[Federal Register Volume 85, Number 232 (Wednesday, December 2, 2020)]
[Rules and Regulations]
[Pages 77492-77682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26140]



[[Page 77491]]

Vol. 85

Wednesday,

No. 232

December 2, 2020

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Part 411





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

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / 
Rules and Regulations

[[Page 77492]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 411

[CMS-1720-F]
RIN 0938-AT64


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

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

ACTION: Final rule.

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SUMMARY: This final rule addresses any undue regulatory impact and 
burden of the physician self-referral law. This final 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 final rule establishes exceptions to the 
physician self-referral law for certain value-based compensation 
arrangements between or among physicians, providers, and suppliers. It 
also establishes a new exception for certain arrangements under which a 
physician receives limited remuneration for items or services actually 
provided by the physician; establishes a new exception for donations of 
cybersecurity technology and related services; and amends the existing 
exception for electronic health records (EHR) items and services. This 
final 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: These regulations are effective on January 19, 2021, except for 
amendment number 3, which further amends section 411.352(i), which is 
effective January 1, 2022.

FOR FURTHER INFORMATION CONTACT: 
Lisa O. Wilson, (410) 786-8852. Matthew Edgar, (410) 786-0698. 
Catherine Martin, (410) 786-8382.

SUPPLEMENTARY INFORMATION: 

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 payor) 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 80533 through 80534).
    On November 23, 2018, in our most recent substantive 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.

[[Page 77493]]

115-123). Specifically, we codified in regulations our longstanding 
policy that the writing requirement in various compensation arrangement 
exceptions in Sec.  411.357 may 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 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 informed us 
that, 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--
    <bullet> A patient's ability to understand treatment plans and make 
empowered decisions;
    <bullet> Providers' alignment on an end-to-end treatment approach 
(that is, coordination among providers along the patient's full care 
journey);
    <bullet> Incentives for providers to coordinate, collaborate, and 
provide patients with tools to be more involved; and
    <bullet> 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 in this section 
of this final rule.

2. Policy Considerations and Other Information Relevant to the 
Development of This Final 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, with 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 final 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 may 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, CMS has 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

[[Page 77494]]

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 facilitates 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 
numerous regulations to implement and update the Shared Savings 
Program. For example, in keeping with the Secretary's vision for 
achieving value-based transformation by pioneering new payment models, 
in 2018, we finalized 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 67816). 
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.\1\
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    \1\ For more information about the Shared Savings Program, see 
http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/index.html.
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    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.\2\
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    \2\ For more information about the Innovation Center's 
innovative health care payment and service delivery models, see 
https://innovation.cms.gov/.
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    The Congress also 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).\3\
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    \3\ 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.
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c. Commercial Payor and Provider-Driven Activity
    Although payments made 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 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 that 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.
d. Request for Information Regarding the Physician Self-Referral Law 
(CMS-1720-NC)
    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 outcomes rather than procedures. We believe that a 
successful value-based system requires integration and coordination 
among physicians and other health care providers and suppliers. The 
Secretary laid out four areas of emphasis for building a system that 
delivers value: (1) Maximizing the promise of health information 
technology (IT); (2) improving transparency in price and quality; (3) 
pioneering bold new models in Medicare and Medicaid; and (4) removing 
government burdens that impede care coordination. (See https://www.hhs.gov/about/leadership/secretary/priorities/index.html#value-based-healthcare.) This final 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 acknowledged, there are burdens associated with the physician 
self-referral regulations that may be inhibiting 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 to 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 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 (the CMS RFI) seeking recommendations and input from the

[[Page 77495]]

public on how to address any undue impact and burden of the physician 
self-referral statute and regulations (83 FR 29524).
    Comments on the CMS RFI 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, including Federal payors. 
Commenters also requested protection for care coordination 
arrangements, including arrangements where entities and physicians 
share resources to facilitate the care of their common patients. 
Generally, commenters recognized the need for appropriate safeguards in 
exceptions for arrangements among parties that participate in 
alternative payment models. 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 specifically 
discussed in 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. Commenters on the CMS RFI provided 
valuable information used to develop the proposals that we are 
finalizing in this final rule.
e. Notice of Proposed Rulemaking
    In the October 17, 2019 Federal Register, we published a proposed 
rule (84 FR 55766) (the proposed rule) in which we proposed a 
comprehensive package of reforms to modernize and clarify the 
regulations that interpret the physician self-referral law. These 
proposed policies were developed in support of the CMS Patients over 
Paperwork initiative, the Regulatory Sprint, and based on our 
experience in administering the physician self-referral law, including 
the CMS Voluntary Self-Referral Disclosure Protocol (SRDP). The CMS 
Patients over Paperwork initiative 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.
    To facilitate the transition of our health care system to one that 
is based on value rather than volume, we proposed new exceptions to the 
physician self-referral law for value-based arrangements, along with 
integrally-related definitions for value-based enterprises, activities, 
arrangements, and purposes, the providers and suppliers that 
participate in a value-based enterprise, and the target patient 
population for whom the parties' efforts are undertaken. We also 
proposed new and revised policies that balance program integrity 
concerns against the burden of the physician self-referral law's 
referral and billing prohibitions by: Providing guidance for physicians 
and health care providers and suppliers whose financial relationships 
are governed by the physician self-referral statute and regulations; 
reassessing the scope of the statute's reach; and establishing new 
exceptions for common nonabusive compensation arrangements between 
physicians and the entities to which they refer Medicare beneficiaries 
for designated health services.
    As part of the Regulatory Sprint and also in the October 17, 2019 
Federal Register, OIG published a proposed rule under the anti-kickback 
statute and CMP law to address concerns regarding provisions in those 
statutes that may act as barriers to coordinated care (84 FR 55694). 
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 
certain provisions of our proposals. Our aim was to promote alignment 
across our agencies, where appropriate, to ease the compliance burden 
on the regulated industry. In some cases, our proposals were 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 were more 
restrictive. In the proposed rule, we stated that, 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 (84 FR 55772).

