) et seq. 
may be applicable. However, for the reasons noted previously, Sec.  
411.357(i) would not be applicable to arrangements for the rental of 
office space or equipment.\8\ That is, we believe that, as a matter of 
statutory construction, the exception for payments by a physician is 
not available to protect any type of arrangement that is specifically 
addressed by another statutory exception at section 1877(e) of the Act, 
including arrangements for the rental of office space or the rental of 
equipment.
---------------------------------------------------------------------------

    \8\ Elsewhere in this proposed rule, we are proposing to extend 
Sec.  411.357(l) to arrangements for the rental of office space, 
including rentals of less than 1 year, provided all the requirements 
of the proposed exception are satisfied.
---------------------------------------------------------------------------

    We are retracting our prior statements that office space is neither 
an ``item'' nor a ``service.'' We made these statements, in significant 
part, to emphasize that we do not believe that the exception for 
payments by a physician should be available to protect the type of 
arrangement for which the Congress established a specific exception in 
statute. In this proposed rule, we have more clearly explained this 
position and no longer believe it is

[[Page 55821]]

necessary to preclude office space from the categories of ``items'' and 
``services.'' (We note that we have not made prior similar statements 
regarding equipment.) As such, and because the exception at Sec.  
411.357(i) is unavailable to protect an arrangement for the rental of 
office space or equipment, parties seeking to protect an arrangement 
for the rental of office space or equipment must structure the 
arrangement to satisfy the requirements of Sec.  411.357(a), Sec.  
411.357(b), Sec.  411.357(l) (for direct compensation arrangements), or 
Sec.  411.357(p) (for indirect compensation arrangements). We note 
that, under our proposal, Sec.  411.357(i) may be available to protect 
payments by a physician for the lease or use of space that is not 
office space, such as storage space or residential real estate.
    We are also proposing to remove from Sec.  411.357(i)(2) the 
reference to exceptions in Sec. Sec.  411.355 and 411.356. As noted 
previously, we believe that the exception at section 1877(e)(8) of the 
Act for payments by a physician functions in the statutory scheme as a 
catch-all, to apply to compensation arrangements for the furnishing of 
other items or services by entities that are not specifically addressed 
at sections 1877(e)(1) through (7) of the Act. Therefore, we no longer 
believe that the exception should be limited by the exceptions at 
sections 1877(b) and (c) of the Act or the regulatory exceptions 
codified in Sec. Sec.  411.355 and 411.356.
    Lastly, we would like to stress that the ``items or services'' 
furnished by the entity under the exception for payments by a physician 
may not include cash or cash equivalents. That is, the physician may 
not make in-kind ``payments'' to the entity in exchange for cash from 
the entity. We believe that cash provided by an entity to a physician 
poses a risk of program or patient abuse, and that the Congress would 
have included additional safeguards at section 1877(e)(8) of the Act if 
the exception were designed to cover such arrangements. At the same 
time, we note that, if a physician pays an entity $10 in cash for a 
gift card worth $10, we do not believe that this would constitute a 
financial relationship for purposes of the physician self-referral law. 
Likewise, in cases where a physician or an entity acts as a pure pass-
through, taking money from one party and passing the exact same amount 
of money to another party, we do not believe that the pass-through 
arrangement is a financial relationship for purposes of the physician 
self-referral law.
10. Exception for Fair Market Value Compensation (Sec.  411.357(l))
    In the 1998 proposed rule, we proposed an exception at Sec.  
411.357(l) for fair market value compensation (63 FR 1699). We noted 
that the statutory exceptions at section 1877(e) of the Act apply to 
specific categories of financial relationships and do not address many 
common and legitimate compensation arrangements between physicians and 
the entities to which they refer designated health services. The 
exception for fair market value compensation was proposed as an open-
ended exception to protect certain compensation arrangements that may 
not be specifically addressed in the statutory exceptions. Among other 
things, we stated that the exception might be used to protect 
arrangements for the sublease of office space (63 FR 1714). We 
suggested that parties could use the exception for fair market value 
compensation if they had any doubts about whether they met the 
requirements of another exception in Sec.  411.357.
    In Phase I, we finalized Sec.  411.357(l), stating that parties 
could use the exception, even if another exception potentially applied 
to an arrangement (66 FR 919). We explained our belief that the 
safeguards incorporated into the exception for fair market value 
compensation were sufficient to cover various compensation 
arrangements, including arrangements covered by other exceptions. In 
Phase II, we responded to commenters who requested that the exception 
at Sec.  411.357(l) be made available to protect arrangements for the 
rental of office space, including arrangements where space is rented by 
entities to physicians (69 FR 16111). We declined to extend Sec.  
411.357(l) to arrangements for the rental of office space, and 
emphasized that Sec.  411.357(l) applied only to payments from an 
entity to a physician for items and services furnished by the 
physician. We modified our policy in Phase III and extended the 
application of the exception at Sec.  411.357(l) to payments from a 
physician to an entity for items or services provided by the entity, 
but continued to decline to make Sec.  411.357(l) applicable to an 
arrangement for the rental of office space (72 FR 51059 through 51060). 
As noted previously, we explained that the rental of office space is 
not an ``item or service.'' We added that, because arrangements for the 
rental of office space had been subject to abuse, we believed that it 
could pose a risk of program or patient abuse to permit parties to 
protect such arrangements relying on Sec.  411.357(l). In the CY 2016 
PFS final rule, we reaffirmed our position that the exception for fair 
market value compensation does not apply to arrangements for the rental 
of office space (80 FR 71327).
    We have reconsidered our policy regarding the application of Sec.  
411.357(l). Through our administration of the SRDP, we have seen 
legitimate, nonabusive arrangements for the rental of office space that 
could not satisfy the requirements of Sec.  411.357(a) because the term 
of the arrangement was less than 1 year, and could not satisfy the 
requirements of Sec.  411.357(y) because the arrangement conveyed a 
possessory leasehold interest in the office space. To provide 
flexibility to stakeholders to protect such nonabusive arrangements, we 
are proposing to make Sec.  411.357(l) available to protect 
arrangements for the rental or lease of office space.
    As discussed in many of our previous rulemakings and most recently 
in the CY 2017 PFS proposed rule (81 FR 46448 through 46453) and final 
rule (81 FR 80524 through 80534), we are concerned about potential 
abuse that may arise when rental charges for the lease of office space 
or equipment are determined using a formula based on: (1) A percentage 
of the revenue raised, earned, billed, collected, or otherwise 
attributable to the services performed or business generated in the 
office space (a ``percentage-based compensation formula''); or (2) per-
unit of service rental charges, to the extent that such charges reflect 
services provided to patients referred by the lessor to the lessee (a 
``per-click compensation formula''). We stated that arrangements based 
on percentage compensation or per-unit of service compensation formulas 
present a risk of program or patient abuse because they may incentivize 
overutilization and patient steering. To address this risk, in the FY 
2009 IPPS final rule, we included in the exceptions for the rental of 
office space, the rental of equipment, fair market value compensation, 
and indirect compensation arrangements restrictions on percentage-based 
compensation and per-click compensation formulas when determining the 
rental charges for the lease of equipment. Because the exception at 
Sec.  411.357(l), to date, has not been applicable to arrangements for 
the rental of office space, it does not include a prohibition on 
percentage-based compensation and per-click compensation formulas when 
determining the rental charges for the lease of office space. (The 
exceptions for the rental of office space and indirect compensation 
arrangements currently include the prohibitions as they relate to

[[Page 55822]]

the determination of rental charges for the lease of office space.) We 
remain concerned about the potential abuse related to percentage-based 
compensation and per-click compensation formulas for determining the 
rental charges of both office space and equipment. Therefore, we are 
proposing to incorporate into the exception at Sec.  411.357(l) 
prohibitions on percentage-based compensation and per-unit of service 
compensation formulas with respect to the determination of rental 
charges for the lease of office space, similar to the restrictions 
found in Sec.  411.357(a)(5)(ii) and Sec.  411.357(p)(1)(ii).
    Unlike the exception for the rental of office space at Sec.  
411.357(a), the exception for fair market value compensation does not 
require a 1-year term. Therefore, short-term arrangements for the 
rental of office space of less than 1 year would be permissible under 
the proposed exception. However, as with other compensation 
arrangements permitted under Sec.  411.357(l), the parties would be 
permitted to enter into only one arrangement for the rental of the same 
office space during the course of a year. The parties would be able to 
renew the arrangement on the same terms and conditions any number of 
times, provided that the terms of the arrangement and the compensation 
for the same office space do not change. Although we believe that, in 
most cases, parties seeking to lease office space prefer leases with 
longer terms--for instance, to justify expenses spent on property 
improvements--as described by commenters, some parties, especially 
parties in rural areas, would prefer or find necessary the flexibility 
of a short-term rental of office space. Given the requirements of the 
exception for fair market value compensation, including the requirement 
that parties enter into only one arrangement for the leased office 
space over the course of a year, we do not believe that short-term 
arrangements for the rental of office space that satisfy all the 
requirements of Sec.  411.357(l) pose a risk of program or patient 
abuse. We remind readers that, as explained in section II.D.9 of this 
proposed rule, the exception for payments by a physician at Sec.  
411.357(i) is not available to protect any leases of office space, 
including short-term leases.
    Lastly, Sec.  411.357(l)(6) requires that any 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. As explained in section II.D.1. of this rule, we 
are proposing to remove from our exceptions the requirements pertaining 
to the anti-kickback statute and Federal or State billing and claims 
submission rules. Although similar, at this time, we are not proposing 
to remove Sec.  411.357(l)(6). However, we are soliciting comments on 
whether this requirement is necessary to protect against program or 
patient abuse or should be removed from the exception, and whether 
substitute safeguards such as those included in many of the statutory 
or regulatory exceptions to the physician self-referral law would be 
appropriate.
11. Electronic Health Records Items and Services (Sec.  411.357(w))
    Relying on our authority at section 1877(b)(4) of the Act, on 
August 8, 2006, we published a final rule (the 2006 EHR final rule) 
that, among other things, finalized an exception at Sec.  411.357(w) 
for certain arrangements involving the donation of interoperable EHR 
software or information technology and training services (the EHR 
exception) (71 FR 45140). The EHR exception was initially scheduled to 
expire on December 31, 2013. On December 27, 2013, we published a final 
rule (the 2013 EHR final rule) modifying the EHR exception by, among 
other things, extending the expiration date of the exception to 
December 31, 2021, excluding laboratory companies from the types of 
entities that may donate EHR items and services under the exception, 
and updating the provision under which EHR software is deemed 
interoperable (78 FR 78751).
    Although we did not specifically request comments on the EHR 
exception in the CMS RFI, we received several comments on the 
exception. In addition, in its request for information, OIG requested 
comments on the anti-kickback statute EHR safe harbor at 42 CFR 
1001.952(y), which is substantively similar to the EHR exception at 
Sec.  411.357(w). After reviewing comments submitted on the EHR 
exception and safe harbor, as well as recent statutory and regulatory 
developments arising from the 21st Century Cures Act (Pub. L. 114-255 
(December 13, 2016)) (Cures Act), we are proposing to update provisions 
in the EHR exception pertaining to interoperability (Sec.  
411.357(w)(2)) and data lock-in (Sec.  411.357(w)(3)), clarify that 
donations of certain cybersecurity software and services are permitted 
under the EHR exception, remove the sunset provision, and modify the 
definitions of ``electronic health record'' and ``interoperable'' to 
ensure consistency with the Cures Act. We are also proposing to modify 
the 15 percent physician contribution requirement and to permit certain 
donations of replacement technology.
    This proposed rule sets forth certain proposed changes to the EHR 
exception. The OIG is considering changes to the EHR safe harbor 
elsewhere in this issue of the Federal Register. We seek comment on our 
proposals and, as noted above, given the close nexus between our 
proposals and OIG's proposals, we encourage stakeholders to review and 
submit comments on both proposed rules. Despite the differences in the 
respective underlying statutes, we attempted to ensure as much 
consistency as possible between our proposed changes to the EHR 
exception and the policies that OIG is considering with respect to its 
safe harbor. Because of the close nexus between this proposed rule and 
OIG's proposed rule, we may consider comments submitted in response to 
OIG's proposed rule, even if we do not receive such comments on our 
proposals, and take additional actions when crafting our final rule.
a. Interoperability
    The requirements at Sec.  411.357(w)(2) and (3) require donated 
items and services to be interoperable and prohibit the donor (or 
someone on the donor's behalf) from taking action to limit the 
interoperability of the donated item or service. We are proposing 
changes that impact Sec.  411.357(w)(2) and (3) based on the Cures Act 
and the Office of the National Coordinator for Health Information 
Technology (ONC), HHS Notice of Proposed Rulemaking, ``21st Century 
Cures Act: Interoperability, Information Blocking, and the ONC Health 
IT Certification Program'' (ONC NPRM), which proposes to implement key 
provisions in Title IV of the Cures Act.\9\ Among other things, the ONC 
NPRM proposes conditions and maintenance of certification requirements 
for health IT developers under the ONC Health IT Certification Program 
(certification program) and reasonable and necessary activities that do 
not constitute information blocking for purposes of section 3022(a)(1) 
of the Public Health Service Act (PHSA). These proposed changes, if 
finalized, would affect the deeming provision pertaining to 
interoperability at Sec.  411.357(w)(2) and provisions related to 
interoperability and data lock-in at Sec.  411.357(w)(3).
---------------------------------------------------------------------------

    \9\ 84 FR 7424 (March 4, 2019).

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[[Page 55823]]

(1) The ``Deeming Provision'' (Sec.  411.357(w)(2))
    Section 411.357(w)(2) requires software donated under the EHR 
exception to be interoperable. The deeming provision at Sec.  
411.357(w)(2) provides certainty to parties seeking protection of the 
EHR exception by providing an optional method of ensuring that donated 
items or services meet the interoperability requirement at Sec.  
411.357(w)(2). Specifically, Sec.  411.357(w)(2) provides that software 
is deemed to be interoperable if it is certified under ONC's 
certification program. In the 2013 EHR final rule, we modified the 
deeming provision to reflect developments in the ONC certification 
program and to track ONC's anticipated regulatory cycle. By relying on 
ONC's certification program and related updates of criteria and 
standards, we stated that the deeming provision would meet our 
objective of ensuring that software is certified to the current 
required standard of interoperability when it is donated (78 FR 78753). 
We are proposing to retain this general construct for the proposed 
updated EHR exception. However, we are proposing two textual 
clarifications to this provision. Our current regulation text specifies 
that the software is deemed to be interoperable if, on the date it is 
provided to the physician, it has been certified by a certifying body 
to an edition of the electronic health record certification criteria 
identified in the then-applicable version of 45 CFR part 170. We are 
proposing to modify this language to clarify that, on the date the 
software is provided, it ``is'' certified. In other words, the 
certification must be current as of the date of the donation, as 
opposed to the software having been certified at some point in the past 
but no longer maintaining certification on the date of the donation. We 
also propose to remove the reference to ``an edition'' of certification 
criteria to align with proposed changes to ONC's certification program. 
We solicit comments on these clarifications. As we describe in more 
detail below, however, we are proposing to update the definition of 
``interoperable.'' Although the revised definition would not require a 
change to the text of paragraph (w)(2), the revision would impact the 
deeming provision, and we solicit comments regarding this update. We 
emphasize that any final revisions to the deeming provisions or the 
definition of ``interoperable'' would be prospective only. That is, 
donated software that met the definition of interoperable and satisfied 
the requirements of Sec.  411.357(w) at the time the donation was made 
would not cease to be protected by the exception if these proposed 
changes are finalized.
(2) Information Blocking and Data Lock-in (Sec.  411.357(w)(3))
    The current requirement at Sec.  411.357(w)(3) prohibits the donor 
(or any person on the donor's behalf) from taking any action to limit 
or restrict the use, compatibility, or interoperability of the items or 
services with other electronic prescribing or EHR systems (including, 
but not limited to, health IT applications, products, or services). 
Beginning with the 2006 EHR final rule and reaffirmed in the 2013 EHR 
final rule, Sec.  411.357(w)(3) has been designed to: (1) Prevent the 
misuse of the exception that results in data and referral lock-in; and 
(2) encourage the free exchange of data (in accordance with protections 
for privacy) (78 FR 78762). Since the publication of the final rules, 
significant legislative, regulatory, policy, and other Federal 
government action defined this problem further (now commonly referred 
to as ``information blocking'') and established penalties for certain 
types of individuals and entities that engage in information blocking. 
Most notably, the Cures Act added section 3022 of the PHSA, known as 
``the information blocking provision,'' which defines conduct by health 
care providers, health IT developers of certified health IT, exchanges, 
and networks that constitutes information blocking. Section 3022(a)(1) 
of the PHSA defines ``information blocking'' in broad terms, while 
section 3022(a)(3) of the PHSA authorizes and charges the Secretary to 
identify reasonable and necessary activities that do not constitute 
information blocking. The ONC NPRM, which includes proposals to 
implement the statutory definition of information blocking at 45 CFR 
part 171, proposes to define certain terms related to the statutory 
definition of information blocking, and proposes seven exceptions to 
the information blocking definition.\10\
---------------------------------------------------------------------------

    \10\ 84 FR at 7602 through 7605.
---------------------------------------------------------------------------

    In this proposed rule, we are proposing modifications to Sec.  
411.357(w)(3) to recognize these significant updates since the 2013 EHR 
final rule. Specifically, we are proposing at Sec.  411.357(w)(3) to 
prohibit the donor (or any person on the donor's behalf) from engaging 
in a practice constituting information blocking, as defined in section 
3022 of the PHSA, in connection with the donated items or services. 
Should ONC finalize its proposals to implement section 3022 of the PHSA 
at 45 CFR part 171, we would incorporate such regulations into the 
requirement at Sec.  411.357(w)(3) for purposes of the physician self-
referral law if we finalize the proposals described in this proposed 
rule. In addition, proposed Sec.  411.357(w)(3) provides that the donor 
(or any person on the donor's behalf) cannot engage in information 
blocking ``in connection with the donated items or services,'' in order 
to clarify that Sec.  411.357(w)(3) prohibits both engaging in conduct 
constituting information blocking that affects the functions of the 
donated items or services and using the donated items or services as an 
instrument of information blocking.
    We note that the current EHR exception requirements, while not 
using the term ``information blocking,'' already include concepts 
similar to those found in the Cures Act's prohibition on information 
blocking. For example, in our prior rulemaking, we were concerned about 
donors (or those on the donor's behalf) taking steps to limit the 
interoperability of donated software to lock in or steer referrals.\11\ 
The modifications proposed here are not intended to change the 
underlying purpose of this requirement, but instead further our 
longstanding goal of preventing abusive arrangements that lead to 
information blocking and referral lock-in through modern understandings 
of those concepts established in the Cures Act.\12\ We solicit comments 
on aligning the condition at Sec.  411.357(w)(3) with the PHSA and the 
information blocking definition in proposed 45 CFR part 171, if 
finalized.
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    \11\ See, for example, Implementation of the 21st Century Cures 
Act: Achieving the Promise of Health Information Technology Before 
the S. Comm. On Health, Education, Labor, & Pensions, 115th Cong. 1 
(2017) (statement of James Cannatti, Senior Counselor for Health 
Information Technology HHS OIG).
    \12\ We recognize that the ONC NPRM is not a final rule and is 
subject to change. However, we base our proposals on both the 
statutory language and the language in ONC's NPRM for purposes of 
soliciting public input on our proposals.
---------------------------------------------------------------------------

b. Cybersecurity
    We are proposing to amend the EHR exception to clarify that the 
exception is available (and always has been available) to protect 
certain cybersecurity software and services,\13\ and to more broadly 
protect the donation of software and services related to cybersecurity. 
Currently, the exception protects EHR software or information 
technology and training services necessary and used predominantly to 
create, maintain,

[[Page 55824]]

transmit, or receive electronic health records. We are proposing to 
modify this language to include software that ``protects'' electronic 
health records, and to expressly include services related to 
cybersecurity.
---------------------------------------------------------------------------

    \13\ For instance, a secure log-in or encrypted access mechanism 
included with an EHR system or EHR software suite would be 
cybersecurity features of the EHR that may be protected under the 
existing EHR exception.
---------------------------------------------------------------------------

    In the 2006 EHR final rule, we emphasized the requirement that 
software, information technology and training services donated must be 
closely related to EHR and that the EHR functions must predominate (71 
FR 54151). We stated that the core functionality of the technology must 
be the creation, maintenance, transmission, or receipt of individual 
patients' EHR, but, recognizing that EHR software is commonly 
integrated with other features, we also stated that arrangements in 
which the software package included other functionality related to the 
care and treatment of individual patients would be protected. Under our 
proposal, the same criteria would apply to cybersecurity software and 
services: The predominant purpose of the software or services must be 
cybersecurity associated with the EHR.
    In section II.E.2. of this proposed rule, we also are proposing a 
new exception at proposed Sec.  411.357(bb) specifically to protect 
arrangements involving the donation of cybersecurity technology and 
related services (the cybersecurity exception). As proposed, the 
cybersecurity exception is broader and includes fewer requirements than 
the EHR exception. Nonetheless, we are proposing to expand the EHR 
exception to expressly include certain cybersecurity software and 
services so that it is clear that an entity donating EHR software, and 
providing training and other related services, may also donate related 
cybersecurity software and services to protect the EHR. As detailed in 
section II.E.2.a. of this proposed rule, we are proposing a definition 
of ``cybersecurity'' at Sec.  411.351 that would apply to both the EHR 
exception and the proposed cybersecurity exception at Sec.  
411.357(bb). A party seeking to protect an arrangement involving the 
donation of cybersecurity software and services only needs to comply 
with the requirements of one applicable exception. We solicit comments 
on this approach. In particular, with the addition of a stand-alone 
cybersecurity exception, we solicit comments on whether it is necessary 
to modify the EHR exception to expressly include cybersecurity.
c. The Sunset Provision
    The EHR exception originally was scheduled to expire on December 
31, 2013. In adopting this sunset provision, we acknowledged in the 
2006 EHR final rule that the need for an exception for donations of EHR 
technology should diminish substantially over time as the use of such 
technology becomes a standard and expected part of medical practice. In 
the 2013 notice of proposed rulemaking for an amendment to the EHR 
exception, we acknowledged that, although EHR technology adoption had 
risen dramatically, use of such technology had not yet been universally 
adopted nationwide. Because continued EHR technology adoption remained 
an important goal of the Department, we solicited comments regarding an 
extension of the EHR exception. In response to those comments, in the 
2013 EHR final rule, we extended the sunset date of the exception to 
December 31, 2021, a date that corresponds to the end of the EHR 
Medicaid incentives. We stated our continued belief that, as progress 
on this goal is achieved, the need for an exception for donations 
should continue to diminish over time. However, commenters on the CMS 
RFI and on OIG's request for information requested that we make the EHR 
exception and safe harbor permanent.
    Although we acknowledge that widespread adoption of EHR technology, 
though not universal, largely has been achieved, we no longer believe 
that once this goal is achieved the need for an exception for 
arrangements involving the donation of such technology will diminish 
over time or completely disappear. Rather, our experience indicates 
that the continued availability of the EHR exception plays a part in 
achieving the Department's goal of promoting EHR technology adoption by 
providing certainty with respect to the cost of EHR items and services 
for recipients, by encouraging adoption by physicians who are new 
entrants into medical practice or have postponed adoption based on 
financial concerns regarding the ongoing costs of maintaining and 
supporting an EHR system, and by preserving the gains already made in 
the adoption of interoperable EHR technology. Therefore, we are 
proposing to eliminate the sunset provision at Sec.  411.357(w)(13). In 
the alternative, we are considering an extension of the sunset date. We 
seek comment on whether we should select a later sunset date instead of 
making the exception permanent, and if so, what that date should be.
d. Definitions
    We are proposing to modify the definitions of ``interoperable'' and 
``electronic health record.'' In the 2006 EHR final rule, we finalized 
these definitions based on contemporaneous terminology, the emerging 
standards for EHR, and other resources cited by commenters at that 
time. The following proposed modifications to these definitions are 
largely based on terms and provisions in the Cures Act that update or 
supersede terminology we used in the 2006 EHR final rule.
    The term ``electronic health record'' is currently defined at Sec.  
411.351 as a repository of consumer health status information in 
computer processable form used for clinical diagnosis and treatment for 
a broad array of clinical conditions. We are proposing the following 
modifications: Replace the term ``consumer health status information'' 
with ``electronic health information;'' replace the term ``computer 
processable form'' with ``is transmitted by or maintained in electronic 
media;'' and replace the phrase ``used for clinical diagnosis and 
treatment for a broad array of clinical conditions'' with ``relates to 
the past, present, or future health or condition of an individual or 
the provision of health care to an individual.'' We are proposing these 
modifications to this definition to reflect the term ``electronic 
health information'' that is used throughout the Cures Act and that is 
central to the definition of interoperability at section 3000(9) of the 
PHSA and the information blocking provisions at section 3022 of the 
PHSA. Additionally, the ONC NPRM proposes a definition of ``electronic 
health information.'' \14\ We have based our proposed modifications, in 
part, on ONC's proposed definition of ``electronic health information'' 
to reflect more modern terminology used to describe the type of 
information that is part of an electronic health record. We solicit 
comments on this updated definition.
---------------------------------------------------------------------------

    \14\ 84 FR 7424, 7513 (Mar. 4, 2019).
---------------------------------------------------------------------------

    The term ``interoperable'' is defined at existing Sec.  411.351 and 
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 purposes and 
meaning of the data are preserved and unaltered. This definition of 
``interoperable'' was based on 44 U.S.C. 3601(6) (pertaining to the 
management and promotion of electronic Government services) and several 
comments we received in response to the proposed rule that referenced

[[Page 55825]]

emerging industry definitions and standards related to 
interoperability.\15\
---------------------------------------------------------------------------

    \15\ See 70 FR 59186 and 71 FR 45155 through 45156.
---------------------------------------------------------------------------

    We are proposing to update the definition of ``interoperable'' to 
align with the statutory definition of ``interoperability'' added by 
the Cures Act to section 3000(9) of the PHSA. Consistent with section 
3000(9) of the PHSA, we are proposing to define ``interoperable'' to 
mean: (i) Able to securely exchange data with and use data from other 
health information technology without special effort on the part of the 
user; (ii) allows for complete access, exchange, and use of all 
electronically accessible health information for authorized use under 
applicable State or Federal law; and (iii) does not constitute 
information blocking as defined in section 3022 of the PHSA. Should ONC 
finalize its proposals to implement section 3022 of the PHSA at 45 CFR 
part 171, and if we finalize our proposed definition of 
``interoperable,'' we would incorporate the final ONC regulations into 
the definition of ``interoperable'' at Sec.  411.351 by referencing 45 
CFR part 171 instead of section 3022 of the PHSA.
    We believe the statutory definition of ``interoperability'' 
includes concepts similar to the existing definition of 
``interoperable'' at Sec.  411.351 (for example, the ability to 
securely exchange data across different systems or technology). Two new 
concepts in the statutory definition are included in the proposed 
modification: (1) Interoperable means the ability to exchange 
electronic health information without special effort on the part of the 
user and (2) interoperable expressly does not mean information 
blocking.\16\ As a practical matter, we believe these two concepts are 
not substantively different from the existing definition and only 
reflect an updated understanding of interoperability and related 
terminology. We solicit comments on the proposed definition that would 
align the definition of ``interoperable'' with the statutory definition 
of ``interoperability.''
---------------------------------------------------------------------------

    \16\ Section 3000(9) of the PHSA; (42 U.S.C. 300jj(9)).
---------------------------------------------------------------------------

    In the alternative, we are considering revising our regulations to 
eliminate the term ``interoperable'' and instead incorporate the term 
``interoperability'' and define this term by reference to section 
3000(9) of the PHSA and 45 CFR part 170 (if finalized). Under this 
alternative proposal, we would revise Sec.  411.357(w)(2) to require 
that the software meets interoperability standards established under 
Title XXX of the PHSA and its implementing regulations. Software would 
be deemed to meet interoperability standards if, on the date it is 
provided to the physician, it is certified by a certifying body 
authorized by the National Coordinator for Health Information 
Technology to electronic health record certification criteria 
identified in the then-applicable version of 45 CFR part 170. We seek 
comment regarding whether using terminology identical to the PHSA and 
ONC regulations would facilitate compliance with the requirements of 
the EHR exception and reduce any regulatory burden resulting from the 
differences in the agencies' different terminology related to the 
singular concept of interoperability.
    We emphasize that our proposed modifications of the definitions of 
``electronic health record'' and ``interoperable'' are prospective 
only. Donations made prior to the effective date of any finalized 
revisions to these definitions are governed by the definitions that are 
in effect when the donations are made. We solicit comments on this 
proposal.
e. Additional Proposals and Considerations
(1) 15 Percent Recipient Contribution
    In the 2006 EHR final rule, we agreed with a number of commenters 
who suggested that cost sharing is an appropriate method to address 
some of the fraud and abuse risks inherent in unlimited donations of 
technology. Accordingly, we incorporated a requirement into Sec.  
411.357(w) that the physician pays 15 percent of the donor's cost of 
the technology. We noted in the 2006 EHR final rule that the 15 percent 
cost sharing requirement is high enough to encourage prudent and robust 
EHR arrangements, without imposing a prohibitive financial burden on 
recipients. Moreover, we stated that this approach requires recipients 
to contribute toward the benefits they may experience from the adoption 
of interoperable EHR (for example, a decrease in practice expenses or 
access to incentive payments related to the adoption of health IT).
    We received a number of comments in response to our RFI, and OIG 
received similar comments in response to its RFI, indicating that the 
15 percent contribution has proven burdensome to some recipients and 
acts as a barrier to adoption of EHR technology. We understand that 
this burden may be particularly acute for small and rural practices 
that cannot afford the contribution. Other commenters suggested that 
applying the 15 percent requirement to upgrades and updates to EHR 
technology is restrictive and cumbersome and similarly acts as a 
barrier. We are considering and solicit comments on two alternatives to 
the existing requirement as outlined below; however, we are not 
proposing specific regulation text regarding the 15 percent 
contribution requirement at this time.
    First, we are considering eliminating or reducing the percentage 
contribution required for small or rural physician organizations. In 
particular, we solicit comments on how we should define ``small or 
rural physician organization.'' We solicit comments on whether ``rural 
physician organization'' should be defined as a physician organization 
located in a rural area, as that term is defined at Sec.  411.351, or 
defined in line with the definition of a rural provider at Sec.  
411.356(c)(1). We also solicit comments on other subsets of potential 
physician recipients for which the 15 percent contribution is a 
particular burden.
    As an alternative, we are considering reducing or eliminating the 
15 percent contribution requirement in the EHR exception for all 
physician recipients. We solicit comments regarding the impact this 
might have on the use and adoption of EHR technology, and any attendant 
risks of fraud and abuse. We are interested in specific examples of any 
prohibitive costs associated with the 15 percent contribution 
requirement, both for the initial donation of EHR technology, and 
subsequent upgrades and updates to the technology.
    Regardless of whether we retain the 15 percent contribution 
requirement or reduce that contribution requirement for some or all 
physician recipients, we are considering modifying or eliminating the 
contribution requirement for updates to previously donated EHR software 
or technology. We solicit comments on this approach as well as what 
such a modification should entail. For example, we are considering 
requiring a contribution for the initial investment only, as well as 
any new modules, but not requiring a contribution for any update of the 
software already purchased. We solicit comments on these alternatives, 
or another similar alternative that would still involve some 
contribution but could reduce the uncertainty and administrative burden 
associated with assessing a contribution for each update.
(2) Replacement Technology
    In the 2013 EHR final rule, we highlighted a commenter's assertion 
that the prohibition on donating equivalent technology currently 
included in the

[[Page 55826]]

exception locks physician practices into a vendor, even if they are 
dissatisfied with the technology, because the recipient must choose 
between paying the full amount for a new system and continuing to pay 
15 percent of the cost of the substandard system (78 FR 78766). The 
same commenter asserted that the cost differential between these two 
options is too high and effectively locks physician practices into EHR 
technology vendors. In the 2013 EHR final rule, we responded that we 
continue to believe that items and services are not necessary if the 
recipient already possesses the equivalent items or services. We noted 
that providing equivalent items and services confers independent value 
on the physician recipient and noted our expectation that physicians 
would not select or continue to use a substandard system if it posed a 
threat to patient safety.
    We appreciate that advancements in EHR technology are continuous 
and rapid. According to commenters, in some situations replacement 
technology is appropriate but prohibitively expensive. We are proposing 
to allow donations of replacement EHR technology. We specifically seek 
comment as to the types of situations in which the donation of 
replacement technology would be appropriate. We further solicit comment 
as to how we might safeguard against situations where donors 
inappropriately offer, or physician recipients inappropriately solicit, 
unnecessary technology instead of upgrading their existing technology 
for appropriate reasons.
12. Exception for Assistance To Compensate a Nonphysician Practitioner 
(Sec.  411.357(x))
    Section 1877(e)(5) of the Act sets forth an exception for 
remuneration provided by a hospital to a physician to induce the 
physician to relocate to the geographic area served by the hospital to 
be a member of the hospital's medical staff, subject to certain 
requirements. This exception is codified in our regulations at Sec.  
411.357(e). In Phase III, we declined a commenter's request to expand 
Sec.  411.357(e) to cover the recruitment of nonphysician practitioners 
(NPPs) into a hospital's service area, including into an existing 
physician practice, stating that the exception for physician 
recruitment at Sec.  411.357(e) applies only to payments made directly 
(or, in some circumstances, passed through) to a recruited physician 
(72 FR 51049). Recruitment payments made by a hospital directly to an 
NPP would not implicate the physician self-referral law, unless the NPP 
serves as a conduit for physician referrals or is an immediate family 
member of a referring physician. We further stated that payments made 
by a hospital to subsidize a physician practice's costs of recruiting 
and employing NPPs would create a compensation arrangement between the 
hospital and the physician practice for which no exception would apply, 
and that these kinds of subsidy arrangements pose a substantial risk of 
fraud and abuse. Following the publication of Phase III, we 
reconsidered our position. There have been significant changes in our 
health care delivery and payment systems, as well as projected 
shortages in the primary care workforce. To address this changed 
landscape, in the CY 2016 PFS final rule, we finalized a limited 
exception at Sec.  411.357(x) for hospitals, FQHCs, and rural health 
clinics (RHCs) to provide remuneration to a physician to assist with 
the employment of an NPP (80 FR 71301 through 71311).
    The exception at Sec.  411.357(x) applies to remuneration provided 
by a hospital to a physician to compensate an NPP to provide patient 
care services. We have received several inquiries regarding the meaning 
of the term ``patient care services'' as it relates to an NPP. The 
inquiries generally concentrate on the requirement at Sec.  
411.357(x)(1)(v)(B) that the NPP has not, within 1 year of the 
commencement of his or her compensation arrangement with the physician, 
been employed or otherwise engaged to provide patient care services by 
a physician or a physician organization that has a medical practice 
site located in the geographic area served by the hospital. Often, 
prior to becoming an NPP, an individual may have been a registered 
nurse (or some other health care professional) and may have provided 
services to patients that are similar to the services provided by an 
NPP. For purposes of the exception at Sec.  411.357(x), the question 
presented by stakeholders is whether the services provided by the 
individual before the individual became an NPP constitute ``patient 
care services.''
    We realize that the definition of ``patient care services'' found 
at Sec.  411.351 relates to tasks performed by a physician only. To 
clarify the meaning of ``patient care services'' for purposes of the 
exception for assistance to compensate an NPP, we are proposing to 
revise Sec.  411.357(x) to change the references to ``patient care 
services'' to ``NPP patient care services'' and include a definition of 
the term ``NPP patient care services'' in the exception at Sec.  
411.357(x)(4)(i). We are proposing to define ``NPP patient care 
services'' to mean direct patient care services furnished by an NPP 
that address the medical needs of specific patients or any task 
performed by an NPP that promotes the care of patients of the physician 
or physician organization with which the NPP has a compensation 
arrangement. Under the proposed definition of ``NPP patient care 
services,'' services provided by an individual who is not an NPP (as 
the term is defined at Sec.  411.357(x)(3)) at the time the services 
are provided, are not NPP patient care services for purposes of Sec.  
411.357(x). Thus, if an individual worked in the geographic area served 
by the hospital providing the assistance (for example, as a registered 
nurse) for some period immediately prior to the commencement of his or 
her compensation arrangement with the physician or physician 
organization in whose shoes the physician stands, but had not worked as 
an NPP in that area during that time period, the exception at Sec.  
411.357(x) would be available to protect remuneration from the hospital 
to the physician to compensate the NPP to provide NPP patient care 
services, provided that all of the requirements of the exception are 
satisfied. In this example, the registered nursing services would not 
be considered NPP patient care services when determining whether the 
arrangement satisfies the 1-year restriction at Sec.  411.357(x)(1)(v).
    In addition, we are proposing conforming changes to the term 
``referral'' as defined at Sec.  411.357(x)(4) for purposes of the 
exception. Specifically, we are proposing to revise Sec.  411.357(x) to 
change references to ``referral'' when describing the actions of an NPP 
to ``NPP referral'' and revise Sec.  411.357(x)(4) accordingly. We 
believe that it is unnecessary to have a general definition of 
``referral'' at Sec.  411.351 that is applicable throughout our 
regulations and a different definition of the same term that applies 
only for purposes of the exception at Sec.  411.357(x). We are not 
proposing substantive changes to the definition itself; however, we are 
proposing to move the definition to Sec.  411.357(x)(4)(ii) in order to 
accommodate the inclusion of the related definition of ``NPP patient 
care services'' within section Sec.  411.357(x)(4).
    We are also proposing a related change to Sec.  
411.357(x)(1)(v)(A). As currently drafted, Sec.  411.357(x)(1)(v)(A) 
requires the NPP to not have practiced in the geographical area served 
by the hospital within 1 year of the commencement of the compensation 
arrangement with the physician. According to stakeholders that 
requested guidance on the scope of the exception, the word 
``practiced'' may be