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

    As we emphasized in the proposed rule, 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 (84 FR 55771; see also, 
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, we have vastly expanded our knowledge of the 
aspects of financial relationships that result in Medicare program or 
patient abuse. Our administration of the SRDP, which has received over 
1,200 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 little risk of Medicare program or patient 
abuse. We made revisions to our regulations and shared policy 
clarifications in the CY 2016 and

[[Page 77496]]

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 had not, until now, addressed 
other requirements in the regulatory exceptions that stakeholders 
identified as adding unnecessary complexity without increasing 
safeguards for program integrity. As described in more detail in 
section II of this final rule, we are eliminating certain requirements 
in our regulatory exceptions that may be unnecessary and revising 
existing exceptions. We are also establishing new exceptions for 
nonabusive arrangements for which there is currently no applicable 
exception to the physician self-referral law's referral and billing 
prohibitions.

D. Purpose of the Final Rule

    This final rule modernizes and clarifies the regulations that 
interpret the Medicare physician self-referral law. Following an 
extensive review of policies that originated in the context of a health 
care delivery and payment system that operates based on the volume of 
services, and to support the innovation necessary for a health care 
delivery and payment system that pays for value, we are establishing 
new, permanent exceptions to the physician self-referral law for value-
based arrangements and definitions for terminology integral to such a 
system. This final rule also includes clarifying provisions and 
guidance intended to reduce unnecessary regulatory burden on physicians 
and other health care providers and suppliers, while reinforcing the 
physician self-referral law's goal of protecting against program and 
patient abuse. Finally, we are establishing new exceptions for 
nonabusive arrangements for which there is currently no applicable 
exception to the physician self-referral law's referral and billing 
prohibitions.

II. Provisions of the Final Rule

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. As we stated in the proposed rule, 
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 (84 FR 55772). Identifying and addressing 
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 on the CMS 
RFI and the proposed rule that the changes to the physician self-
referral regulations will allow greater 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 many 
commenters on the CMS RFI and the proposed rule highlighted, the 
physician self-referral law was enacted at a time when the goals of the 
various components of the health care system were 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 
these commenters, the current physician self-referral regulations--
intended to combat overutilization in a volume-based system--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 some 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. We agree in concept and, as described 
below in this section II.A. of this final rule, we are finalizing an 
interwoven set of definitions and exceptions that depart from the 
historic exceptions to the physician self-referral law in order to 
facilitate the transition to a value-based health care delivery and 
payment system.
    We intend for the policies finalized in this final rule to 
facilitate an evolving health care delivery system, and endeavored to 
design policies that will stand the test of time. We believe that our 
final policies 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 we did with respect to the proposed rule, we coordinated closely 
with OIG in developing our final exceptions, definitions, and related 
policies. However, for the reasons described in this final rule, the 
final definitions and exceptions that pertain to the physician self-
referral law differ in some respects from the final definitions and 
safe harbors that pertain to the anti-kickback statute. Compensation 
arrangements may implicate both statutes and, therefore, should be 
analyzed for compliance with each statute.
2. Definitions and Exceptions
    In Sec.  411.357(aa), we are finalizing 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 apply regardless of whether the 
arrangement relates to care furnished to Medicare beneficiaries, non-
Medicare patients, or a combination of both. Although 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 final policies 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 exceptions, we are finalizing 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, which 
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. The definitions and exceptions together create the set of 
requirements for protection from the physician self-referral law's 
referral and billing prohibitions. Again, where possible and feasible, 
we have aligned with OIG's final policies to ease the compliance burden 
on the regulated industry. Specifically, with respect to the value-
based terminology as defined in this final rule, we are aligned with 
the OIG in most respects, and points of difference are explained below.
    To facilitate readers' review of our final policies, we first 
discuss the value-

[[Page 77497]]

based definitions we are finalizing in this final rule.
a. Definitions
    The final definitions and exceptions together create the set of 
requirements for protection from the physician self-referral law's 
referral and billing prohibitions. The ``value-based'' definitions are 
interconnected and, for the best understanding, should be read 
together. In the proposed rule (84 FR 55773), we proposed the following 
terms and definitions for purposes of applying the new exceptions at 
Sec.  411.357(aa):
    <bullet> Value-based activity 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: 
(1) The provision of an item or service; (2) the taking of an action; 
or (3) the refraining from taking an action. We also proposed that the 
making of a referral is not a value-based activity.
    <bullet<ls-thn-eq> Value-based arrangement means 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.
    <bullet<ls-thn-eq> Value-based enterprise 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).
    <bullet<ls-thn-eq> 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.
    <bullet<ls-thn-eq> VBE participant means an individual or entity 
that engages in at least one value-based activity as part of a value-
based enterprise.
    <bullet<ls-thn-eq> 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 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).
    We are finalizing the definitions as proposed, with the 
modifications described below in this section II.A.2.a. of this final 
rule.
    The activities undertaken by the parties to a compensation 
arrangement are key to the arrangement qualifying as a ``value-based 
arrangement'' to which the exceptions at Sec.  411.357(aa) apply. We 
refer to these activities as value-based activities. In the proposed 
rule, we acknowledged that sometimes value-based activities are easily 
identifiable as the provision of items or services to a patient and, 
other times, identifying a specific activity responsible for an outcome 
in a value-based health care system can be difficult (84 FR 55773). 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 or altering 
his or her past patient care practices rather than for direct patient 
care items or services provided by the physician. Therefore, at final 
Sec.  411.351, ``value-based activity'' is defined to mean the 
provision of an item or service, the taking of an action, or the 
refraining from taking an action, provided that the activity is 
reasonably designed to achieve at least one value-based purpose of the 
value-based enterprise of which the parties to the arrangement are 
participants. In the proposed rule, we stated that the act of referring 
patients for designated health services is itself not a value-based 
activity. In addition, 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 (84 FR 55773). Because of this view, we proposed 
to expressly state in the definition of ``value-based activity'' that 
the making of a referral is not a value-based activity in order to make 
clear that the exceptions would not protect the direct payment for 
referrals. For the reasons discussed in response to comments below, we 
are not finalizing this part of our proposal. However, as discussed in 
section II.D.2.c. of this final rule, we are revising the definition of 
``referral'' at Sec.  411.351 to affirm our policy that, as a general 
matter, referrals are not items or services for which a physician may 
be compensated under the physician self-referral law.
    Our final definition of ``value-based activity'' requires that the 
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. The value-based 
activity--that is, the physician's participation in the post-discharge 
meetings--would be reasonably designed to achieve the enterprise's 
value-based purpose. In contrast, if the value-based purpose of the 
enterprise is to reduce the costs to or growth in expenditures of 
payors while improving or maintaining the 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 final 
policies aimed at facilitating the transition to value-based care and 
fostering care coordination, as the final exceptions apply only to 
arrangements that qualify as value-based arrangements. At final Sec.  
411.351, ``value-based arrangement'' is defined to mean an arrangement 
for the provision of at least one value-based activity for a target 
patient population to which the only parties are: (1) A value-based 
enterprise and one or more of its VBE participants; or (2) VBE 
participants in the same value-based enterprise. We have revised the 
language of our proposed definition by substituting ``to which the only 
parties are'' for ``between or among'' to make clear that all parties 
to the value-based arrangement must be VBE participants in the same 
value-based enterprise. For

[[Page 77498]]

instance, a value-based arrangement between an imaging center and a 
physician would not be a value-based arrangement if the imaging center 
is not part of the same value-based enterprise as the physician. 
Effectively, the parties to a value-based arrangement must include an 
entity (as defined at Sec.  411.351) and a physician; otherwise, the 
physician self-referral law's prohibitions would not be implicated. 
Also, because the exceptions at final Sec.  411.357(aa) 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.
    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,\4\ 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 did not propose to limit the universe of 
compensation arrangements that will qualify as value-based arrangements 
to those arrangements specifically for the coordination and management 
of patient care. Rather, we sought comment on our approach and whether 
we should revise the definition of ``value-based arrangement'' to 
require care coordination and management in order to qualify as a 
value-based arrangement. As discussed in more detail later in this 
section, the final definition of ``value-based arrangement'' does not 
require care coordination and management in order to qualify as a 
value-based arrangement; therefore, we are not including a corollary 
definition of ``care coordination and management'' in our final 
regulations.
---------------------------------------------------------------------------

    \4\ 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 final exceptions at Sec.  411.357(aa) apply only to value-based 
arrangements, the only parties to which, as described previously, are a 
value-based enterprise and one or more of its VBE participants or VBE 
participants in the same value-based enterprise. At final Sec.  
411.351, value-based enterprise is defined to 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 
the 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). A ``value-based enterprise'' includes 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 delivery and payment system. As we stated in the proposed 
rule, 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 (84 FR 55774). 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). 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. The definition of 
``value-based enterprise'' finalized at Sec.  411.351 is focused on 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 enterprise, whom we refer to as a VBE participant, 
must be a party to at least one value-based arrangement with at least 
one other participant in the enterprise. If a value-based enterprise is 
comprised of only two VBE participants, they must have at least one 
value-based arrangement with each other in order for the enterprise to 
qualify as a value-based enterprise. (Provided that a value-based 
enterprise exists, an arrangement between the enterprise and a 
physician who is a VBE participant in the value-based enterprise may 
qualify as a ``value-based arrangement'' for purposes of the exceptions 
at Sec.  411.357(aa) if the value-based enterprise is itself an 
``entity'' as defined at Sec.  411.351.) In addition, 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 (for example, if the 
``enterprise'' consists of just the two parties). Finally, a value-
based enterprise must have a governing document that describes the 
enterprise and how its VBE participants intend to achieve its value-
based purpose(s). Implicit in this requirement is that the value-based 
enterprise must have at least one value-based purpose.
    Also critical to qualifying as a value-based arrangement are the 
scope and objective of the arrangement. As noted previously, only an 
arrangement for activities that are reasonably designed to achieve at 
least one of the value-based enterprise's value-based purposes may 
qualify as a value-based arrangement to which the exceptions at Sec.  
411.357(aa) apply. At final Sec.  411.351, value-based purpose is 
defined to 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. As we stated 
in the proposed rule, 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 (84 FR 55774). Our definition 
of ``value-based purpose'' identifies four core goals related to a 
target patient population. One or more of these goals must anchor the 
activities underlying every compensation arrangement that qualifies as 
a value-