[[Page 55827]]

interpreted to include the provision of NPP patient care services (as 
we are proposing to define the term here) and other services, for 
example, services provided by a health care professional who is not an 
NPP at the time the services are furnished. To resolve any potential 
stakeholder confusion, we are proposing to replace the term 
``practiced'' with ``furnished NPP patient care services.'' Under the 
proposal, a hospital would not run afoul of Sec.  411.357(x)(1)(v)(A) 
if the hospital provided remuneration to a physician to compensate an 
NPP, and the individual receiving compensation from the physician 
furnished services in the hospital's geographic service area within 1 
year of the commencement of his or her compensation arrangement with 
the physician, provided that the services furnished by the individual 
during the 1-year period were not NPP patient care services, as we are 
proposing to define the term at Sec.  411.357(x)(4)(i).
    In addition to the inquiries related to the meaning of the terms 
``patient care services'' and ``practice,'' we are aware of stakeholder 
uncertainty regarding the timing of arrangements that may be 
permissible under Sec.  411.357(x). Specifically, stakeholders have 
inquired whether an NPP must begin his or her compensation arrangement 
with the physician (or physician organization in whose shoes the 
physician stands) on or after the commencement of the compensation 
arrangement between the hospital, FQHC, or RHC and the physician. 
Stakeholders noted that the exception includes no explicit prohibition 
on an entity providing assistance to a physician to reimburse the 
physician for the compensation, signing bonus, or benefits paid to an 
NPP already employed or contracted by the physician prior to the date 
of the commencement of the physician's compensation arrangement with 
the hospital, FQHC, or RHC. As we stated when finalizing the exception 
at Sec.  411.357(x), our underlying goal is to increase access to 
needed care (80 FR 71309). Permitting a hospital, FQHC, or RHC to 
simply reimburse a physician for overhead costs of current employees or 
contractors already serving patients in the geographic area served by 
the hospital, FQHC, or RHC does not support this goal. Nonetheless, as 
stakeholders pointed out, there is no express requirement regarding the 
timing of the compensation arrangement between the NPP and the 
physician (or physician organization in whose shoes the physician 
stands) in Sec.  411.357(x). To ensure that compensation arrangements 
protected under the exception do not pose a risk of program or patient 
abuse, we are proposing to amend Sec.  411.357(x)(1)(i) to expressly 
require that the compensation arrangement between the hospital, FQHC, 
or RHC and the physician commences before the physician (or the 
physician organization in whose shoes the physician stands under Sec.  
411.354(c)) enters into the compensation with the NPP. Put another way, 
the compensation arrangement between the NPP and the physician (or 
physician organization in whose shoes the physician stands) must 
commence on or after the commencement of the compensation arrangement 
between the hospital, FQHC, or RHC and the physician.
13. Updating and Eliminating an Out-of-Date References
a. Medicare+Choice (Sec.  411.355(c)(5))
    Section 1877(b)(3) of the Act and Sec.  411.355(c) of the physician 
self-referral regulations set forth exceptions for designated health 
services furnished by various organizations to enrollees of certain 
prepaid health plans. When the Medicare+Choice program was established 
in the Balanced Budget Act of 1997 (Pub. L. 105-33) (BBA), the Congress 
failed to update section 1877(b)(3) of the Act to except the designated 
health services furnished under Medicare+Choice coordinated care plans. 
Based on our belief that this was an oversight, in the June 26, 1998 
interim final rule with comment period (Medicare Program; Establishment 
of the Medicare+Choice Program (63 FR 34968)), we revised Sec.  
411.355(c) to accommodate the creation of the Medicare+Choice program 
and, relying on the Secretary's authority to create new exceptions 
under section 1877(b)(4) of the Act, we included Medicare+Choice 
coordinated care plans in Sec.  411.355(c)(5) of our regulations (63 FR 
35033 through 35034). (We declined to include Medicare+Choice medical 
savings account plans and Medicare+Choice private fee-fee-for service 
plans due to the risk of patient abuse related to financial liability 
for premiums and cost sharing, which were not limited by the BBA.) We 
included Medicare+Choice coordinated care plans at Sec.  411.355(c)(5), 
in part, to avoid contradiction with the BBA's establishment of 
provider-sponsored organization (PSO) plans as coordinated care plans. 
PSOs are defined in the BBA as entities that must be organized and 
operated by a provider (which may be a physician) or a group of 
affiliated health care providers (which may include physicians). The 
BBA requires that the providers have at least a majority financial 
interest in the entity and share a substantial financial risk for the 
provision of items and services. If such ownership was not excepted, 
the physician owners of PSOs would not be permitted to refer enrollees 
for designated health services furnished by the coordinated care plan 
(or its contractors and subcontractors). Subsequently, in 1999, the 
Congress amended section 1877(b)(3) of the Act to create a similar 
statutory exception for Medicare+Choice at section 1877(b)(3)(E) of the 
Act (Pub. L. 106-113).
    Section 201 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (Pub. L. 108-173, enacted on December 8, 
2003) (MMA) renamed the Medicare+Choice program as the Medicare 
Advantage program and provided that any statutory reference to 
``Medicare+Choice'' was deemed to be a reference to the Medicare 
Advantage program. In reviewing our regulations for out-of-date 
references, including references to Medicare+Choice, as part of this 
proposed rulemaking, it came to our attention that the language of 
Sec.  411.355(c)(5) may be inconsistent with other program regulations. 
Current Sec.  411.355(c)(5) excepts designated health services 
furnished by an organization (or its subcontractors) to enrollees of 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 Title 42, Chapter IV 
of the Code of Federal Regulations. For consistency with the MMA 
directive and to ensure the accuracy of our regulations, we are 
proposing to revise Sec.  411.355(c)(5) to more accurately reference 
Medicare Advantage plans. Under this proposal, Sec.  411.355(c)(5) 
would reference designated health services furnished by an organization 
(or its contractors or subcontractors) to enrollees of a coordinated 
care plan (within the meaning of section 1851(a)(2)(A) of the Act) 
offered by a Medicare Advantage organization in accordance with a 
contract with CMS under section 1857 of the Act and part 422 of this 
chapter. This proposal does not represent a change in our policy.
    The Medicare Advantage program varies from the Medicare+Choice 
program in ways other than its name and has matured in the years since 
passage of the MMA. More than 20 years have passed since we determined 
to

[[Page 55828]]

protect designated health services furnished to enrollees of 
coordinated care plans and exclude medical savings account plans and 
private fee-fee-for service plans from the scope of Sec.  
411.355(c)(5). In light of this, we are seeking comments regarding 
whether Sec.  411.355(c)(5) is broad enough to protect designated 
health services furnished to enrollees in the full range of Medicare 
Advantage plans that exist today and that do not pose a risk of program 
or patient abuse. Specifically, we are interested in commenters' views 
on which, if any, other Medicare Advantage plans we should include 
within the scope of Sec.  411.355(c)(5).
b. Website
    We are proposing to modernize the regulatory text by changing 
``website'' to ``website'' throughout the physician self-referral 
regulations to conform to the spelling of the term in the Government 
Publishing Office's Style Manual and other current style guides.

E. Providing Flexibility for Nonabusive Business Practices

1. Limited Remuneration to a Physician (Proposed Sec.  411.357(z))
    In the 1998 proposed rule, we proposed an exception for de minimis 
compensation in the form of noncash items or services (63 FR 1699). In 
Phase I, using the Secretary's authority at section 1877(b)(4) of the 
Act, we finalized the proposal at Sec.  411.357(k) and changed the name 
of the exception to nonmonetary compensation, noting that, although 
free or discounted items and services such as free samples of certain 
drugs, chemicals from a laboratory, or free coffee mugs or note pads 
from a hospital fall within the definition of ``compensation 
arrangement,'' we believe that such compensation is unlikely to cause 
overutilization, if held within reasonable limits (66 FR 920). The 
exception for nonmonetary compensation at Sec.  411.357(k) permits an 
entity to provide compensation to a physician in the form of items or 
services (other than cash or cash equivalents) up to an aggregate 
amount of $300 per calendar year, adjusted annually for inflation and 
currently $416 per calendar year, provided that the compensation is not 
solicited by the physician and 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 exception does not require 
that the physician provide anything to the entity in return for the 
nonmonetary compensation, nor does it require that the arrangement be 
set forth in writing and signed by the parties.
    We also recognized in Phase I that many of the incidental benefits 
that hospitals provide to medical staff members do not qualify for the 
exception at Sec.  411.357(c) for bona fide employment relationships 
because most members of a hospital's medical staff are not hospital 
employees, nor would they qualify for the exception at Sec.  411.357(l) 
for fair market value compensation because, to the extent that the 
medical staff membership is the only relationship between the hospital 
and the physician, there is no written arrangement between the parties 
to which these incidental benefits could be added. We acknowledged that 
many medical staff incidental benefits are customary industry practices 
that are intended to benefit the hospital and its patients; for 
example, free computer and internet access benefits the hospital and 
its patients by facilitating the maintenance of up-to-date, accurate 
medical records and the availability of cutting edge medical 
information (66 FR 921). To address this, using the Secretary's 
authority under section 1877(b)(4) of the Act, we finalized a second 
exception for noncash items or services provided to a physician. The 
exception at Sec.  411.357(m) for medical staff incidental benefits 
permits a hospital to provide noncash items or services to members of 
its medical staff when the item or service is used on the hospital's 
campus and certain conditions are met, including that the compensation 
is reasonably related to the provision of (or designed to facilitate) 
the delivery of medical services at the hospital and the item or 
service is provided only during periods when the physician is making 
rounds or engaged in other services or activities that benefit the 
hospital or its patients (66 FR 921). In addition the compensation may 
not be offered in a manner that takes into account the volume or value 
of referrals or other business generated between the parties. Under the 
exception, permissible noncash compensation is limited on a per-
instance basis, and the current limit is $35 per instance. Like the 
exception at Sec.  411.357(k) for nonmonetary compensation, the 
exception at Sec.  411.357(m) for medical staff incidental benefits 
does not impose any documentation or signature requirements.
    Through our administration of the SRDP, we have been made aware of 
numerous nonabusive arrangements under which a limited amount of 
remuneration was paid by an entity to a physician in exchange for the 
physician's provision of items and services to the entity. In some 
instances, the arrangements were ongoing service arrangements under 
which services were furnished sporadically or for a low rate of 
compensation; in others, services were furnished during a short period 
of time and the arrangement did not continue past the service period. 
For example, one submission to the SRDP disclosed an arrangement with a 
physician for short-term medical director services while the hospital 
was finalizing the engagement of its new medical director following the 
unexpected resignation of its previous medical director. Despite the 
hospital's legitimate need for the services and compensation that was 
fair market value and not determined in any manner that took into 
account the volume or value of the referrals or other business 
generated by the physician, the arrangement could not satisfy all 
requirements of any applicable exception because the compensation was 
not set in advance of the provision of the services and was not reduced 
to writing and signed by the parties. Under arrangements such as this, 
insofar as the hospital paid the physician in cash, the exception at 
Sec.  411.357(k) for nonmonetary compensation would not apply to the 
arrangement. Similarly, the exception at Sec.  411.357(l) for fair 
market value compensation would not protect the payment if the 
arrangement was not documented in contemporaneous signed writings and 
the amount of or formula for calculating the compensation was not set 
in advance of provision of the items or services, even if the payment 
did not exceed fair market value for actual items or services provided 
and was not determined in a manner that takes into account the volume 
or value of referrals or other business generated by the physician.
    After reviewing numerous arrangements in the SRDP, we believe that 
the provision of limited remuneration to a physician would not pose a 
risk of program or patient abuse, even in the absence of documentation 
regarding the arrangement and where the amount of or a formula for 
calculating the remuneration is not set in advance of the provision of 
items or services, if: (1) The arrangement is for items or services 
actually provided by the physician; (2) the amount of the remuneration 
to the physician is limited; (3) the arrangement furthers a legitimate 
business purpose of the parties and is on similar terms and conditions 
as like arrangements, regardless of whether it results in profit for 
either or both of the parties; (4) the

[[Page 55829]]

remuneration is not determined in any manner that takes into account 
the volume or value of referrals or other business generated by the 
physician; and (5) the remuneration does not exceed the fair market 
value for the items or services. Under these circumstances, we believe 
that, if held within reasonable limits, remuneration is unlikely to 
cause overutilization or similar harms to the Medicare program. 
Therefore, using the Secretary's authority under section 1877(b)(4) of 
the Act, we are proposing an exception for limited remuneration from an 
entity to a physician for items or services actually provided by the 
physician. We are proposing that the exception would apply only where 
the remuneration does not exceed an aggregate of $3,500 per calendar 
year, which would be adjusted for inflation in the same manner as the 
annual limit on nonmonetary compensation and the per-instance limit on 
medical staff incidental benefits; that is, adjusted to the nearest 
whole dollar by the increase in the Consumer Price Index--Urban All 
Items for the 12-month period ending the preceding September 30. Under 
the proposal, the remuneration may not be determined in any manner that 
takes into account the volume or value of referrals or other business 
generated by the physician or exceed fair market value for the items or 
services provided by the physician, and the compensation arrangement 
must be commercially reasonable. We believe that an annual aggregate 
limit of $3,500 is sufficient to cover the typical range of 
commercially reasonable arrangements for the provision of items and 
services that a physician might provide to an entity on an infrequent 
or short-term basis. The proposed exception would not be applicable to 
payments from an entity to a physician's immediate family member or to 
payments for items or services provided by the physician's immediate 
family member.
    Given the low annual limit of the proposed exception and the other 
proposed safeguards of the exception, we believe that the exception for 
limited remuneration to a physician would not pose a risk of program or 
patient abuse. In contrast, when the remuneration a physician receives 
from an entity for items or services exceeds the aggregate annual limit 
of $3,500, as adjusted annually for inflation, we believe that the 
additional safeguards of other applicable exceptions are necessary to 
prevent program or patient abuse. For example, for long-term 
arrangements for items or services provided on a more routine or 
frequent basis, where the aggregate annual compensation exceeds $3,500, 
we believe that the requirement that compensation is set in advance 
before the provision of the items or services is necessary to ensure 
that various payments made over the term of the arrangement are not 
determined retrospectively to reward past referrals or encourage 
increased referrals from the physician. We note that the annual limit 
of $3,500 for the proposed exception is higher than the annual limit 
for the exception for nonmonetary compensation at Sec.  411.357(k) 
because the exception for limited remuneration to a physician would 
protect a fair market value exchange of remuneration for items or 
services actually furnished by a physician, while the exception for 
nonmonetary compensation does not require a physician to provide actual 
items or services in exchange for the nonmonetary compensation. We seek 
public comment on whether the $3,500 limit is appropriate, too high, or 
too low to accommodate nonabusive compensation arrangements for the 
provision of items or services by a physician. We are also interested 
in comments regarding whether it is necessary to limit the 
applicability of the exception to services that are personally 
performed by the physician and items provided by the physician in order 
to further safeguard against program or patient abuse.
    The proposed exception at Sec.  411.357(z) for limited remuneration 
to a physician would apply to the furnishing of both items and services 
by a physician. Previously, we stated that we are retracting prior 
statements that office space is neither an ``item'' nor a ``service.'' 
Thus, for the reasons articulated in section II.D.10. of this proposed 
rule and the CY 2017 PFS proposed rule (81 FR 46448 through 46453) and 
final rule (81 FR 80524 through 80534), we are proposing to incorporate 
in proposed Sec.  411.357(z) prohibitions on percentage-based and per-
unit of service compensation to the extent the remuneration is for the 
use or lease of office space or equipment, similar to the provisions at 
existing Sec.  411.357(p)(1)(ii) for indirect compensation arrangements 
and Sec.  411.357(y)(6)(ii) for timeshare arrangements. Lastly, in 
keeping with our policy decision in this rule to decouple exceptions 
issued under our authority at section 1877(b)(4) of the Act from the 
anti-kickback statute, the proposed exception for limited remuneration 
to a physician does not include a requirement that the arrangement must 
not violate the anti-kickback statute or other Federal or State law or 
regulation governing billing or claims submission. However, we are 
soliciting comment regarding whether such a safeguard is necessary here 
in light of the absence of requirements for set in advance compensation 
and written documentation of the arrangement. We note that, if we do 
not finalize our proposal to remove the requirements related to the 
compliance with the anti-kickback statute and Federal and State laws 
and regulations governing billing or claims submission, we would 
include a requirement at proposed Sec.  411.357(z) that the arrangement 
does not violate the anti-kickback statute or any Federal or State law 
or regulation governing billing or claims submission. Moreover, to the 
extent that remuneration implicates the anti-kickback statute, nothing 
in our proposals would affect the parties' obligation to comply with 
the anti-kickback statute, and compliance with the exception for 
limited remuneration to a physician, if finalized, would not 
consequentially result in compliance with the anti-kickback statute. As 
we stated in Phase I, section 1877 of the Act is limited in its 
application and does not address every abuse in the health care 
industry. The fact that particular referrals and claims are not 
prohibited by section 1877 of the Act does not mean that the 
arrangement is not abusive (66 FR 879).
    In determining whether payments to a physician under the proposed 
exception for limited remuneration to a physician exceed the annual 
limit, we would not count compensation to a physician for items or 
services provided outside of the arrangement, if the items or services 
provided are protected under an exception in Sec.  411.355 or the 
arrangement for the other items or services fully complies with the 
requirements of another exception in Sec.  411.357. To illustrate, 
assume an entity has an established call coverage arrangement with a 
physician that fully satisfies the requirements of Sec.  411.357(d)(1) 
or Sec.  411.357(l). Assume further that the entity later engages the 
physician to provide supervision services on a sporadic basis during 
the same year but failed to document the arrangement in a writing 
signed by the parties. In determining whether the supervision 
arrangement satisfies the requirements of the proposed exception for 
limited remuneration to a physician, we would not count the 
compensation provided under the call coverage arrangement towards the 
aggregate $3,500 annual limit. However, if an entity has multiple 
undocumented, unsigned arrangements under which it provides 
compensation to a physician