[[Page 77499]]

based arrangement to which the exceptions at final Sec.  411.357(aa) 
apply.
    In the proposed rule, we sought comment on whether it would be 
desirable or necessary to codify 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 (84 FR 
55775). This definition was intended to correspond to a similar 
definition proposed by OIG. As described in more detail below, we are 
not finalizing a definition of ``coordinating and managing care'' in 
our regulations. We also sought comment regarding whether additional 
interpretation of the other proposed value-based purposes is necessary, 
but did not receive comments on the need for additional interpretation 
of any other aspect of the definition of ``value-based purpose.'' We 
respond to comments on this topic below.
    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. 
We noted in the proposed rule that the word ``entity,'' as used in the 
definition of ``VBE participant,'' is not limited to non-natural 
persons that qualify as ``entities'' as defined at Sec.  411.351 (84 FR 
55775). We proposed to use the word ``entity'' in the definition of 
``VBE participant'' in order to align with the definition proposed by 
OIG. We sought 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'' under Sec.  411.351 and, if so, what 
alternatives exist for defining ``VBE participant'' for purposes of the 
physician self-referral law. As discussed in more detail below, we are 
modifying the definition of VBE participant in this final rule to mean 
a person or entity that engages in at least one value-based activity as 
part of a value-based enterprise. The phrase ``person or entity'' is 
used more frequently throughout our regulations and, even though the 
word ``entity'' (as included in the definition of ``VBE participant'') 
is not limited to an ``entity'' as defined at Sec.  411.351 and its use 
could result in some confusion for stakeholders, we believe that it is 
less disruptive to use the already-common phrase ``person or entity'' 
to define VBE participant. We may consider whether to replace the word 
``entity'' throughout our regulations in those instances where it is 
not intended to be limited to the defined term at Sec.  411.351. 
However, any revisions to our regulations to achieve this substitution 
would occur through future notice-and-comment rulemaking.
    In the proposed rule, we also discussed the experiences of our law 
enforcement partners, including oversight experience, and the resulting 
concern about protecting potentially abusive arrangements between 
certain types of entities that furnish designated health services for 
purposes of the physician self-referral law (84 FR 55775). 
Specifically, we discussed concerns 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 (84 FR 
55776). We stated that we were considering whether to 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), a requirement that the arrangement is 
not between a physician (or immediate family member of a physician) and 
a laboratory or DMEPOS supplier. We also stated that, in particular, we 
were uncertain as to whether 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. In addition, due to our (and our law 
enforcement partners') ongoing program integrity concerns with certain 
other participants in the health care system and to maintain 
consistency with policies proposed by OIG, we stated that we were 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. At 
final Sec.  411.351, ``VBE participant'' is defined to mean a person or 
entity that engages in at least one value-based activity as part of a 
value-based enterprise. The definition of ``VBE participant'' finalized 
here does not exclude any specific persons, entities, or organizations 
from qualifying as a VBE participant.
    Lastly, we are finalizing the definition of ``target patient 
population'' as proposed, without modification. Specifically, the 
target patient population for which VBE participants undertake value-
based activities is defined at final Sec.  411.351 to mean 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). We affirm in this final rule that 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. As we 
stated in the proposed rule, 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) (84 FR 55776).
    We received comments on the proposed definitions of value-based 
activity, value-based arrangement, value-based enterprise, value-based 
purpose, VBE participant, and target patient population. Our responses 
follow.
    Comment: Most commenters supported our proposed definition of 
value-based activity, but many requested further guidance regarding 
what CMS would consider appropriate value-based activities. 
Specifically, some commenters asked whether particular items or 
services, such as transportation services or the provision of non-
medical personnel, would qualify as value-based activities. Commenters 
did not explain how the arrangements for those particular items or 
services would implicate the physician self-referral law; that is, 
whether the items or services are in-kind remuneration provided by an 
entity to a physician or an immediate family member of a physician 
under an arrangement between a physician (or

[[Page 77500]]