[[Page 55830]]

for items or services provided by the physician, we would consider the 
parties to have a single compensation arrangement for various items and 
services, and the aggregate of all the compensation provided under the 
arrangement could not exceed $3,500 during the calendar year in order 
for the proposed exception to protect the remuneration to the 
physician. To illustrate, assume the entity in the previous example 
also engaged the physician to provide occasional EKG interpretations 
during the course of the year, and that the aggregate annual 
compensation for the supervision services and the EKG interpretation 
services taken together exceeded $3,500.\17\ Assuming neither 
arrangement satisfied the requirements of any other applicable 
exception, the exception for limited remuneration to a physician would 
not protect either arrangement (which, as noted, we would treat as a 
single arrangement for multiple services) after the $3,500 limit was 
exceeded during the calendar year.
---------------------------------------------------------------------------

    \17\ As noted previously, compensation paid under the call 
coverage arrangement would not be included when determining whether 
the limit was exceeded, because the call coverage arrangement in 
this example fully complies with an applicable exception.
---------------------------------------------------------------------------

    We note that the proposed exception for limited remuneration to a 
physician could be used in conjunction with other exceptions to protect 
an arrangement during the course of a calendar year in certain 
circumstances. To illustrate, assume that an entity engages a physician 
to provide call coverage services, and that the arrangement is not 
documented or the rate of compensation has not been set in advance at 
the time the services are first provided. Further, assume that, after 
the services are provided and payment is made, the parties agree to 
continue the arrangement on a going forward basis and agree to a rate 
of compensation. Assume also that the parties have no other 
arrangements between them. Depending on the facts and circumstances, 
the parties could rely on the proposed exception to protect the first 
payments up to the $3,500 annual limit, provided that the requirements 
of the proposed exception are satisfied. For the ongoing compensation 
arrangement, the parties could rely on another applicable exception, 
such as Sec.  411.357(d)(1), to protect the arrangement once the 
compensation is set in advance and the other requirements of the 
exception are satisfied. (We remind readers that, under proposed Sec.  
411.354(e)(3), the parties would have up to 90 consecutive calendar 
days to document and sign the arrangement.)
    We note that Sec.  411.357(d)(1)(ii) requires that the personal 
service arrangement covers all the services provided by the physician 
(or an immediate family member of the physician) to the entity (or 
incorporate other arrangements by reference or cross-reference a master 
list of contracts) and Sec.  411.357(l)(2) requires that parties enter 
into only one arrangement for the same services in a year. For purposes 
of Sec.  411.357(d)(1)(ii), we would not require an arrangement for 
items or services that satisfies all of the requirements of the 
proposed exception for limited remuneration to a physician to be 
covered by a personal service arrangement protected under Sec.  
411.357(d) or listed in a master list of contracts. Likewise, with 
respect to the restriction in the exception for fair market value 
compensation at Sec.  411.357(l)(2), we would not consider an 
arrangement for items or services that is protected under the proposed 
exception at Sec.  411.357(z) to violate the prohibition on entering 
into an arrangement for the same items and services during a calendar 
year. We are seeking comments on whether the regulation text at Sec.  
411.357(d)(1)(ii) or Sec.  411.357(l)(2) should be modified to 
explicitly state this policy.
2. Cybersecurity Technology and Related Services (Proposed Sec.  
411.357(bb))
    Relying on our authority under section 1877(b)(4) of the Act, we 
are proposing an exception at Sec.  411.357(bb) to protect arrangements 
involving the donation of certain cybersecurity technology and related 
services. We believe that the proposed exception will help improve the 
cybersecurity posture of the health care industry by removing a 
perceived barrier to donations to address the growing threat of 
cyberattacks that infiltrate data systems and corrupt or prevent access 
to health records and other information essential to the delivery of 
health care. The OIG is considering a similar safe harbor to the anti-
kickback statute elsewhere in this issue of the Federal Register. 
Despite the differences in the respective underlying statutes, we 
attempted to ensure as much consistency as possible between our 
proposed exception and OIG's proposed safe harbor. Because of the close 
nexus between our proposed exception and the policies under 
consideration by OIG, we may consider comments submitted in response to 
OIG's proposals, even if we do not receive such comments on our 
proposals, and take additional actions when crafting our final rule.
    In recent years, both CMS and OIG have received numerous comments 
and suggestions urging the creation of an exception and a safe harbor 
to protect donations of cybersecurity technology and related 
services.\18\ The digitization of health care delivery and rules 
designed to increase interoperability and data sharing in the delivery 
of health care create numerous targets for cyberattacks. The health 
care industry and the technology used to deliver health care have been 
described as an interconnected ecosystem where the weakest link in the 
system can compromise the entire system.\19\ Given the prevalence of 
electronic health record storage, as well as the processing and transit 
of health records and other critical protected health information (PHI) 
between and within the components of the health care ecosystem, the 
risks associated with cyberattacks originating with ``weak links'' are 
borne by every component of the system.
---------------------------------------------------------------------------

    \18\ See, for example, U.S. Department of Health and Human 
Services, Office of Inspector General, Semiannual Report to 
Congress, Apr. 1, 2018-Sept. 30, 2018, at 84.
    \19\ See, for example, Health Care Industry Cybersecurity Task 
Force, Report on Improving Cybersecurity in the Health Care 
Industry, June 2017 (HCIC Task Force Report), available at https://www.phe.gov/preparedness/planning/cybertf/documents/report2017.pdf.
---------------------------------------------------------------------------

    Although we did not specifically request comments on cybersecurity, 
numerous commenters on the CMS RFI requested that we create an 
exception to protect the donation of cybersecurity technology and 
related services. Likewise, in response to its request for information 
specifically related to cybersecurity, OIG received overwhelming 
support for a safe harbor to protect the donation of cybersecurity 
technology and related services. Many commenters on both requests for 
information outlined the increasing prevalence of cyberattacks and 
other threats. Commenters noted that cyberattacks pose a fundamental 
risk to the health care ecosystem and that data breaches result in high 
costs to the health care industry and may endanger patients. Moreover, 
disclosures of PHI through a data breach can result in identity fraud, 
among other things.
    The Health Care Industry Cybersecurity (HCIC) Task Force, created 
by the Cybersecurity Information Sharing Act of 2015 (CISA),\20\ was 
established in March 2016 and is comprised of government and private 
sector experts. The HCIC Task Force produced its HCIC Task Force

[[Page 55831]]

Report in June 2017.\21\ The HCIC Task Force recommended, among other 
things, that the Congress ``evaluate an amendment to [the physician 
self-referral law and the anti-kickback statute] specifically for 
cybersecurity software that would allow health care organizations the 
ability to assist physicians in the acquisition of this technology, 
through either donation or subsidy,'' and noted that the regulatory 
exception to the physician self-referral law for EHR items and services 
and the safe harbor for EHR items and services could serve as a 
template for a new statutory exception.\22\
---------------------------------------------------------------------------

    \20\ Public Law 114-113, 129 Stat. 2242.
    \21\ HCIC Task Force Report, available at https://www.phe.gov/preparedness/planning/cybertf/documents/report2017.pdf.
    \22\ Id. at 27.
---------------------------------------------------------------------------

    Based on responses to OIG's request for information, we understand 
that the cost of cybersecurity technology and related services has 
increased dramatically, to the point where some providers and suppliers 
are unable to invest in and, therefore, have not invested in, adequate 
cybersecurity measures. Therefore, we believe that allowing entities 
that are willing to donate certain cybersecurity technology and related 
services, with appropriate safeguards, would greatly strengthen the 
entire health care ecosystem. Although donated technology and services 
may have value for the recipients of a donation insomuch as the 
recipient would be able to use its resources for needs other than 
cybersecurity expenses, we believe that a primary reason donors would 
provide cybersecurity technology and related services is to protect 
themselves from cyberattacks. As previously noted, the risks associated 
with a cyberattack on a single provider or supplier in an 
interconnected system are ultimately borne by every player in the 
system. Thus, an entity wishing to protect itself from cyberattacks has 
a vested interest in ensuring that the physicians with whom the entity 
shares data are also protected from cyberattacks, particularly where 
the connections allow the physicians to establish bidirectional 
interfaces with the entity, which inherently present higher risk than 
connections that permit physicians ``read-only'' access to the entity's 
data systems. We believe that certain cybersecurity donations would not 
pose a risk of program or patient abuse, provided that they satisfy all 
the requirements of the proposed exception, and that the exception we 
are proposing in this proposed rule, if finalized, would promote 
increased security for interconnected and interoperable health care IT 
systems without protecting potentially abusive arrangements.
    We are proposing to protect nonmonetary remuneration in the form of 
certain types of cybersecurity technology and related services. We are 
proposing to include within the scope of covered technology any 
software or other type of IT, other than hardware. In section II.E.2.e. 
of this proposed rule, we are alternatively proposing to permit the 
donation of certain cybersecurity hardware under certain circumstances. 
In an effort to foster beneficial cybersecurity donation arrangements 
without permitting arrangements that pose a risk of program or patient 
abuse, the proposed exception at Sec.  411.357(bb) would impose a 
number of requirements for cybersecurity donations, as set forth below. 
Notably, the proposed exception would require the donation to be 
necessary and used predominantly to implement, maintain, or reestablish 
cybersecurity.
a. Definitions
    We are proposing to define the terms ``cybersecurity'' and 
``technology.'' Because the definition of ``cybersecurity'' would also 
apply to our proposal to explicitly permit the donation of 
cybersecurity software and services under Sec.  411.357(w), we are 
proposing to include the definition of ``cybersecurity'' in our 
regulations at Sec.  411.351. The proposed definition of 
``technology,'' on the other hand, would be applicable only to the 
proposed exception for the donation of cybersecurity technology and 
related services and, therefore, would be included in the regulation 
text at proposed Sec.  411.357(bb)(2). We are proposing to define the 
term ``cybersecurity'' to mean the process of protecting information by 
preventing, detecting, and responding to cyberattacks and define the 
term ``technology'' to mean any software or other type of information 
technology other than hardware.
    We intend to interpret ``cybersecurity'' broadly and our proposed 
definition is derived from the National Institute for Standards and 
Technology (NIST) Framework for Improving Critical Infrastructure,\23\ 
a framework that does not apply specifically to the health care 
industry, but applies generally to any United States critical 
infrastructure. Our goal is to broadly define cybersecurity and avoid 
unintentionally limiting donations by relying on a narrow definition or 
a definition that might become obsolete over time. We solicit comment 
on this approach and whether a definition tailored to the health care 
industry would be more appropriate.
---------------------------------------------------------------------------

    \23\ Appendix B, Version 1.1 (April 16, 2018) available at 
https://nvlpubs.nist.gov/nistpubs/CSWP/NIST.CSWP.04162018.pdf.
---------------------------------------------------------------------------

    Our proposed definition of ``technology'' is similarly broad. We 
intend to be neutral with respect to the types of non-hardware 
cybersecurity technology to which the exception would be applicable. We 
intend for this exception to be broad enough to include cybersecurity 
software and other IT, such as an Application Programming Interface 
(API), which is neither software nor a service as those terms are 
generally used, that is available now and technology that may become 
available as the industry continues to develop. The definition of 
``technology'' for purposes of the proposed exception excludes 
hardware. Although we recognize that effective cybersecurity may 
require hardware that meets certain standards (for example, encrypted 
endpoints or updated servers), we are concerned that donations of 
valuable, multifunctional hardware may pose a risk of program or 
patient abuse. We believe that donations of technology that may be used 
for purposes other than cybersecurity present a risk that the donation 
is being made to influence referrals. Hardware is usually 
multifunctional and, as a result, likely would not be necessary and 
used predominantly to implement, maintain, or reestablish effective 
cybersecurity. To illustrate this policy, the proposed exception would 
not protect a laptop computer or tablet used in the general course by a 
physician to enter patient visit information into an EHR and respond to 
emails. However, it would protect encryption software for the laptop 
computer or tablet. Our proposal is consistent with a similar exclusion 
of hardware in the EHR exception at Sec.  411.357(w). (See 71 FR 45149 
for a discussion of our rationale for excluding hardware from 
protection under the EHR exception.) We solicit comments on this 
approach.
    We are considering two alternative proposals that would allow for 
the donation of certain cybersecurity hardware. Under the first 
alternative proposal, the exception at Sec.  411.357(bb) would cover 
specific hardware that is necessary for cybersecurity, provided that 
the hardware is stand-alone (that is, is not integrated within 
multifunctional equipment) and serves only cybersecurity purposes (for 
example, a two-factor authentication dongle). We solicit comments on 
what types of hardware might qualify and whether we should protect them 
under the proposed exception. Under our second alternative

[[Page 55832]]

proposal, we would permit entities to donate a broader range of 
cybersecurity technology, including hardware, provided that specified 
requirements are satisfied. We discuss the second alternative proposal 
in section II.E.2.e. of this proposed rule.
    Finally, we note that the proposed exception only protects items 
and services that meet the definition of cybersecurity technology and 
related services. It does not extend to other types of cybersecurity 
measures outside of technology or services. For example, the proposed 
exception would not protect donations of installation, improvement, or 
repair of infrastructure related to physical safeguards, even if they 
could improve cybersecurity (for example, upgraded wiring or installing 
high security doors). Donations of infrastructure upgrades are 
extremely valuable and have multiple benefits in addition to 
cybersecurity, and, thus, pose an increased risk that one purpose of 
the donation is to pay for or influence a physician's referrals to the 
donor entity.
b. Conditions on Donation and Protected Donors
    At Sec.  411.357(bb)(1)(i), we are proposing to limit the 
applicability of the exception for cybersecurity technology and related 
services to donated technology or services that are necessary and 
predominantly used to implement, maintain, or reestablish 
cybersecurity. The goal of this condition is to ensure that donations 
are being made for the purposes of addressing legitimate cybersecurity 
needs of donors and recipients; that is, the core function of the 
donated technology or service must be to protect information by 
preventing, detecting, and responding to cyberattacks. Our intent is to 
protect a wide range of technology and services that are specifically 
donated for the purpose of, and are necessary for, ensuring that donors 
and recipients have cybersecurity.
    As stated previously, we are taking a neutral position with respect 
to protected technology, including as to the types and versions of 
software that can receive protection. We do not distinguish between 
cloud-based software and software that must be installed locally. The 
types of technology potentially protected under the proposed exception 
include, but are not limited to, software that provides malware 
prevention, software security measures to protect endpoints that allow 
for network access control, business continuity software, data 
protection and encryption, and email traffic filtering. We believe 
these examples are indicative of the types of technology that are 
necessary and used predominantly for cybersecurity. We solicit comments 
on the proposed breadth of protected technology as well as whether we 
should expressly include (or exclude) other technology or categories of 
technology in the proposed exception.
    Similarly, we are proposing to protect a broad range of services. 
Such services could include--
     Services associated with developing, installing, and 
updating cybersecurity software;
     Cybersecurity training services, such as training 
recipients on how to use the cybersecurity technology, how to prevent, 
detect, and respond to cyber threats, and how to troubleshoot problems 
with the cybersecurity technology (for example, ``help desk'' services 
specific to cybersecurity);
     Cybersecurity services for business continuity and data 
recovery services to ensure the recipient's operations can continue 
during and after a cybersecurity attack;
     ``Cybersecurity as a service'' models that rely on a 
third-party service provider to manage, monitor, or operate 
cybersecurity of a recipient;
     Services associated with performing a cybersecurity risk 
assessment or analysis, vulnerability analysis, or penetration test; or
     Services associated with sharing information about known 
cyber threats, and assisting recipients responding to threats or 
attacks on their systems.
    We believe these types of services are indicative of the types of 
services that are necessary and used predominantly for cybersecurity. 
We solicit comments on the proposed breadth of protected services as 
well as whether we should expressly include (or exclude) other services 
or categories of services in the proposed exception. In all cases, the 
donation of services must be nonmonetary. For example, donating the 
time of a consultant to implement a cybersecurity program could be 
protected, but if an entity were to experience a cyberattack that 
involved ransomware, payment of the ransom amount for a recipient would 
not be protected.
    We reiterate that, although technology or services may have 
multiple uses, the proposed exception would only protect donations of 
technology and services that are used predominantly to implement, 
maintain, and reestablish cybersecurity. As explained in the discussion 
of the definition of technology, we remain concerned that donations of 
valuable multi-use technology or services pose a risk of program or 
patient abuse. The proposed exception would not protect donations of 
technology or services that are otherwise used in the normal course of 
the recipient's business (for example, general help desk services 
related to use of a practice's IT). We solicit comment on this approach 
and whether this proposed limitation would prohibit the donation of 
cybersecurity technology and related services that are vital to 
improving the cybersecurity posture of the health care industry.
    For the purposes of meeting the proposed requirement at Sec.  
411.357(bb)(1)(i) that the technology or services are necessary to 
implement, maintain, or reestablish cybersecurity, we are considering, 
and seek comment on, whether to deem certain arrangements to satisfy 
this requirement. (The deeming provision would not affect the 
requirement that the technology or services are used predominantly to 
implement, maintain, or reestablish cybersecurity. Parties would have 
to show on a case-by-case basis that this requirement is met.) 
Specifically, if we determine that a deeming provision is appropriate, 
we would deem donors and recipients to satisfy the requirement that the 
technology or services are necessary to implement, maintain, or 
reestablish cybersecurity if the parties demonstrate that the donation 
furthers a recipient's compliance with a written cybersecurity program 
that reasonably conforms to a widely-recognized cybersecurity framework 
or set of standards. Examples of such frameworks and sets of standards 
include those developed or endorsed by NIST, another American National 
Standards Institute-accredited standards body, or an international 
voluntary standards body such as the International Organization for 
Standardization. If finalized, the deeming provision would not require 
compliance with a specific framework or specific set of standards; 
rather, a deeming provision would merely provide an option for donors 
to demonstrate that the donation is necessary to implement, maintain, 
or reestablish cybersecurity. We believe that a deeming provision would 
provide some assurance to donors and recipients about how to 
demonstrate that donations are necessary to secure IT systems, devices, 
and patient data. We solicit comments on incorporating a deeming 
provision in Sec.  411.357(bb)(1)(i), including comments on ways that 
parties could reliably demonstrate that a donation furthers a 
recipient's compliance with a written cybersecurity program that 
reasonably

[[Page 55833]]

conforms to a widely-recognized cybersecurity framework or set of 
standards. For example, we seek comments on whether parties could 
demonstrate that a donation meets the cybersecurity deeming provision 
through documentation, certifications, or other methods not proscribed 
by regulation, as well as what qualifies as a widely recognized 
cybersecurity framework or set of standards.
    At proposed Sec.  411.357(bb)(1)(ii), we would require that donors 
not condition the amount or nature of, or eligibility for, 
cybersecurity donations on referrals. In other words, we are proposing 
that a donor could not require, explicitly or implicitly, that a 
recipient either refer to the donor or recommend the donor's business 
as a condition of receiving a cybersecurity donation. We understand 
that the purpose of donating cybersecurity technology and related 
services is to guard against threats that come from interconnected 
systems, and we understand and expect that a donor would provide the 
cybersecurity technology and related services only to physicians that 
connect to its systems, which includes physicians that refer to the 
donor. However, this condition would restrict a donor from conditioning 
the donation on referrals or other business generated.\24\
---------------------------------------------------------------------------

    \24\ We note that, if a system is only as strong as its weakest 
link, then even a very low-referring physician's practice poses a 
cybersecurity risk.
---------------------------------------------------------------------------

    Nothing in the proposed requirements of the exception is intended 
to require a donor to donate cybersecurity technology and related 
services to every physician that connects to its system. Donors would 
be able to select recipients in a variety of ways, provided that 
neither a recipient's eligibility, nor the amount or nature of the 
cybersecurity technology or related services donated, is determined in 
a manner that directly takes into account the volume or value of 
referrals or other business generated between the parties. For example, 
a donor could perform a risk assessment of a potential recipient (or 
require a potential recipient to provide the donor with a risk 
assessment) before determining whether to make a donation or the scope 
of a donation. If a donor is a hospital, the hospital might choose to 
limit donations to physicians who are on the hospital's medical staff. 
Or, the donor might select recipients based on the type of actual or 
proposed interface between them. For example, an entity may elect to 
provide a higher level of cybersecurity technology and services to a 
physician with whom it has a higher-risk, bi-directional read-write 
connection than the entity would provide to a physician with whom it 
has a read-only connection to a properly implemented, standards-based 
API that enables only the secure transmission of a copy of the 
patient's record to the physician. We solicit comments on this 
requirement.
    In contrast to the similar requirement in the EHR exception at 
Sec.  411.357(w)(6), the proposed exception for cybersecurity 
technology and related services does not include a list of selection 
criteria which, if met, would be deemed not to directly take into 
account the volume or value of referrals or other business generated by 
the physician. Our intent in proposing this exception is to remove 
obstacles to the adoption of cybersecurity in the health care industry 
in order to address the growing threat of cyberattacks. We are 
concerned that deeming provisions pertaining to the volume or value of 
referrals or other business generated may be interpreted as 
prescriptive requirements. It is our experience that deeming provisions 
may act as limits on the type or range of items or services that are 
deemed acceptable. Because we do not want to inhibit legitimate 
cybersecurity donations that may not fit squarely within an enumerated 
deeming provision, we are not proposing any deeming provisions 
pertaining to the requirement at proposed Sec.  411.357(bb)(1)(ii). At 
the same time, we recognize that some parties may prefer the guidance 
and assurance offered by deeming provisions, even if the deeming 
provisions are only ``safe harbors'' and are not requirements of the 
exception. Therefore, we are soliciting comments on whether we should 
include deeming provisions in the exception for cybersecurity donations 
that are similar to the provisions at Sec.  411.357(w)(6). We solicit 
comments on this approach and any other conditions or permitted conduct 
we should enumerate in this exception.
    We do not propose to restrict the types of entities that may make 
cybersecurity donations under this exception. Although donating 
cybersecurity technology and related services would relieve a recipient 
of a cost that it otherwise would incur, the fraud and abuse risks 
associated with cybersecurity are different than donations of other 
valuable technology, such as EHR items and services.
    Several commenters to OIG's request for information suggest that 
technology donations risk making referral sources beholden to the 
donors. Therefore, we are considering narrowing the scope of entities 
that may provide remuneration under the exception as we have done in 
other exceptions, such as the EHR exception. We solicit comments on 
whether particular types of entities should be excluded from donating 
cybersecurity technology and related services, and if so, why. 
Specifically, in past rulemakings we have distinguished between 
individuals and entities with direct and primary patient care 
relationships that have a central role in the health care delivery 
infrastructure, such as hospitals and physician practices, and 
suppliers of ancillary services, such as laboratories, and 
manufacturers or vendors that indirectly furnish items and services 
used in the care of patients. (For a discussion of our rationale in 
past rulemakings, see 78 FR 78757 through 78762.) We seek comments as 
to whether our historical concerns and other considerations regarding 
direct and indirect patient care apply in the context of cybersecurity 
donations.
c. Conditions for Recipients
    In proposed Sec.  411.357(bb)(1)(iii), we are proposing a 
requirement that neither a potential recipient, nor a potential 
recipient's practice (including employees or staff members), may make 
the receipt of cybersecurity technology and related services, or the 
amount or nature of the technology or services, a condition of 
continuing to do business with the donor. This requirement mirrors a 
requirement in the EHR exception at Sec.  411.357(w)(5). We solicit 
comments on this proposed requirement.
    We are not proposing to require a recipient contribution under the 
exception for cybersecurity technology and related services. As we 
explained previously, with this proposed exception, we seek to remove a 
barrier to donations that improve cybersecurity throughout the health 
care industry in response to the critical cybersecurity issues 
identified in the HCIC Task Force Report, by commenters to the CMS RFI 
and OIG request for information, and elsewhere. We are proposing to 
include only those requirements under the proposed exception that we 
believe are necessary to ensure that the arrangements do not pose a 
risk of program or patient abuse. In the case of cybersecurity 
technology and related services, we do not believe that requiring a 
minimum contribution to the cost by the recipient is necessary or, in 
some cases, practical. We recognize that the level of services for each 
recipient might vary, and might be higher or lower each year, each 
month, or even each week, resulting in the inability of certain 
physician practices, especially those in rural areas, to make the 
required contribution, which, in

[[Page 55834]]

turn, risks the overall cybersecurity of the health ecosystem of which 
the practices are a part. Similarly, donors may aggregate the cost of 
certain services across all recipients, such as cybersecurity patches 
and updates, on a regular basis, which may result in a contribution 
requirement becoming a barrier to widespread, low-cost improvements in 
cybersecurity because of the amount allocated to each recipient. 
Moreover, if physicians are not required to utilize resources to 
contribute to the cost of cybersecurity that benefits both the donor 
and the physician, they will instead have the flexibility to contribute 
to the overall cybersecurity of the health care system by using 
available resources for otherwise unprotected cybersecurity-related 
hardware that is core to their business, including updates or 
replacements for outdated legacy hardware that may pose a cybersecurity 
risk.
    Importantly, although the proposed exception would not require a 
recipient to contribute to the cost of donated cybersecurity technology 
or related services, the exception would not prohibit donors from 
requiring such a contribution. Donors are free to require recipients to 
contribute to the cost, and such contributions would be excepted under 
proposed Sec.  411.357(bb), provided that the arrangement satisfies all 
other requirements of the proposed exception, including the requirement 
at proposed Sec.  411.357(bb)(ii) regarding determinations of the 
eligibility for or the amount or nature of the donated cybersecurity 
technology and related services. For example, if a donor gave a full 
suite of cybersecurity technology and related services at no cost to a 
high-referring practice but required a low-referring practice to 
contribute 20 percent of the cost, then the donor could violate the 
conditions at proposed Sec.  411.357(bb)(1)(ii).
d. Written Documentation
    At Sec.  411.357(bb)(iv), we are proposing to require that the 
arrangement is documented in writing. Although we would not interpret 
this requirement to mean that every item of cybersecurity technology 
and every potential related cybersecurity service must be specified in 
the documentation evidencing the arrangement, we expect that written 
documentation of the arrangement would identify the recipient of the 
donation and include the following: A general description of the 
cybersecurity technology and related services provided to the recipient 
over the course of the arrangement, the timeframe of donations made 
under the arrangement, a reasonable estimate of the value of the 
donation(s), and, if applicable, any financial responsibility for the 
cost of the cybersecurity technology and related services that is 
shared by the recipient. We are not requiring the parties to document 
the arrangement in a signed contract, because we believe that this 
requirement may lead to inadvertent violation of the physician self-
referral law, especially in situations where donors need to act quickly 
and decisively--prior to obtaining the signature of each physician who 
is considered a party to the arrangement--to provide needed 
cybersecurity technology or related services to recipients. However, we 
note that a written agreement between the parties that includes the 
identified elements would satisfy the proposed writing requirement at 
Sec.  411.357(bb)(1)(iv). We solicit comments on whether we should 
specify in regulation which terms should be required to be in writing 
and, if so, whether they should be the terms discussed in this section 
II.E.2.d. or whether additional or different terms should be required. 
We also seek comment regarding whether we should require a signed 
writing between the parties to the arrangement.
e. Alternative Proposal for Inclusion of Cybersecurity Hardware 
Donations
    We are also proposing and solicit comments on an alternative 
approach that would allow the donation of cybersecurity hardware, 
provided that an additional requirement is satisfied. Under this 
alternative proposal, a protected donation could also include 
cybersecurity hardware that a donor has determined is reasonably 
necessary based on cybersecurity risk assessments of its own 
organization and the potential recipient. We believe that this 
alternative proposal would provide donors and recipients the ability to 
provide most types of technology necessary to bolster cybersecurity 
without creating a risk of program or patient abuse because the 
hardware would be necessary to implement and maintain effective 
cybersecurity if it was identified in the cybersecurity risk 
assessments.
    This alternative proposal builds on existing legal requirements and 
best practices related to information security generally and the health 
care industry more specifically. NIST Special Publication 800-30, which 
does not directly apply to the health care industry, but represents 
industry standards for information security practices, explains that 
the purpose of a risk assessment is to inform decision makers and 
support risk responses.\25\
    According to NIST, a risk assessment does so by identifying: (i) 
Relevant threats to organizations or threats directed through 
organizations against other organizations; (ii) vulnerabilities both 
internal and external to organizations; (iii) impact ([that is], harm) 
to organizations that may occur given the potential for threats 
exploiting vulnerabilities; and (iv) likelihood that harm will occur. 
The end result is a determination of risk ([that is], typically a 
function of the degree of harm and likelihood of harm occurring). With 
respect to health care organizations, the HHS Office for Civil Rights 
has explained that conducting a risk analysis is the first step in 
identifying and implementing safeguards that comply with and carry out 
the standards and implementation specifications in the Health 
Information Technology for Economic and Clinical Health (HITECH) Act 
(Title XIII of the American Recovery and Reinvestment Act of 2009, Pub. 
L. 111-5). (For more information, see HHS Guidance on Risk Analysis at 
https://www.hhs.gov/hipaa/for-professionals/security/guidance/guidance-risk-analysis/index.html?language=es.) We believe that risk assessments 
are a key component to developing effective organization-wide risk 
management for information security and that, when conducted consistent 
with industry standards, would provide a reasonable basis for donors to 
identify risks and threats to their organizational information security 
that could be mitigated by donating cybersecurity hardware to 
physicians who connect with their IT systems. We expect that donations 
made in response to a risk or threat identified through a cybersecurity 
risk assessment would satisfy the core requirement of the proposed 
exception; that is, that the donated cybersecurity technology and 
related services are necessary to implement and maintain effective 
cybersecurity.
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    \25\ NIST Special Publication 800-30 Revision 1, Guide for 
Conducting Risk Assessments (Sept. 2012), available at https://nvlpubs.nist.gov/nistpubs/legacy/sp/nistspecialpublication800-30r1.pdf.
---------------------------------------------------------------------------

    Under this alternative proposal, a donor must have a cybersecurity 
risk assessment that identifies the recipient as a risk to its 
cybersecurity. In addition, the recipient must have a cybersecurity 
risk assessment (which may be provided by the donor if all the 
requirements of proposed Sec.  411.357(bb) are satisfied) that would 
provide a reasonable basis to determine that the donated cybersecurity 
hardware is needed to address a risk or threat identified by a

[[Page 55835]]

risk assessment. Both risk assessments must be conducted in a manner 
consistent with industry standards. We are proposing to base our 
definition of ``risk assessment'' on NIST Special Publication 800-30 
and we are soliciting comment on whether such a definition would be 
sufficient for purposes of our proposed exception and the alternative 
proposal to allow donations of hardware. We are also soliciting comment 
on whether we should include specific standards for cybersecurity risk 
assessments as independent requirements of the exception at Sec.  
411.357(bb) if we finalize this alternative proposal, and whether the 
requirement that any donated cybersecurity hardware must be necessary 
and used predominantly for cybersecurity obviates the need for 
requiring that the recipient has a cybersecurity risk assessment. 
Finally, we are interested in commenters' perspectives as to whether 
the requirement that both the donor and recipient have cybersecurity 
risk assessments: (1) Is necessary in light of other laws and 
regulations that require similar risk assessments; and (2) would 
inhibit donations of critical cybersecurity technology and related 
services by diverting resources to the procurement of such risk 
assessments that could otherwise be used to improve the cybersecurity 
of the parties to the arrangement or the health care ecosystem as a 
whole.
    As described previously in this section II.E.2., the proposed 
exception for cybersecurity technology and related services would allow 
an entity to donate a cybersecurity risk assessment, provided that all 
of the requirements of the exception are satisfied. One goal of our 
proposed exception is to eliminate certain barriers to the donation of 
cybersecurity and related services, in order to increase the 
cybersecurity of all health care organizations and improve their 
cybersecurity practices. We believe that protecting the donation of 
cybersecurity hardware that is reasonably based on the risks or threats 
identified in a risk assessment (whether or not the risk assessment is 
donated by the donor) would lead to improved cybersecurity for all 
health care organizations, especially those organizations that cannot 
afford to retain dedicated in-house information security personnel or 
designate an IT staff member with cybersecurity as a collateral duty. 
We expect that risk assessment practices vary across the health care 
industry and may be dependent on the size and sophistication of the 
organization. We are interested in comments that describe the existing 
practices of potential donors and recipients with respect to the 
conducting of risk assessments that would provide a reasonable basis to 
determine that a donation of cybersecurity hardware is reasonable and 
necessary.
    We are considering additional safeguards in the event we finalize 
this alternate proposal. For instance, we might limit the types of 
cybersecurity hardware permitted under the alternative proposal by 
defining ``hardware'' for purposes of Sec.  411.357(bb). We are 
interested in comments that explain what types of hardware are 
necessary for effective cybersecurity. Even if we finalize this 
alternative proposal, multifunctional hardware still would be 
prohibited because it would not be necessary and predominantly used to 
implement and maintain effective cybersecurity, as required under 
proposed Sec.  411.357(bb)(1)(i). We are also considering requiring a 
15 percent financial contribution from the recipient, similar to the 
EHR exception at Sec.  411.357(w)(4). We are interested in comments on 
this approach, whether a 15 percent financial contribution would be 
sufficient to ensure that the recipient would use the donated hardware 
to improve its cybersecurity posture as well as that of the donor, and 
whether a different financial contribution percentage would be more 
appropriate and why. We are proposing to exempt small and rural 
providers from the financial contribution requirement if we finalize 
this alternative proposal, and we are interested in comments on this 
approach.
    Finally, we are soliciting comments regarding whether we should 
limit the amount or type of donated hardware by establishing a cap on 
the value of the donated hardware, either in lieu of or in conjunction 
with the 15 percent financial contribution.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to 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.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding Exceptions to the Physician Self-Referral Law Related 
to Compensation (Sec.  411.357)

    We are proposing new exceptions for compensation arrangements that 
facilitate value-based health care delivery and payment in a value-
based enterprise (Sec.  411.357(aa)). A value-based enterprise would be 
required to have a governing document that describes the enterprise and 
how its VBE participants intend to achieve the value-based purposes of 
that enterprise (see the proposed definition of ``value-based 
enterprise'' at Sec.  411.351).
    The proposed exception for value-based arrangements with meaningful 
downside financial risk to the physician at Sec.  411.357(aa)(2) would 
require a description of the nature and extent of the physician's 
downside financial risk to be set forth in writing.
    The proposed exception for value-based arrangements at Sec.  
411.357(aa)(3) would require the arrangement to be set forth in writing 
and signed by the parties. All proposed exceptions at Sec.  411.357(aa) 
would require records of the methodology for determining and the actual 
amount of remuneration paid under the arrangement to be maintained for 
a period of at least 6 years. We have also proposed a new exception for 
cybersecurity technology and related services (Sec.  411.357(bb)), and 
arrangements under this new exception would have to be documented in 
writing. Finally, we have proposed streamlining the parties who must 
sign the writing in the exception for physician recruitment (Sec.  
411.357(e)). The burden associated with writing and signature 
requirements would be the time and effort necessary to prepare written 
documents and obtain signatures of the parties. The burden associated 
with record retention requirements would be the time and effort 
necessary to compile and store the records.
    While the writing, signature, and record retention requirements are

[[Page 55836]]

subject to the PRA, we believe the associated burden is exempt under 5 
CFR 1320.3(b)(2). We believe that the time, effort, and financial 
resources necessary to comply with these requirements would be incurred 
by persons without federal regulation during the normal course of their 
activities. Specifically, we believe that, for normal business 
operations purposes, health care providers and suppliers document their 
financial arrangements with physicians and others and retain these 
documents in order to identify and be able to enforce the legal 
obligations of the parties. Therefore, we believe that the writing, 
signature and record retention requirements should be considered usual 
and customary business practices.
    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
CMS-1720-P, Fax: (202) 395-6974; or Email: [email protected]

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Statement (or Analysis) (RIA)

A. Statement of Need

    This proposed rule aims to remove potential regulatory barriers to 
care coordination and value-based care created by the physician self-
referral law. Currently, certain beneficial arrangements that would 
advance the transition to value-based care and the coordination of care 
among providers in both the Federal and commercial sectors may be 
impermissible under the physician self-referral law. Industry 
stakeholders have informed us that, because the consequences of 
noncompliance with the physician self-referral law are so dire, 
providers, suppliers, and physicians may be discouraged from entering 
into innovative arrangements that would improve quality outcomes, 
produce health system efficiencies, and lower costs (or slow their rate 
of growth). This proposed rule would address this issue by establishing 
three new exceptions that would protect certain arrangements for value-
based activities between physicians and entities that furnish 
designated health services in a value-based enterprise. These 
exceptions would provide critically needed flexibility for physicians 
and entities to work together while protecting the integrity of the 
Medicare program. We believe this new flexibility will promote 
innovation throughout the health care system.
    Commenters on the CMS RFI also told us that they currently invest 
sizeable resources to comply with the physician self-referral law's 
billing and claims submission prohibitions and thereby avoid its 
substantial penalties. Our proposals that do not directly address 
value-based arrangements seek to balance genuine program integrity 
concerns against this considerable burden. These proposals would 
reassess our regulations to ensure they appropriately reflect the scope 
of the statute's reach, establish exceptions for common nonabusive 
compensation arrangements between physicians and the entities to which 
they refer Medicare beneficiaries for designated health services, and 
provide critically necessary guidance for physicians and health care 
providers and suppliers whose financial relationships are governed by 
the physician self-referral law. We believe these reforms will greatly 
reduce burden by providing additional flexibility to enable parties to 
enter into nonabusive arrangements and by making physician self-
referral law compliance more straightforward.

B. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Act, section 202 of the 
Unfunded Mandates Reform Act of 1995 (March 22, 1995; Pub. L. 104-4), 
Executive Order 13132 on Federalism (August 4, 1999), the Congressional 
Review Act (5 U.S.C. 804(2)), and Executive Order 13771 on Reducing 
Regulation and Controlling Regulatory Costs (January 30, 2017).
    Executive Orders 12866 and 13563 direct 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). An RIA 
must be prepared for major rules with economically significant effects 
($100 million or more in any 1 year). This rule is considered to be 
economically significant. Pursuant to the Congressional Review Act (5 
U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs 
designated this rule as a major rule, as defined by 5 U.S.C. 804(2).
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. For purposes of the RFA, most hospitals and most other 
providers and suppliers are considered small entities, either by 
nonprofit status or by having revenues of less than $7.5 million to 
$38.5 million in any 1 year. We anticipate that a large portion of 
affected entities are small based on these standards. The specific 
affected entities are discussed later in this section. Individuals and 
states are not included in the definition of a ``small entity.'' HHS 
considers a rule to have a significant impact on a substantial number 
of small entities if it has at least a three percent impact of revenue 
on at least five percent of small entities. We are not preparing an 
analysis for the RFA because we have determined, and the Secretary 
proposes to certify, that this proposed rule would not have a 
significant economic impact on a substantial number of small entities.
    We determined that this proposed rule does not have a significant 
impact on small businesses because it would likely reduce, not 
increase, regulatory burden. This proposed rule would not require 
existing compliant financial relationships to be restructured. Instead, 
it would provide important new flexibility to enable parties to create 
new arrangements that advance the transformation to a value-based 
health care system and remove regulatory barriers to certain beneficial 
and nonabusive arrangements, such as the donation of cybersecurity 
technology and services. It would also reduce burden by clarifying 
certain key provisions found in current regulations. Also, although we 
expect entities to incur costs, these costs are estimated to be less 
than $1,000 per entity. These costs are unlikely to have an impact of 
three percent of revenue, and we expect they will be offset by savings 
resulting

[[Page 55837]]

from this rule. Overall, this proposed rule is accommodating to 
legitimate financial relationships while reducing regulatory burden and 
continuing to protect against program and patient abuse.
    In addition, section 1102(b) of the Act requires us to prepare an 
RIA if a rule may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must conform 
to the provisions of section 603 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 for Medicare 
payment regulations 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 participate in innovative 
arrangements that enhance care coordination and advance the transition 
to a value-based health care system. Therefore, we are not preparing an 
analysis for section 1102(b) of the Act because we have determined, and 
the Secretary certifies, that this proposed rule would not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2019, that 
threshold is approximately $154 million. This rule imposes no mandates 
on state, local, or tribal governments, or on the private sector, and 
reduces regulatory burden on health care providers and suppliers.
    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. Since this regulation does not impose any costs on state 
or local governments, the requirements of Executive Order 13132 are not 
applicable.
    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017 and requires that the 
costs associated with significant new regulations ``shall, to the 
extent permitted by law, be offset by the elimination of existing costs 
associated with at least two prior regulations.'' This proposed rule, 
if finalized, is expected to be a deregulatory action. We seek comment 
on the economic impact of this proposed rule, including any potential 
increase or decrease in utilization, any potential effects due to 
behavioral changes, or any other potential cost savings or expenses to 
the Government as a result of this rule.

C. Anticipated Effects

    This proposed rule would affect physicians and entities with which 
they have financial relationships that furnish designated health 
services payable by Medicare. The following items or services are DHS: 
(1) Clinical laboratory services; (2) physical therapy services; (3) 
occupational therapy services; (4) outpatient speech-language pathology 
services; (5) radiology and certain other imaging services; (6) 
radiation therapy services and supplies; (7) durable medical equipment 
and supplies; (8) parenteral and enteral nutrients, equipment, and 
supplies; (9) prosthetics, orthotics, and prosthetic devices and 
supplies; (10) home health services; (11) outpatient prescription 
drugs; and (12) inpatient and outpatient hospital services. We do not 
have data on the number of physicians and entities that furnish 
designated health services payable by Medicare that have financial 
relationships, but we believe a substantial fraction of Medicare-
enrolled physicians, group practices, hospitals, clinical laboratories, 
and home health agencies are affected by the physician self-referral 
law. We anticipate that this proposed rule will have significant, 
ongoing benefits for the affected physicians and entities and the 
entire health care system.
    To estimate the number of entities directly affected by this rule, 
we use Medicare enrollment data. According to this data, there were 
2,039 single or multispecialty clinics or group practices, 3,139 
clinical laboratories (billing independently), 2,043 outpatient 
physical therapy/speech pathology providers, 2,843 independent 
diagnostic testing facilities, 11,593 home health agencies, 6,123 
inpatient hospitals, 4,233 rural health clinics, 180 comprehensive 
outpatient rehabilitation facilities, 8,289 federally qualified health 
centers, and 9,748 medical supply companies enrolled in Medicare in in 
2017.\26\ In addition, we estimate that 400 physician practices 
unassociated with single or multispecialty clinics or group practices 
will independently review and respond to the rule. We request public 
comment on the entities affected by the rule.
---------------------------------------------------------------------------

    \26\ CMS Program Statistics, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/CMSProgramStatistics/2017/2017_Providers.html.
---------------------------------------------------------------------------

    We anticipate that directly affected entities will review the rule 
upon finalization in order to determine whether to explore newly 
permissible value-based arrangements and to take advantage of burden-
reducing clarifications provided by the rule. We estimate that all 
directly affected entities described above that would be eligible to 
use the proposed rules will review the rule. We estimate that reviewing 
the final rule will require an average of three hours of time each from 
the equivalent of a compliance officer and a lawyer.
    To estimate the costs associated with this review, we use a 2018 
wage rate of $34.86 for compliance officers and $69.34 for lawyers from 
the Bureau of Labor Statistics,\27\ and we double those wages to 
account for overhead and benefits. As a result, we estimate total 
regulatory review costs of $31.7 million in the first year following 
finalization of the rule. We seek public comment on these assumptions.
---------------------------------------------------------------------------

    \27\ U.S. Department of Labor, Bureau of Labor Statistics, May 
2018 National Occupational Employment and Wage Estimates United 
States, https://www.bls.gov/oes/2018/may/oes_nat.htm.
---------------------------------------------------------------------------

    In developing this proposed rule, we have taken great care to 
ensure that the safeguards against program and patient abuse in our 
proposed new exceptions impose the minimum burden possible while 
providing full protection against overutilization and other harms 
against which the physician self-referral law is designed to protect. 
For example, we believe a value-based enterprise would ordinarily 
develop a governing document that describes the value-based enterprise 
and how the VBE participants intend to achieve its value-based 
purpose(s), so our requirement would not impose any additional burden. 
We also believe that parties to an arrangement under which remuneration 
is paid already keep business records necessary for a variety of 
purposes, such as income tax filings, records of compliance with state 
laws (including fee splitting laws), and, for nonprofit entities, 
justification for tax-exempt status. Therefore, we do not believe the 
proposed requirement to maintain records of the methodology for 
determining and the actual amount of remuneration paid under a value-
based arrangement for a period of at least 6 years imposes additional 
burden. In addition, we believe that physicians and entities routinely 
document their financial arrangements in writing as a common good 
business practice and so the arrangements can be enforced. For

[[Page 55838]]

example, we believe that an entity would ordinarily ensure that the 
details of a shared loss repayment agreement are documented in writing 
to ensure the arrangement can be enforced under state law. Similarly, 
we believe that entities that are working together to achieve a purpose 
would routinely monitor their operations to confirm that their plans 
are working as intended. We seek comments on these assumptions.
    The new exceptions for arrangements that facilitate value-based 
health care delivery and payment have numerous benefits that would 
reduce costs and improve quality not only for Medicare and its 
beneficiaries but to patients and the health care system in general. 
For example, these new exceptions provide important new flexibility for 
physicians and entities to work together to improve patient care and 
reduce costs. This increased flexibility would provide new 
opportunities for the private sector to develop and implement cost-
saving, quality-improving programs that might currently be 
impermissible. We anticipate that implementation of improvements and 
efficiencies such as care redesign protocols resulting from private 
sector innovation could have a beneficial effect on the care provided 
to Medicare beneficiaries and thereby result in savings for 
beneficiaries and the Trust Funds. We believe that these new exceptions 
would also increase participation in Innovation Center models because, 
unlike the fraud and abuse waivers that have been issued for certain 
Innovation Models, the exceptions would not expire and would not be 
narrowly designed to apply solely to one specific model. We anticipate 
that this increased participation would bolster the cost savings and 
quality improvements of Innovation Center models. We also believe that 
applying the new exceptions would make compliance more straightforward 
for physicians and entities participating in Innovation Center models, 
thus resulting in cost savings for these parties. In addition, we 
believe that the new exceptions for arrangements that facilitate value-
based health care delivery and payment would ensure that the physician 
self-referral law continues to provide meaningful protection against 
overutilization and other harms, thus preventing increased Medicare 
expenditures and associated beneficiary liability. We lack data to 
quantify these effects and seek public comment on these impacts.
    We believe that the clarifications and regulatory revisions of key 
terminology (specifically, the terms ``commercially reasonable'' and 
``fair market value,'' the volume or value standard, and the other 
business generated standard) discussed in section II.B. of this 
proposed rule would have significant, ongoing benefits to all 
physicians and entities affected by the physician self-referral law. 
These terms are used throughout the physician self-referral 
regulations. Commenters on the CMS RFI indicated that additional 
guidance on these terms is necessary to reduce the complexity of 
structuring financial arrangements to comply with the physician self-
referral law.
    We anticipate that the proposed changes to decouple the physician 
self-referral law regulations from the anti-kickback statute and 
federal and state laws or regulations governing billing or claims 
submission would reduce burden by making compliance more 
straightforward for physicians and entities. We stress that the anti-
kickback statute and billing laws remain in full force and effect, so 
those laws would continue to protect against program and patient abuse. 
We anticipate that our proposed changes to the definitions of 
``designated health services,'' ``physician,'' and ``remuneration;'' 
the proposed ownership and investment interest provisions in Sec.  
411.354(b); and the proposed exception for remuneration unrelated to 
the provision of designated health services would reduce compliance 
burden by providing protection for nonabusive financial relationships. 
Our proposed changes for the exception for payments by a physician and 
the exception to fair market value would make these exceptions 
available to protect financial arrangements that must currently be 
protected by other exceptions that are more complicated and burdensome 
to meet. We anticipate that this added flexibility would provide 
substantial burden reduction through reduced compliance costs. We note 
that RFI commenters expressed concern about the need for regulatory 
change to reduce burden on many of these matters.
    We have also proposed numerous other changes that while relatively 
minor, would reduce burden. For example, we believe that the 
modifications to the group practice rules provide useful clarification 
to physicians and group practices. We anticipate that even these minor 
changes would provide a beneficial effect on the burden to comply with 
the group practice rules. We anticipate that our proposed changes 
relating to isolated transactions, the period of disallowance, the 
special rules on compensation arrangements, the exceptions for rental 
of office space and rental of office equipment, the exception for 
physician recruitment, and the exception for assistance to compensate a 
nonphysician practitioner would also have a beneficial impact by 
reducing the existing burden on physicians and entities through the 
provision of additional guidance and clarifications. We lack data to 
quantify these effects and seek public comment on these impacts.
    The American Hospital Association estimates compliance costs faced 
by hospitals.\28\ They estimate $350,000 \29\ in annual costs for an 
average hospital to comply with fraud and abuse regulations, which 
include the physician self-referral rules. To estimate aggregate fraud 
and abuse compliance costs, we multiply this figure by the number of 
Medicare enrolled hospitals, which implies $2.1 billion in total annual 
costs across these hospitals. Based on RFI comments, compliance with 
the physician self-referral regulations comprises a substantial 
fraction of these costs. Furthermore, we anticipate that clarifications 
provided in this rule will substantially reduce the complexity of 
compliance for affected entities, greatly reducing the burden that they 
face. As a result, we expect this rule will substantially reduce net 
fraud and abuse compliance burden for affected entities, although we 
lack data to quantify these estimates. If this rule reduces this burden 
for hospitals by 1.5 percent, this burden reduction will offset all 
first year costs of the rule and generate substantial net savings in 
subsequent years. We believe it is very likely that burden reduction at 
hospitals will exceed this level, and therefore tentatively believe 
that this rule will be considered a deregulatory action. We note that 
hospitals represent a fraction of entities affected by this rule, and 
burden is likely to decline substantially for other categories of 
entities affected by this rule. We seek public comment on the extent to 
which this rule will reduce compliance burden for hospitals and 
entities other than hospitals.
---------------------------------------------------------------------------

    \28\ https://www.aha.org/sites/default/files/regulatory-overload-report.pdf.
    \29\ Note that the figure is adjusted for inflation between 2017 
and 2018.
---------------------------------------------------------------------------

    Our proposed modifications to the EHR exception are modest and 
would clarify that protection for certain cybersecurity technology is 
included as part of an electronic health records arrangement, update 
provisions regarding interoperability to align with newer CMS and ONC 
standards in a manner that is not expected to increase costs as a 
result of this rulemaking, and remove the sunset date. The EHR 
exception would continue to be available to physicians and entities 
other than laboratories. We would

[[Page 55839]]

expect the same entities that are currently using the EHR exception to 
continue to use the exception. We anticipate that these proposed 
changes would result in an incremental reduction in compliance burden.
    In section II.E. of this proposed rule, we discuss new exceptions 
for limited remuneration to a physician and cybersecurity technology. 
We anticipate that the new exception for limited remuneration to a 
physician would ease compliance burden because it would allow entities 
to compensate a physician for items or services provided by the 
physician without being subject to all the documentation and certain 
other requirements of existing exceptions to the physician self-
referral law. We believe this new exception would also provide 
additional flexibility where these arrangements are not covered by an 
existing exception. We anticipate that the cybersecurity exception 
would be widely used by physicians, group practices, and hospitals. We 
believe this proposed exception would help to address the growing 
threat of cyberattacks that infiltrate data systems and corrupt or 
prevent access to health records and other information essential to the 
safe and effective delivery of health care. We lack data to quantify 
these effects and seek public comment on these impacts.

D. Alternatives Considered

    We carefully considered the alternative of maintaining the status 
quo and not pursuing regulatory action. However, we believe that the 
transition to a value-based healthcare system is urgently needed due to 
unsustainable costs inherent in the current volume-based system. We 
believe this proposed rule would address the critical need for 
additional flexibility that is necessary to advance the transition to 
value-based care and improve the coordination of care among providers 
in both the Federal and commercial sectors.
    We also considered proposing to limit the new exceptions for 
arrangements that facilitate value-based health care delivery and 
payment to CMS- sponsored models or establishing separate exceptions 
with different criteria for arrangements that exist outside CMS-
sponsored models. However, we believe that in their current state, the 
physician self-referral regulations discourage the development and 
adoption of rewards that encourage change on a broad scale, across all 
patient populations and payor types, and over indefinite periods of 
time. In addition, we considered establishing an exception to protect 
care coordination activities performed outside of a value-based 
enterprise. We rejected this alternative due to program integrity 
concerns that could exist without the incentives and protections 
inherent in a value-based enterprise.
    We considered including provisions in the proposed exceptions for 
value-based arrangements that would require compensation to be set in 
advance, fair market value, and not determined in any manner that takes 
into account the volume or value of a physician's referrals or the 
other business generated between the parties. We are concerned, 
however, that the inclusion of such requirements would conflict with 
our goal of dismantling and addressing regulatory barriers to value-
based care transformation. We further believe that the disincentives 
for overutilization, stinting on patient care, and other harms the 
physician self-referral law was intended to address that are built into 
the proposed value-based definitions will operate in tandem with the 
requirements included in the proposed exceptions and be sufficient to 
protect against program and patient abuse. We are also considering 
whether to exclude laboratories and DMEPOS suppliers from the 
definition of VBE participant. It is not clear to us that laboratories 
and DMEPOS suppliers have the direct patient contacts that would 
justify their inclusion as parties working under a protected value-
based arrangement to achieve the type of patient-centered care that is 
a core tenet of care coordination and a value-based health care system.
    Through our own experience administering the physician self-
referral law regulations and our thorough analysis of CMS RFI comments, 
we recognize the urgent and compelling public policy need for 
additional guidance on the physician self-referral law. In preparing 
this rule, we conducted an in-depth review of our existing regulations 
to identify those matters that might benefit from additional guidance. 
We have also taken great care to provide this guidance in the clearest, 
most straightforward manner possible. For example, we considered 
addressing the need for guidance on the applicability of the physician 
self-referral law to referrals for inpatient hospital services after 
admission through modifying the definition of ``referral'' rather than 
the definition of ``designated health services.'' We are concerned that 
modifying the definition of ``referral'' could have a broader effect 
and would not be as clear. We have also carefully weighed each proposal 
to ensure that it does not pose a risk of program or patient abuse. For 
example, we considered whether to protect donations of multi-use 
technology or services in the proposed cybersecurity exception but are 
concerned that they may pose a risk of program or patient abuse. We 
seek comments on these regulatory alternatives.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 411

    Diseases, Medicare, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR part 411 as set forth 
below:

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

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

    Authority:  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. Amend Sec.  411.351 by--
0
a. Revising the introductory text;
0
b. Adding alphabetically definitions for ``Commercially reasonable'' 
and ``Cybersecurity'';
0
c. In the definition of ``Designated health services (DHS)'' by 
revising paragraph (2);
0
d. Removing the definition of ``Does not violate the anti-kickback 
statute'';
0
e. Revising the definition of ``Electronic health record'';
0
f. Revising the definition of ``Fair market value'';
0
g. Adding alphabetically a definition for ``General market value'';
0
h. Revising the definition of ``Interoperable'';
0
i. Adding alphabetically a definition for ``Isolated financial 
transaction'';
0
j. In the definition of ``List of CPT/HCPCS Codes'' by removing the 
term ``website'' and adding in its place the term '' website'';
0
k. In the definition of ``Locum tenens physician (or substitute 
physician)'' by removing the phrase ``is a physician'' and adding in 
its place the phrase ``means a physician'';
0
l. Revising the definition of ``Physician'';
0
m. In the definition of ``Referral'' by adding paragraph (4);
0
n. In the definition of ``Remuneration'' by revising paragraphs (2) 
introductory text and (3)(iii);
0
o. Adding alphabetically a definition for ``Target patient 
population'';

[[Page 55840]]

0
p. Revising the definition of ``Transaction''; and
0
q. Adding alphabetically definitions for ``Value-base activity'', 
``Value-based arrangement'', ``Value-based enterprise (VBE)'', ``Value-
based purpose'', and ``VBE participant''.
    The revisions and additions read as follows:


Sec.  411.351   Definitions.