immediate family member of a physician), whether the items or services 
are provided by one of the parties to a value-based arrangement and 
paid for by the recipient of the items or services, or whether the 
services are provided to patients.
    Response: We decline to provide a list of items or services, 
actions, and ways to refrain from taking an action that qualify as 
value-based activities. We are concerned that even a non-exhaustive 
list of common value-based activities could unintentionally limit 
innovation and inhibit robust participation in value-based health care 
delivery and payment systems. The final definition of ``value-based 
activity'' provides the flexibility for parties to design arrangements 
that further the value-based purpose(s) of value-based enterprises. The 
determination regarding whether the provision of an item or service, 
the taking of an action, or the refraining from taking an action 
constitutes a value-based activity is a fact-specific analysis and 
turns on whether the activity is reasonably designed to achieve at 
least one value-based purpose of the value-based enterprise.
    With respect to the examples provided by the commenters, we note 
that the scope of the physician self-referral law is limited to a 
financial relationship between a physician (or the immediate family 
member of a physician) and the entity to which the physician makes 
referrals for designated health services. We assume that the commenters 
were referring to the provision of transportation services to a 
beneficiary, which would not implicate the law unless the beneficiary 
was a physician or an immediate family member of a physician. With 
respect to the commenters' inquiry regarding the provision of non-
medical personnel, assuming that the commenters were referring to the 
provision of non-medical personnel to a physician by an entity, we are 
uncertain whether the commenter is referring to in-kind remuneration 
between an entity and a physician in the form of the services of non-
medical personnel without expectation of payment or whether the 
provision of non-medical personnel would be paid for in cash under the 
terms of an arrangement between an entity and a physician. Therefore, 
we are unable to provide specific guidance in response to the inquiry.
    Comment: A few commenters requested guidance on what it means for a 
value-based activity to be reasonably designed to achieve at least one 
value-based purpose. Some of the commenters expressed concern that our 
solicitation of comments in the proposed rule could be interpreted to 
signal that success is required in order for the protections of the 
value-based exceptions to apply, noting that success of a value-based 
activity in achieving the intended value-based purpose is never 
guaranteed. One of the commenters urged CMS to confirm that 
``satisfying the value-based purposes element of various value-based 
definitions does not necessarily mean actual success in achieving the 
purposes but means engaging in collaboration and activities `reasonably 
designed to achieve' one or more of these value-based purposes.''
    Response: The determination regarding whether a value-based 
activity is reasonably designed to achieve at least one value-based 
purpose is a fact-specific determination. Parties must have a good 
faith belief that the value-based activity will achieve or lead to the 
achievement of at least one value-based purpose of the value-based 
enterprise in which the parties to the arrangement are VBE 
participants. We recognize that parties may undertake activities that 
do not ultimately achieve the value-based purpose(s) of the enterprise. 
Nothing in our final regulations requires that the value-based 
purpose(s) must be achieved in order for a value-based arrangement to 
be protected under an applicable exception at Sec.  411.357(aa). 
However, if the parties are aware that the provision of the item or 
service, the taking of the action, or the refraining from taking the 
action will not further the value-based purpose(s) of the value-based 
enterprise, it will cease to qualify as a value-based activity and the 
parties may need to amend or terminate their arrangement. As discussed 
in section II.A.2.b.(3). of this final rule, we are including a 
requirement in the final exception for value-based arrangements at 
Sec.  411.357(aa)(3)(vii) that parties must monitor whether they have 
furnished the value-based activities required under the arrangement and 
whether and how continuation of the value-based activities is expected 
to further the value-based purpose(s) of the value-based enterprise.
    Comment: A few commenters requested guidance on how parties can 
document or otherwise show that a value-based activity is ``reasonably 
designed'' to achieve a value-based purpose.
    Response: We do not dictate how parties should analyze the design 
of their value-based arrangements to ensure that the value-based 
activities they undertake are reasonably designed to achieve at least 
one value-based purpose of the value-based enterprise of which they are 
participants or how they should substantiate their efforts. We note 
that contemporaneous documentation is a best practice, and we encourage 
parties to follow this practice. We also remind parties that the burden 
of proof to show compliance with the physician self-referral law is set 
forth at Sec.  411.353 and is applicable to parties utilizing the new 
exceptions for value-based arrangements at final Sec.  411.357(aa). We 
emphasize that the new exceptions do not impose an additional or 
different burden of proof. It is the responsibility of the entity 
submitting a claim for payment for designated health services furnished 
pursuant to a referral from a physician with which it has a financial 
relationship to ensure compliance with the physician self-referral law 
at the time of submission of the claim. That is, parties must ensure 
that their financial relationship satisfies all the requirements of an 
applicable exception at the time the physician makes a referral for 
designated health service(s).
    Comment: Several commenters expressed concern with our statement 
that the making of a referral is not a value-based activity and 
requested that CMS revise the definition of value-based activity to 
include the making of a referral. These commenters noted that the 
definition of ``referral'' at Sec.  411.351 includes the establishment 
of a plan of care that includes the provision of designated health 
services. The commenters also asserted that referrals are an integral 
part of a value-based health care delivery and payment system, 
especially with respect to care planning, and contended that excluding 
the making of a referral from the definition of ``value-based 
activity'' would significantly limit the utility of the exceptions. 
Some commenters urged CMS to revise the definition of ``value-based 
activity'' to specifically include the making of a referral as a value-
based activity.
    Response: The commenters raise important points about the scope of 
the definition of ``referral'' at Sec.  411.351 and the exclusion of 
the making of a referral from the definition of ``value-based 
activity.'' It was not our intention to exclude the development of a 
care plan that includes the furnishing of designated health services 
from the definition of ``value-based activity.'' Accordingly, we are 
not finalizing the reference to the making of a referral in the 
definition of ``value-based activity.'' We are defining value-based 
activity to 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

[[Page 77501]]

or service; (2) the taking of an action; or (3) the refraining from 
taking an action. Care planning activities that meet the definition of 
``referral'' at Sec.  411.351 will qualify as ``the taking of an 
action'' for purposes of applying the definition of ``value-based 
activity.'' As discussed in section II.D.2.c. of this final rule, we 
are revising the definition of ``referral'' at Sec.  411.351 to codify 
in regulation text our policy that a referral is not an item or service 
for purposes of section 1877 of the Act and the physician self-referral 
law regulations.
    Comment: Most commenters supported the proposed definition of 
``value-based arrangement.'' However, a few commenters requested that 
we expand the definition to specifically include the following 
alternative payment models (APMs): Advanced APMs, all-payor/other-payor 
APMs, and Merit-based Incentive Payment System (MIPS) Alternative 
Payment Models (APMs) under the Quality Payment Program (QPP). The 
commenters also requested that we include State-based Medicaid 
initiatives in the definition of ``value-based arrangement.''
    Response: We decline to adopt the commenters' suggestion and are 
finalizing the definition as proposed. The models referenced by the 
commenters relate to value-based payments from a payor to a physician 
under a payment arrangement between the payor and the physician. For 
purposes of the physician self-referral law, a compensation arrangement 
is an arrangement between a physician (or immediate family member of a 
physician) and the entity to which the physician makes referrals for 
designated health services. The definition of ``value-based 
arrangement'' relates to a compensation arrangement between a physician 
and an entity that participate in the same value-based enterprise. It 
does not cover compensation arrangements between a payor and a 
physician.
    Comment: Most commenters generally supported our proposed 
definition of ``value-based enterprise,'' although one commenter had 
concerns with the requirement that each VBE participant must be a party 
to a value-based arrangement with at least one other VBE participant in 
the value-based enterprise. This commenter interpreted this requirement 
to preclude the addition of VBE participants to a value-based 
arrangement after the value-based arrangement has begun. The commenter 
requested that we permit parties to add VBE participants to a value-
based arrangement throughout the duration of the arrangement, either on 
an ongoing basis or at least annually.
    Response: The design and structure of contracts is separate and 
distinct from the analysis of financial relationships under the 
physician self-referral law. Although nothing in our regulations 
prohibits having multiple parties to a contract or adding parties after 
the effective date of the contract, each of the financial relationships 
that results from the contract must be analyzed separately under the 
physician self-referral law. The commenter described adding new 
physicians to an existing value-based arrangement. For purposes of 
determining compliance with the physician self-referral law, an 
arrangement between an entity and a ``new'' physician engaging in 
value-based activities will not be viewed as an ``addition'' to an 
existing value-based arrangement but, rather, a separate and distinct 
compensation arrangement that must be analyzed for compliance with an 
applicable exception. To illustrate, assume that a hospital and a 
physician organization enter into a value-based arrangement under which 
the physician organization agrees that all its physicians will abide by 
the hospital's care protocols for a period of 2 years. During the 
course of the value-based arrangement, the physician organization hires 
a new physician who agrees to abide by the hospital's care protocols as 
called for by the physician organization's arrangement with the 
hospital. Assuming the new physician stands in the shoes of the 
physician organization under Sec.  411.354(c), the ``addition'' of the 
new physician to the physician organization creates a separate new 
financial relationship between the hospital and the new physician that 
must satisfy the requirements of an applicable exception to the 
physician self-referral law. Nothing in the definition of ``value-based 
enterprise'' will preclude a new VBE participant from providing value-
based activities and participating in a value-based arrangement with 
another VBE participant or the value-based enterprise itself (if the 
value-based enterprise is an entity for purposes of the physician self-
referral law).
    Comment: Many commenters sought additional guidance regarding the 
type of organized network or group of persons or entities that may 
qualify as a value-based enterprise.
    Response: A value-based 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 and suppliers. A value-based enterprise may also 
be an informal affiliation, even consisting of only the two parties to 
a value-based arrangement. The definition of ``value-based enterprise'' 
is intended 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 delivery and payment 
system. 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. Simply stated, a value-based enterprise 
is a network of individuals and entities that are collaborating to 
achieve one or more value-based purposes of the value-based enterprise. 
We do not believe that it would be beneficial to dictate particular 
legal or other structural requirements for a value-based enterprise. 
Rather, the definition of ``value-based enterprise'' is intended to 
encompass a wide-range of structures to help facilitate health care 
providers' transition to a value-based health care delivery and payment 
system.
    Comment: A few commenters requested guidance with respect to the 
requirement that the value-based enterprise have an accountable body or 
person responsible for the financial and operational oversight of the 
value-based enterprise, specifically with respect to the 
responsibilities, requirements, structure, and composition of the 
accountable body. One commenter requested confirmation that an ACO 
could rely on its existing governing body and would not need to 
establish a separate accountable body or identify a person other than 
the ACO's governing body to be responsible for the financial and 
operational oversight of the value-based enterprise. Several commenters 
expressed concern that requiring one individual or entity to assume 
responsibility for the financial and operational oversight of the 
value-based enterprise could create tension between VBE participants 
and limit the utility of the exceptions for smaller value-based 
enterprises. Other commenters asserted that the establishment of the 
accountable body or person and the development of the governing 
document would require the expenditure of significant resources, 
including legal expenses, and questioned whether this burden is 
necessary. One of these commenters suggested that this requirement is 
especially burdensome for small or rural practices that may not