    The definitions in this subpart apply only for purposes of section 
1877 of the Act and this subpart. As used in this subpart, unless the 
context indicates otherwise:
* * * * *
    Commercially reasonable means that the particular arrangement 
furthers a legitimate business purpose of the parties and is on similar 
terms and conditions as like arrangements. An arrangement may be 
commercially reasonable even if it does not result in profit for one or 
more of the parties.
* * * * *
    Cybersecurity means the process of protecting information by 
preventing, detecting, and responding to cyberattacks.
    Designated health services (DHS) * * *
    (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, SNF 
Part A payments or ASC services identified at Sec.  416.164(a)), except 
to the extent that services listed in paragraphs (1)(i) through (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). For services furnished to 
inpatients by a hospital, a service is not a designated health service 
payable, in whole or in part, by Medicare if the furnishing of the 
service does not affect the amount of Medicare's payment to the 
hospital under the Acute Care Hospital Inpatient Prospective Payment 
System (IPPS).
* * * * *
    Electronic health record means a repository that includes 
electronic health information that--
    (1) Is transmitted by or maintained in electronic media; and
    (2) Relates to the past, present, or future health or condition of 
an individual or the provision of health care to an individual.
* * * * *
    Fair market value means--
    (1) General. The value in an arm's-length transaction, with like 
parties and under like circumstances, of like assets or services, 
consistent with the general market value of the subject transaction.
    (2) Rental of equipment. With respect to the rental of equipment, 
the value in an arm's-length transaction, with like parties and under 
like circumstances, of rental property for general commercial purposes 
(not taking into account its intended use), consistent with the general 
market value of the subject transaction.
    (3) Rental of office space. With respect to the rental of office 
space, the value in an arm's-length transaction, with like parties and 
under like circumstances, of rental property for general commercial 
purposes (not taking into account its intended use), without adjustment 
to reflect the additional value the prospective lessee or lessor would 
attribute to the proximity or convenience to the lessor where the 
lessor is a potential source of patient referrals to the lessee, and 
consistent with the general market value of the subject transaction.
    General market value means--
    (1) General. The price that assets or services would bring as the 
result of bona fide bargaining between the buyer and seller in the 
subject transaction on the date of acquisition of the assets or at the 
time the parties enter into the service arrangement.
    (2) Rental of equipment or office space. The price that rental 
property would bring as the result of bona fide bargaining between the 
lessor and the lessee in the subject transaction at the time the 
parties enter into the rental arrangement.
* * * * *
    Interoperable means--
    (1) Able to securely exchange data with and use data from other 
health information technology without special effort on the part of the 
user;
    (2) Allows for complete access, exchange, and use of all 
electronically accessible health information for authorized use under 
applicable State or Federal law; and
    (3) Does not constitute information blocking as defined in section 
3022 of the Public Health Service Act.
    Isolated financial transaction--(1) Isolated financial transaction 
means a transaction involving a single payment between two or more 
persons or a transaction that involves integrally related installment 
payments, provided that--
    (i) The total aggregate payment is fixed before the first payment 
is made and does not take into account the volume or value of referrals 
or other business generated by the physician; and
    (ii) The payments are immediately negotiable, 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.
    (2) An isolated financial transaction includes a one-time sale of 
property or a practice, or similar one-time transaction, but does not 
include a single payment for multiple or repeated services (such as a 
payment for services previously provided but not yet compensated).
* * * * *
    Physician has the meaning set forth in section 1861(r) of the Act. 
A physician and the professional corporation of which he or she is a 
sole owner are the same for purposes of this subpart.
* * * * *
    Referral * * *
    (4) A referral is not an item or service for purposes of section 
1877 of the Act and this subpart.
* * * * *
    Remuneration * * *
    (2) The furnishing of items, devices, or supplies that are, in 
fact, used solely for one or more of the following purposes:
* * * * *
    (3) * * *
    (iii) The amount of the payment is set in advance, does not exceed 
fair market value, and is not determined in any manner that takes into 
account the volume or value of any referrals.
* * * * *
    Target patient population means an identified patient population 
selected by a value-based enterprise or its VBE participants based on 
legitimate and verifiable criteria that--
    (1) Are set out in writing in advance of the commencement of the 
value-based arrangement; and
    (2) Further the value-based enterprise's value-based purpose(s).
    Transaction means an instance or process of two or more persons or 
entities doing business.
    Value-based activity--(1) Means any of the following activities, 
provided that the activity is reasonably designed to achieve at least 
one value-based purpose of the value-based enterprise:
    (i) The provision of an item or service;
    (ii) The taking of an action; or
    (iii) The refraining from taking an action.
    (2) The making of a referral is not a value-based activity.
    Value-based arrangement means an arrangement for the provision of 
at least one value-based activity for a target patient population 
between or among--

[[Page 55841]]

    (1) The value-based enterprise and one or more of its VBE 
participants; or
    (2) VBE participants in the same value-based enterprise.
    Value-based enterprise (VBE) means two or more VBE participants--
    (1) Collaborating to achieve at least one value-based purpose;
    (2) Each of which is a party to a value-based arrangement with the 
other or at least one other VBE participant in the value-based 
enterprise;
    (3) That have an accountable body or person responsible for 
financial and operational oversight of the value-based enterprise; and
    (4) That have a governing document that describes the value-based 
enterprise and how the VBE participants intend to achieve its value-
based purpose(s).
    Value-based purpose means--
    (1) Coordinating and managing the care of a target patient 
population;
    (2) Improving the quality of care for a target patient population;
    (3) Appropriately reducing the costs to, or growth in expenditures 
of, payors without reducing the quality of care for a target patient 
population; or
    (4) Transitioning from health care delivery and payment mechanisms 
based on the volume of items and services provided to mechanisms based 
on the quality of care and control of costs of care for a target 
patient population.
    VBE participant means an individual or entity that engages in at 
least one value-based activity as part of a value-based enterprise.
0
3. Section 411.352 is amended by revising paragraph (i) to read as 
follows:


Sec.  411.352   Group practice.

* * * * *
    (i) Special rules for profit shares and productivity bonuses--(1) 
Overall profits. (i) Notwithstanding paragraph (g) of this section, a 
physician in the group practice may be paid a share of overall profits 
of the group that is indirectly related to the volume or value of the 
physician's referrals.
    (ii) Overall profits means the profits derived from all the 
designated health services of any component of the group that consists 
of at least five physicians, which may include all physicians in the 
group. If there are fewer than five physicians in the group, overall 
profits means the profits derived from all the designated health 
services of the group.
    (iii) Overall profits must be divided in a reasonable and 
verifiable manner. 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:
    (A) Overall profits are divided per capita (for example, per member 
of the group or per physician in the group).
    (B) Overall profits derived from designated health services are 
distributed based on the distribution of the group's revenues 
attributed to services that are not designated health services and 
would not be considered designated health services if they were payable 
by Medicare.
    (C) Revenues derived from designated health services constitute 
less than 5 percent of the group's total revenues, and the portion of 
those revenues distributed to each physician in the group constitutes 5 
percent or less of his or her total compensation from the group.
    (2) Productivity bonuses. (i) Notwithstanding paragraph (g) of this 
section, 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, that is indirectly 
related to the volume or value of the physician's referrals (except 
that the bonus may directly relate to the volume or value of referrals 
by the physician if the referrals are for services ``incident to'' the 
physician's personally performed services).
    (ii) A productivity bonus must be calculated in a reasonable and 
verifiable manner. A productivity bonus will be deemed not to relate 
directly to the volume or value of referrals if one of the following 
conditions is met:
    (A) The productivity bonus is based on the physician's total 
patient encounters or the relative value units (RVUs) personally 
performed by the physician. (The methodology for establishing RVUs is 
set forth in Sec.  414.22 of this chapter.)
    (B) The services on which the productivity bonus is based are not 
designated health services and would not be considered designated 
health services if they were payable by Medicare.
    (C) Revenues derived from designated health services are less than 
5 percent of the group's total revenues, and the portion of those 
revenues distributed to each physician in the group constitutes 5 
percent or less of his or her total compensation from the group.
    (3) Value-based enterprise participation. Profits from designated 
health services that are directly attributable to a physician's 
participation in a value-based enterprise, as defined in Sec.  411.351, 
are distributed to the participating physician.
    (4) Supporting documentation. Supporting documentation verifying 
the method used to calculate the profit share or productivity bonus 
under paragraphs (i)(1), (2), and (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 amended--
0
a. By revising paragraph (c)(1);
0
b. In paragraph (f)(1)(i) by removing the semicolon and adding in its 
place ``; and'';
0
c. In paragraph (f)(1)(ii) by removing ``; and'' and adding in its 
place a period;
0
d. By removing paragraphs (f)(1)(iii) and (g).
    The revision reads as follows:


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

* * * * *
    (c) * * *
    (1) 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.
* * * * *
0
5. Section 411.354 is amended--
0
a. In paragraph (b)(3)(iv) by removing ``or'' at the end of the 
paragraph;
0
b. In paragraph (b)(3)(v) by removing the period at the end of the 
paragraph and adding in its place a semicolon;
0
c. By adding paragraphs (b)(3)(vi) and (vii);
0
d. By revising paragraph (c)(2)(ii);
0
e. By adding paragraph (c)(4);
0
f. By revising paragraphs (d)(2) through (4);
0
g. By adding paragraphs (d)(5) and (6); and
0
h. Adding paragraph (e)(3).
    The additions and revisions read as follows:


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

* * * * *
    (b) * * *
    (3) * * *
    (vi) A titular ownership or investment interest that excludes the 
ability or right to receive the financial benefits of ownership or 
investment, including, but not limited to, the distribution of profits, 
dividends, proceeds of sale, or similar returns on investment; or
    (vii) An interest in an entity that arises from an employee stock 
ownership plan (ESOP) that is qualified under Internal Revenue Code 
section 401(a).
    (c) * * *
    (2) * * *
    (ii) The referring physician (or immediate family member) receives 
aggregate compensation from the person or entity in the chain with 
which the

[[Page 55842]]

physician (or immediate family member) has a direct financial 
relationship that 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 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));
* * * * *
    (4) Exceptions applicable to indirect compensation arrangements--
(i) General. Except as provided in this paragraph (c)(4) of this 
section, only the exceptions at Sec. Sec.  411.355 and 411.357(p) are 
applicable to indirect compensation arrangements.
    (ii) Special rule for indirect compensation arrangements involving 
value-based arrangements. When an unbroken chain described in paragraph 
(c)(2)(i) of this section includes a value-based arrangement (as 
defined in Sec.  411.351) to which the physician (or the physician 
organization in whose shoes the physician stands under this paragraph) 
is a direct party, only the exceptions at Sec. Sec.  411.355, 
411.357(p), and 411.357(aa) are applicable to the indirect compensation 
arrangement.
    (d) * * *
    (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 is fair market value 
for items or services actually provided and does not vary during the 
course of the compensation arrangement in any manner that takes into 
account referrals.
    (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 or other business generated by 
the referring physician if the compensation is fair market value for 
items or 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 physician, which are not considered ``other 
business generated'' by the physician).
    (4) If a physician's compensation under a bona fide employment 
relationship, personal service arrangement, or managed care contract is 
conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier, all of the following conditions must be met.
    (i) The compensation, or a formula for determining the 
compensation, is set in advance for the duration of the arrangement. 
Any changes to the compensation (or the formula for determining the 
compensation) must be made prospectively.
    (ii) The compensation is consistent with the fair market value of 
the physician's services.
    (iii) The compensation arrangement otherwise complies with an 
applicable exception at Sec. Sec.  411.355 or 411.357.
    (iv) The compensation arrangement complies with both of the 
following conditions:
    (A) The requirement to make referrals to a particular provider, 
practitioner, or supplier is set out in writing and 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, personal service 
arrangement, or managed care 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, personal service 
arrangement, or managed care contract.
    (5)(i) Compensation from an entity furnishing designated health 
services to a physician (or immediate family member of the physician) 
takes into account the volume or value of referrals only if--
    (A) The formula used to calculate the physician's (or immediate 
family member's) compensation includes the physician's referrals to the 
entity as a variable, resulting in an increase or decrease in the 
physician's (or immediate family member's) compensation that positively 
correlates with the number or value of the physician's referrals to the 
entity; or
    (B) There is a predetermined, direct correlation between the 
physician's prior referrals to the entity and the prospective rate of 
compensation to be paid over the entire duration of the arrangement for 
which the compensation is determined.
    (ii) Compensation from an entity furnishing designated health 
services to a physician (or immediate family member of the physician) 
takes into account the volume or value of other business generated only 
if--
    (A) The formula used to calculate the physician's (or immediate 
family member's) compensation includes other business generated by the 
physician for the entity as a variable, resulting in an increase or 
decrease in the physician's (or immediate family member's) compensation 
that positively correlates with the physician's generation of other 
business for the entity; or
    (B) There is a predetermined, direct correlation between the other 
business previously generated by the physician for the entity and the 
prospective rate of compensation to be paid over the entire duration of 
the arrangement for which the compensation is determined.
    (iii) For purposes of applying this paragraph (d)(5), a positive 
correlation between two variables exists when one variable decreases as 
the other variable decreases, or one variable increases as the other 
variable increases.
    (iv) This paragraph (d)(5) applies only to section 1877 of the Act.
    (6)(i) Compensation from a physician (or immediate family member of 
the physician) to an entity furnishing designated health services takes 
into account the volume or value of referrals only if--
    (A) The formula used to calculate the entity's compensation 
includes the physician's referrals to the entity as a variable, 
resulting in an increase or decrease in the entity's compensation that 
negatively correlates with the

[[Page 55843]]

number or value of the physician's referrals to the entity; or
    (B) There is a predetermined, direct correlation between the 
physician's prior referrals to the entity and the prospective rate of 
compensation to be paid over the entire duration of the arrangement for 
which the compensation is determined.
    (ii) Compensation from a physician (or immediate family member of 
the physician) to an entity furnishing designated health services takes 
into account the volume or value of other business generated only if--
    (A) The formula used to calculate the entity's compensation 
includes other business generated by the physician for the entity as a 
variable, resulting in an increase or decrease in the entity's 
compensation that negatively correlates with the physician's generation 
of other business for the entity; or
    (B) There is a predetermined, direct correlation between the other 
business previously generated by the physician for the entity and the 
prospective rate of compensation to be paid over the entire duration of 
the arrangement for which the compensation is determined.
    (iii) For purposes of applying this paragraph (d)(6), a negative 
correlation between two variables exists when one variable increases as 
the other variable decreases, or when one variable decreases as the 
other variable increases.
    (iv) This paragraph (d)(6) applies only to section 1877 of the Act.
    (e) * * *
    (3) Special rule on writing and signature requirements. In the case 
of any requirement in this subpart for a compensation arrangement to be 
in writing and signed by the parties, the writing requirement or the 
signature requirement is satisfied if--
    (i) The compensation arrangement between the entity and the 
referring physician fully complies with an applicable exception in this 
subpart except with respect to the writing or signature requirement of 
the exception; and
    (ii) The parties obtain the required writing(s) or signature(s) 
within 90 consecutive calendar days immediately following the date on 
which the compensation arrangement became noncompliant with the 
requirements of the applicable exception.
0
6. Section 411.355 is amended by--
0
a. Removing and reserving paragraph (b)(4)(v);
0
b. Revising paragraphs (c)(5) and (e)(1)(ii)(C);
0
c. Adding paragraph (e)(1)(ii)(D);
0
d. Removing paragraph (e)(1)(iv), removing and reserving paragraphs 
(f)(3) and (4), (g)(2) and (3), (h)(2) and (3), and (i)(2), and 
removing paragraphs (i)(3) and (j)(1)(iv).
    The revisions and addition read as follows:


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

* * * * *
    (c) * * *
    (5) A coordinated care plan (within the meaning of section 
1851(a)(2)(A) of the Act) offered by a Medicare Advantage organization 
in accordance with a contract with CMS under section 1857 of the Act 
and part 422 of this chapter.
    (e) * * *
    (1) * * *
    (ii) * * *
    (C) The total compensation paid by each academic medical center 
component is not determined in any manner that takes into account the 
volume or value of referrals or other business generated by the 
referring physician within the academic medical center.
    (D) If any compensation paid to the referring physician is 
conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier, the arrangement satisfies the requirements 
of Sec.  411.354(d)(4).
* * * * *
0
7. Section 411.357 is amended--
0
a. By revising paragraphs (a)(3), (a)(5)(i), (b)(2), (b)(4)(i), and 
(c)(2)(ii);
0
b. By adding paragraph (c)(5);
0
c. By revising paragraph (d)(1)(v);
0
d. By adding paragraph (d)(1)(viii);
0
e. By revising paragraph (d)(2) introductory text;
0
f. By adding paragraph (d)(2)(iv);
0
g. By revising paragraphs (e)(1)(iii) and (e)(4)(i) and (v);
0
h. By removing paragraph (e)(4)(vii);
0
i By revising paragraphs (e)(6)(i), (f)(1) and (3), (g), and (h)(5);
0
j. By adding paragraph (h)(7);
0
k. By revising paragraph (i)(2);
0
l. Adding paragraph (i)(3);
0
m. By removing paragraph (j)(3);
0
n. By removing paragraph (k)(1)(iii);
0
o. In paragraph (k)(2), by removing the term ``website'' and adding in 
its place the term ``website'';
0
p. By revising paragraphs (l) and (m)(1);
0
q. In paragraphs (m)(2), (3), and (5) by removing the term '' website'' 
and adding in its place the term '' website'';
0
r. By removing and reserving paragraph (m)(7);
0
s. By revising paragraph (n);
0
t. By removing paragraph (p)(3);
0
u. By revising paragraph (r)(2)(iv);
0
v. By removing paragraph (r)(2)(x);
0
w. By removing paragraph (s)(5);
0
x. By removing paragraph (t)(3)(iv);
0
y. By removing paragraph (u)(3);
0
z. By revising paragraphs (w) introductory text, (w)(2) and (3), and 
(w)(6) introductory text.
0
aa By removing paragraphs (w)(11) through (13);
0
bb. By revising paragraphs (x)(1) and (4);
0
cc. In paragraph (x)(7)(ii) introductory text by removing the phrase 
``patient care services'' is adding in its place the phrase ``NPP 
patient care services'';
0
dd. In paragraph (x)(7)(ii)(A) by removing the phrase ``patient care 
services'' and adding in its place the phrase ``NPP patient care 
services'';
0
ee. By revising paragraph (y)(6)(i);
0
ff. By removing and reserving paragraph (y)(8); and
0
gg. By adding paragraphs (z), (aa), and (bb).
    The revisions and additions read as follows:


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

    (a) * * *
    (3) The space rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease arrangement 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. For purposes of this paragraph (a), 
exclusive use means that the lessee (and any other lessees of the same 
office space) uses the office space to the exclusion of the lessor (or 
any person or entity related to the lessor). The lessor (or any person 
or entity related to the lessor) may not be an invitee of the lessee to 
use the office space.
* * * * *
    (5) * * *
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
* * * * *
    (b) * * *
    (2) The equipment leased does not exceed that which is reasonable 
and necessary for the legitimate business purposes of the lease 
arrangement and is used exclusively by the lessee when

[[Page 55844]]

being used by the lessee (and is not shared with or used by the lessor 
or any person or entity related to the lessor). For purposes of this 
paragraph (b), exclusive use means that the lessee (and any other 
lessees of the same equipment) uses the equipment to the exclusion of 
the lessor (or any person or entity related to the lessor). The lessor 
(or any person or entity related to the lessor) may not be an invitee 
of the lessee to use the equipment.
* * * * *
    (4) * * *
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
* * * * *
    (c) * * *
    (2) * * *
    (ii) Except as provided in paragraph (c)(4) of this section, is not 
determined in any manner that takes into account the volume or value of 
referrals by the referring physician.
* * * * *
    (5) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the requirements of Sec.  
411.354(d)(4).
    (d) * * *
    (1) * * *
    (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 in Sec.  411.351), 
is not determined in any manner that takes into account the volume or 
value of referrals or other business generated between the parties.
* * * * *
    (viii) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the requirements of Sec.  
411.354(d)(4).
    (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 any manner (through a withhold, capitation, bonus, or otherwise) 
that takes into account the volume or value of referrals or other 
business generated between the parties, if the plan meets the following 
requirements:
* * * * *
    (iv) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the requirements of Sec.  
411.354(d)(4).
    (e) * * *
    (1) * * *
    (iii) The amount of remuneration under the arrangement is not 
determined in any manner that takes into account the volume or value of 
actual or anticipated referrals by the physician or other business 
generated between the parties; and
* * * * *
    (4) * * *
    (i) The writing in paragraph (e)(1) of this section is also signed 
by the physician practice if the remuneration is provided indirectly to 
the physician through payments made to the physician practice and the 
physician practice does not pass directly through to the physician all 
of the remuneration from the hospital.
* * * * *
    (v) The remuneration from the hospital under the arrangement is not 
determined in any manner that takes into account the volume or value of 
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.
* * * * *
    (6) * * *
    (i) 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.
* * * * *
    (f) * * *
    (1) The amount of remuneration under the isolated financial 
transaction is--
    (i) Consistent with the fair market value of the isolated financial 
transaction; and
    (ii) Not determined in any manner that takes into account the 
volume or value of referrals by the referring physician or other 
business generated between the parties.
* * * * *
    (3) There are no additional transactions between the parties for 6 
months after the isolated financial transaction, except for 
transactions that are specifically excepted under the other provisions 
in Sec. Sec.  411.355 through 411.357 and except for commercially 
reasonable post-closing adjustments that do not take into account the 
volume or value of referrals or other business generated by the 
referring physician.
    (g) Remuneration unrelated to the provision of designated health 
services. Remuneration provided by a hospital to a physician if the 
remuneration does not relate to the provision of designated health 
services. Remuneration does not relate to the provision of designated 
health services if--
    (1) The remuneration is not determined in any manner that takes 
into account the volume or value of the physician's referrals; and
    (2) The remuneration is for an item or service that is not related 
to the provision of patient care services.
    (3) For purposes of this this paragraph (g):
    (i) Items that are related to the provision of patient care 
services include, but are not limited to, any item, supply, device, 
equipment, or space that is used in the diagnosis or treatment of 
patients and any technology that is used to communicate with patients 
regarding patient care services.
    (ii) A service is deemed to be not related to the provision of 
patient care services if the service could be provided by a person who 
is not a licensed medical professional.
    (h) * * *
    (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 any manner that 
takes into account the volume or value of referrals or other business 
generated between the parties.
* * * * *
    (7) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the requirements of Sec.  
411.354(d)(4).
    (i) * * *
    (2) To an entity as compensation for any other items or services--
    (i) That are furnished at a price that is consistent with fair 
market value; and
    (ii) To which the exceptions in paragraphs (a) through (h) of this 
section are not applicable.
    (3) For purposes of this paragraph (i), ``services'' means services 
of any kind (not merely those defined as ``services'' for purposes of 
the Medicare program in Sec.  400.202 of this chapter).
* * * * *
    (l) Fair market value compensation. Compensation resulting from an 
arrangement between an entity and a physician (or an immediate family 
member) or any group of physicians (regardless of whether the group 
meets the definition of a group practice set forth in Sec.  411.352) 
for the provision of items or services or for the use of office space 
or equipment, if the arrangement meets the following conditions:
    (1) The arrangement is in writing, signed by the parties, and 
covers only

[[Page 55845]]

identifiable items, services, office space, or equipment, all of which 
are specified in writing.
    (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, services, office space, or equipment during the course of a 
year. An arrangement may be renewed any number of times if the terms of 
the arrangement and the compensation for the same items, services, 
office space, or equipment 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 any manner 
that takes into account the volume or value of referrals or other 
business generated by the referring physician. Compensation for the 
rental of office space or equipment may not be determined using a 
formula based on--
    (i) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed or business 
generated in the office space or to the services performed on or 
business generated through the use of the equipment; or
    (ii) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred by the lessor to 
the lessee.
    (4) The arrangement is commercially reasonable (taking into account 
the nature and scope of the transaction).
    (5) [Reserved]
    (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.
    (7) The arrangement satisfies the requirements of Sec.  
411.354(d)(4) in the case of--
    (i) Remuneration to the physician that is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier; or
    (ii) Remuneration paid to the group of physicians that is 
conditioned on one of the group's physician's referrals to a particular 
provider, practitioner, or supplier.
    (m) * * *
    (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) and is not offered in any manner that 
takes into account the volume or value of referrals or other business 
generated between the parties.
* * * * *
    (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. For purposes of this paragraph (n), 
``health plan'' and ``enrollees'' have the meanings set forth in Sec.  
1001.952(l) of this title.
* * * * *
    (r) * * *
    (2) * * *
    (iv) The hospital, federally qualified health center, or rural 
health clinic does not determine the amount of the payment in any 
manner that takes into account the volume or value of referrals by the 
physician or other business generated between the parties.
* * * * *
    (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, including certain 
cybersecurity software and services) necessary and used predominantly 
to create, maintain, transmit, receive, or protect electronic health 
records, if all of the following conditions are met:
* * * * *
    (2) The software is interoperable (as defined in Sec.  411.351) at 
the time it is provided to the physician. For purposes of this 
paragraph (w), software is deemed to be interoperable if, on the date 
it is provided to the physician, it is certified by a certifying body 
authorized by the National Coordinator for Health Information 
Technology to electronic health record certification criteria 
identified in the then-applicable version of 45 CFR part 170.
    (3) The donor (or any person on the donor's behalf) does not engage 
in a practice constituting information blocking, as defined in section 
3022 of the Public Health Service Act, in connection with the donated 
items or services.
* * * * *
    (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 any manner that directly takes into account the volume or 
value of referrals or other business generated between the parties. For 
purposes of this paragraph (w), 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:
* * * * *
    (x) * * *
    (1) Remuneration provided by a hospital to a physician to 
compensate a nonphysician practitioner to provide NPP patient care 
services, if all of the following conditions are met:
    (i) The arrangement--
    (A) Is set out in writing and signed by the hospital, the 
physician, and the nonphysician practitioner; and
    (B) Commences before the physician (or the physician organization 
in whose shoes the physician stands under Sec.  411.354(c)) enters into 
the compensation arrangement described in paragraph (x)(1)(vi)(A) of 
this section.
    (ii) The arrangement is not conditioned on--
    (A) The physician's referrals to the hospital; or
    (B) The nonphysician practitioner's NPP referrals to the hospital.
    (iii) The remuneration from the hospital--
    (A) Does not exceed 50 percent of the actual compensation, signing 
bonus, and benefits paid by the physician to the nonphysician 
practitioner during a period not to exceed the first 2 consecutive 
years of the compensation arrangement between the nonphysician 
practitioner and the physician (or the physician organization in whose 
shoes the physician stands); and
    (B) Is not determined in any manner that takes into account the 
volume or value of actual or anticipated--
    (1) Referrals by the physician (or any physician in the physician's 
practice) or other business generated between the parties; or
    (2) NPP referrals by the nonphysician practitioner (or any 
nonphysician practitioner in the physician's practice) or other 
business generated between the parties.
    (iv) The compensation, signing bonus, and benefits paid to the 
nonphysician practitioner by the physician does not exceed fair market 
value for the NPP patient care services furnished by the nonphysician 
practitioner to patients of the physician's practice.
    (v) The nonphysician practitioner has not, within 1 year of the 
commencement of his or her compensation arrangement with the physician 
(or the physician organization in whose shoes the physician stands 
under Sec.  411.354(c))--
    (A) Furnished NPP patient care services in the geographic area 
served by the hospital; or
    (B) Been employed or otherwise engaged to provide NPP patient care

[[Page 55846]]

services by a physician or a physician organization that has a medical 
practice site located in the geographic area served by the hospital, 
regardless of whether the nonphysician practitioner furnished NPP 
patient care services at the medical practice site located in the 
geographic area served by the hospital.
    (vi)(A) The nonphysician practitioner has a compensation 
arrangement directly with the physician or the physician organization 
in whose shoes the physician stands under Sec.  411.354(c); and
    (B) Substantially all of the NPP patient care services that the 
nonphysician practitioner furnishes to patients of the physician's 
practice are primary care services or mental health care services.
    (vii) The physician does not impose practice restrictions on the 
nonphysician practitioner that unreasonably restrict the nonphysician 
practitioner's ability to provide NPP patient care services in the 
geographic area served by the hospital.
* * * * *
    (4) For purposes of this paragraph (x), the following terms have 
the meanings indicated.
    (i) ``NPP patient care services'' means direct patient care 
services furnished by a nonphysician practitioner that address the 
medical needs of specific patients or any task performed by a 
nonphysician practitioner that promotes the care of patients of the 
physician or physician organization with which the nonphysician 
practitioner has a compensation arrangement.
    (ii) ``NPP referral'' means a request by a nonphysician 
practitioner that includes the provision of any designated health 
service for which payment may be made under Medicare, the establishment 
of any plan of care by a nonphysician practitioner 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 does 
not include any designated health service personally performed or 
provided by the nonphysician practitioner.
* * * * *
    (y) * * *
    (6) * * *
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
* * * * *
    (z) Limited remuneration to a physician--(1) Remuneration from an 
entity to a physician for the provision of items or services provided 
by the physician to the entity that does not exceed an aggregate of 
$3,500 per calendar year, as adjusted for inflation in accordance with 
paragraph (z)(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 physician.
    (ii) The compensation does not exceed the fair market value of the 
items or services.
    (iii) The arrangement is commercially reasonable.
    (iv) Compensation for the lease of office space or equipment is not 
determined using a formula based on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed or business 
generated in the office space or to the services performed on or 
business generated through the use of the equipment; or
    (B) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred by the lessor to 
the lessee.
    (v) Compensation for the use of premises, equipment, personnel, 
items, supplies, or services is not determined using a formula based 
on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services provided while using the 
premises, equipment, personnel, items, supplies, or services covered by 
the arrangement; or
    (B) Per-unit of service fees that are not time-based, to the extent 
that such fees reflect services provided to patients referred by the 
party granting permission to use the premises, equipment, personnel, 
items, supplies, or services covered by the arrangement to the party to 
which the permission is granted.
    (2) The annual remuneration limit in this paragraph (z) 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 
remuneration limit on the physician self-referral website at http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
    (aa) Arrangements that facilitate value-based health care delivery 
and payment--(1) Full financial risk--Remuneration paid under a value-
based arrangement, as defined in Sec.  411.351, if the following 
conditions are met:
    (i) The value-based enterprise is at full financial risk (or is 
contractually obligated to be at full financial risk within the 6 
months following the commencement of the value-based arrangement) 
during the entire duration of the value-based arrangement.
    (ii) The remuneration is for or results from value-based activities 
undertaken by the recipient of the remuneration for patients in the 
target patient population.
    (iii) The remuneration is not an inducement to reduce or limit 
medically necessary items or services to any patient.
    (iv) The remuneration is not conditioned on referrals of patients 
who are not part of the target patient population or business not 
covered under the value-based arrangement.
    (v) If remuneration paid to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the value-based arrangement satisfies the requirements of 
Sec.  411.354(d)(4)(iv).
    (vi) Records of the methodology for determining and the actual 
amount of remuneration paid under the value-based arrangement must be 
maintained for a period of at least 6 years and made available to the 
Secretary upon request.
    (vii) For purposes of this paragraph (aa), ``full financial risk'' 
means that the value-based enterprise is financially responsible on a 
prospective basis for the cost of all patient care items and services 
covered by the applicable payor for each patient in the target patient 
population for a specified period of time. For purposes of this 
paragraph (aa), ``prospective basis'' means that the value-based 
enterprise has assumed financial responsibility for the cost of all 
patient care items and services covered by the applicable payor prior 
to providing patient care items and services to patients in the target 
patient population.
    (2) Value-based arrangements with meaningful downside financial 
risk to the physician--Remuneration paid under a value-based 
arrangement, as defined in Sec.  411.351, if the following conditions 
are met:
    (i) The physician is at meaningful downside financial risk for 
failure to achieve the value-based purpose(s) of the value-based 
enterprise during the entire duration of the value-based arrangement.
    (ii) A description of the nature and extent of the physician's 
downside financial risk is set forth in writing.
    (iii) The methodology used to determine the amount of the 
remuneration is set in advance of the undertaking of value-based 
activities for which the remuneration is paid.

[[Page 55847]]

    (iv) The remuneration is for or results from value-based activities 
undertaken by the recipient of the remuneration for patients in the 
target patient population.
    (v) The remuneration is not an inducement to reduce or limit 
medically necessary items or services to any patient.
    (vi) The remuneration is not conditioned on referrals of patients 
who are not part of the target patient population or business not 
covered under the value-based arrangement.
    (vii) If remuneration paid to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the value-based arrangement satisfies the requirements of 
Sec.  411.354(d)(4)(iv).
    (viii) Records of the methodology for determining and the actual 
amount of remuneration paid under the value-based arrangement must be 
maintained for a period of at least 6 years and made available to the 
Secretary upon request.
    (ix) For purposes of this paragraph (aa), ``meaningful downside 
financial risk'' means that the physician--
    (A) Is responsible to pay the entity no less than 25 percent of the 
value of the remuneration the physician receives under the value-based 
arrangement; or
    (B) Is financially responsible to the entity on a prospective basis 
for the cost of all or a defined set of patient care items and services 
covered by the applicable payor for each patient in the target patient 
population for a specified period of time.
    (3) Value-based arrangements--Remuneration paid under a value-based 
arrangement, as defined in Sec.  411.351, if the following conditions 
are met:
    (i) The arrangement is set forth in writing and signed by the 
parties. The writing includes a description of--
    (A) The value-based activities to be undertaken under the 
arrangement;
    (B) How the value-based activities are expected to further the 
value-based purpose(s) of the value-based enterprise;
    (C) The target patient population for the arrangement;
    (D) The type or nature of the remuneration;
    (E) The methodology used to determine the remuneration; and
    (F) The performance or quality standards against which the 
recipient will be measured, if any.
    (ii) The performance or quality standards against which the 
recipient will be measured, if any, are objective and measurable, and 
any changes to the performance or quality standards must be made 
prospectively and set forth in writing.
    (iii) The methodology used to determine the amount of the 
remuneration is set in advance of the undertaking of value-based 
activities for which the remuneration is paid.
    (iv) The remuneration is for or results from value-based activities 
undertaken by the recipient of the remuneration for patients in the 
target patient population.
    (v) The remuneration is not an inducement to reduce or limit 
medically necessary items or services to any patient.
    (vi) The remuneration is not conditioned on referrals of patients 
who are not part of the target patient population or business not 
covered under the value-based arrangement.
    (vii) If the remuneration paid to the physician is conditioned on 
the physician's referrals to a particular provider, practitioner, or 
supplier, the value-based arrangement satisfies the requirements of 
Sec.  411.354(d)(4)(iv).
    (viii) Records of the methodology for determining and the actual 
amount of remuneration paid under the value-based arrangement must be 
maintained for a period of at least 6 years and made available to the 
Secretary upon request.
    (bb) Cybersecurity technology and related services. (1) Nonmonetary 
remuneration (consisting of certain types of technology and services), 
if all of the following conditions are met:
    (i) The technology and services are necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity.
    (ii) Neither the eligibility of a physician for the technology or 
services, nor the amount or nature of the technology or services, is 
determined in any manner that directly takes into account the volume or 
value of referrals or other business generated between the parties.
    (iii) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of technology or 
services, or the amount or nature of the technology or services, a 
condition of doing business with the donor.
    (iv) The arrangement is documented in writing.
    (2) For purposes of this paragraph (bb), ``technology'' means any 
software or other types of information technology other than hardware.


Sec.  411.362   [Amended]

0
8. Section 411.362 is amended in paragraphs (b)(3)(ii)(C), (c)(2)(iv), 
(c)(2)(v), and (c)(5) introductory text by removing the term 
``website'' each time it appears and adding in its place the term 
``website''.


Sec.  411.372   [Amended]

0
9. Section 411.372 is amended in paragraph (a) by removing the term 
``website'' and adding in its place the term ``website''.


Sec.  411.384   [Amended]

0
10. Section 411.384 is amended in paragraph (b) by removing the term 
``website'' and adding in its place the term ``website''.

    Dated: September 26, 2019.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: September 27, 2019.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2019-22028 Filed 10-9-19; 4:15 pm]
 BILLING CODE 4120-01-P