[[Page 77502]]

have sufficient resources to satisfy the requirement. Some commenters 
also requested explicit guidance regarding the governing document that 
describes the value-based enterprise and how its VBE participants 
intend to achieve the enterprise's value-based purpose(s).
    Response: Transparency and accountability are critical to a 
successful transition to a value-based health care delivery and payment 
system. It is essential that CMS and our law enforcement partners are 
able to identify the person or organization ultimately responsible for 
the financial and operational oversight of a value-based enterprise. We 
do not believe that requiring a value-based enterprise to have an 
accountable body or responsible person and a governing document creates 
an administrative or financial burden beyond what parties that wish to 
transition to value-based health care would already incur.
    We are not persuaded to abandon the requirement that a value-based 
enterprise must have an accountable body or person that is responsible 
for the financial and operational oversight of the enterprise. As 
discussed in the proposed rule and as noted above, the accountable body 
or person that is responsible for the financial and operational 
oversight of the enterprise 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 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) (84 
FR 55774). We expect that a value-based enterprise would establish an 
accountable body or designate a responsible person commensurate with 
the scope and objectives of the value-based enterprise and its 
available resources.
    We are also maintaining the requirement that the enterprise must 
have a governing document that describes the value-based enterprise and 
how its VBE participants intend to achieve its value-based purpose(s). 
Parties regularly enter into payor contracts, employment relationships, 
service arrangements, and other arrangements for items and services 
related to the provision of patient care services. It is a matter of 
general contracting practice that these contracts and written 
agreements specify the rights, responsibilities, and obligations of the 
parties. We expect that independent health care providers that wish to 
organize and collaborate to achieve value-based purposes would utilize 
these same basic practices to reduce their arrangements to writing, 
including their arrangement to form a value-based enterprise. We 
believe that the same is true for the development of a governing 
document that describes the value-based enterprise and how the VBE 
participants intend to achieve its value-based purpose(s). We remind 
parties that we are not dictating particular legal or other structural 
requirements for a value-based enterprise; rather, the final 
regulations accommodate both formal and informal value-based 
enterprises. As a result, the written agreements and contracts that 
parties enter into in the normal course of their business dealings 
could serve as the documentation required under the new exception for 
value-based arrangements.
    It is simply not possible to establish one set of financial and 
operational oversight requirements that would be applicable to value-
based enterprises of all types and sizes. The financial and operational 
oversight of a value-based enterprise and the related governing 
document for a value-based enterprise made up of only a hospital and 
physician will look very different from that of an ACO that contracts 
with thousands of providers and suppliers. Again, we do not dictate the 
structure or composition of the accountable body; rather, we simply 
require that the accountable body or responsible person for the value-
based enterprise exercise appropriate financial and operational 
oversight of the value-based enterprise. Similarly, we do not dictate 
the format or content of the governing document that describes the 
value-based enterprise and how the VBE participants intend to achieve 
its value-based purpose(s). The necessary infrastructure to effectively 
oversee the financial and operational activities of the value-based 
enterprise and the governing document will depend on the size and 
structure of the value-based enterprise.
    Comment: Several commenters recommended that CMS not limit the 
types of entities that may qualify as a VBE participant out of concern 
that any such limitations could slow down or inhibit the movement of 
the entire health care industry towards value-based health care 
delivery and significantly limit the utility of the exceptions. The 
commenters provided detailed examples of how laboratories and DMEPOS 
suppliers, in particular, contribute to the value-based health care 
delivery and payment system by collaborating with other sectors of the 
health care industry to improve care, lower costs, and ensure that 
patients are receiving appropriate care. Other commenters expressed 
concern that the exclusion of laboratories and DMEPOS suppliers from 
participation in value-based enterprises would impact the ability of 
health systems that own laboratories or DMEPOS suppliers from 
participating in value-based health care delivery.
    Response: We are not excluding any specific persons, entities, or 
organizations from the definition of ``VBE participant.'' We find the 
commenters' assertions that laboratories and DMEPOS suppliers may play 
a beneficial role in the delivery of value-based health care 
persuasive. However, we will continue to monitor the evolution of the 
value-based health care delivery and payment system to ensure that the 
inclusion of all types of providers and suppliers as VBE participants 
does not create a program integrity risk.
    Comment: A number of commenters supported the inclusion of 
coordinating and managing the care of a target patient population as an 
appropriate value-based purpose, although the majority of these 
commenters urged CMS to not define ``coordinating and managing care'' 
in regulation text, suggesting that the phrase is self-explanatory and 
defining it could inadvertently limit or interfere with innovation. 
Commenters that were open to the inclusion of a definition of 
``coordinating and managing care'' stressed the need for any such 
definition to be drafted broadly. Other commenters suggested that, if 
we codify a definition of ``coordinating and managing care,'' it should 
align with any definition of the same term adopted by OIG.
    Response: We agree with the commenters that it is not necessary to 
define ``coordinating and managing care'' for purposes of the 
definition of ``value-based purpose.'' In addition, we do not believe 
that it is necessary to define ``coordinating and managing care'' for 
purposes of the exceptions finalized at Sec.  411.357(aa), as they are 
not limited only to value-based arrangements for the coordination or 
management of care.
    Comment: Many commenters requested that we include as a value-based 
purpose the maintenance of quality of care for the target population 
without requiring a reduction in costs to payors.
    Response: We decline to include the maintenance of quality of care 
as a permissible value-based purpose in the absence of reduction of the 
costs to or growth in expenditures of payors. Although we recognize 
that the maintenance of quality of care may advance the goals of a 
value-based

[[Page 77503]]

enterprise or the specific parties to a value-based arrangement, we do 
not believe that the maintenance of quality of care in the absence of a 
reduction in the costs to or growth in expenditures of payors advances 
the goals of the Regulatory Sprint. Thus, it is not appropriate to 
include the maintenance of quality of care as a stand-alone value-based 
purpose that would unlock access to the exceptions at Sec.  
411.357(aa). We note that numerous CMS programs and Medicare payment 
mechanisms already require the maintenance of quality across the care 
continuum and encourage improvement and maintenance of quality through 
use of payment incentives and payment reductions. For example, under 
the Hospital Inpatient Quality Reporting Program, CMS collects quality 
data from hospitals paid under the IPPS. Data for selected measures are 
used for paying a portion of hospitals based on the quality and 
efficiency of care, including the Hospital-Acquired Condition Reduction 
Program, Hospital Readmissions Reduction Program, and Hospital Value-
Based Purchasing Program, which rewards acute care hospitals with 
incentive payments based on the quality of care they provide, rather 
than just the quantity of services they provide.
    Comment: The majority of commenters supported the definition of 
``value-based purpose'' and urged CMS to finalize the definition 
without modifications. A few commenters requested that we revise the 
definition of ``value-based purpose'' to include the reduction in costs 
to or growth in expenditures of health care providers and suppliers. 
These commenters asserted that limiting the definition of value-based 
purpose to reducing the costs to or growth in expenditures of only 
payors fails to recognize the benefits to Medicare that come from the 
reduction of provider costs, such as reporting lower costs to Medicare 
on the hospital's cost report, which, in turn, result in lower Medicare 
expenditures. These commenters pointed to internal cost savings 
programs that distribute savings generated from implementing specific 
cost saving measures to physicians. The commenters expressed concern 
that hospital-initiated quality and efficiency programs that drive down 
hospital costs, improve efficiency, and improve quality of care would 
not be protected by the exceptions because the hospital's program would 
not directly reduce costs to or growth in expenditures of payors.
    Response: We are not persuaded to revise the definition of ``value-
based purpose'' as requested by the commenters. We believe that the 
four purposes included in the definition are sufficiently inclusive to 
allow for innovative value-based arrangements while protecting against 
program or patient abuse. We do not believe that permitting a value-
based enterprise to exist solely for the purpose of reducing costs to 
its VBE participants would adequately protect the Medicare program and 
its beneficiaries from abuse. Moreover, allowing parties to share in 
the reduction of costs without also improving or maintaining quality of 
care for patients or otherwise benefitting payors does not advance the 
transition to a value-based health care delivery and payment system. We 
note that nothing in this final rule precludes the sharing of cost 
savings and other entity-specific savings programs, provided those 
programs are part of a value-based arrangement for value-based 
activities reasonably designed to further at least one value-based 
purpose of the value-based enterprise of which the parties to the 
arrangement are VBE participants. The compensation to a physician under 
such a value-based arrangement could include a share of the savings 
that result from a hospital's internal cost sharing (or gainsharing) 
program.
    Comment: A few commenters specifically supported the inclusion as a 
value-based purpose ``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.'' These commenters stated that 
allowing a value-based enterprise to operate for this purpose is 
necessary to achieve CMS' goal of transitioning to a value-based health 
care delivery and payment system and strikes the right balance between 
precision and flexibility. The commenters asserted that value-based 
enterprises would rely on this purpose to cover the clinical 
integration and infrastructure activities necessary to develop and 
implement a value-based enterprise and to meet future operational and 
capital requirements. Commenters likened this value-based purpose to 
the purpose underlying the pre-participation waiver for the Shared 
Savings Program. The commenters recommended that we make no further 
refinement to this value-based purpose.
    Response: The commenters' understanding of the scope of this value-
based purpose is correct. As we discussed in the proposed rule, this 
value-based purpose is intended to accommodate efforts aimed at 
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 (84 FR 55775). Generally speaking, we interpret 
``transitioning'' to mean undergoing the process or period of 
transition from one state or condition to another and, specifically, 
with respect to this value-based purpose, the process or period of 
transition from furnishing patient care services in a FFS volume-based 
system to furnishing patient care services in a value-based health care 
delivery and payment system. Thus, this value-based purpose applies 
during the period of a value-based enterprise's start-up or preparatory 
activities. In the proposed rule, we interpreted this value-based 
purpose 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 (84 FR 55775). 
This purpose will also apply to activities undertaken by an 
unincorporated value-based enterprise that wishes to formalize its 
legal and operational structure, as well as the preparation by a value-
based enterprise to accept financial risk and the preparation of VBE 
participants to furnish services in a manner focused on the value of 
those services instead of volume.
    We agree that this value-based purpose shares certain aspects of 
the pre-participation waiver under the Shared Savings Program. In our 
discussion of the Shared Savings Program pre-participation waiver in 
our October 29, 2015 Shared Savings Program Final Waivers in Connection 
with the Shared Savings Program Final Rule (80 FR 66726) (the SSP 
waivers final rule), we provided examples of start-up arrangements as 
guideposts for determining whether a particular arrangement may qualify 
for protection under the pre-participation waiver (80 FR 66733). We 
believe those examples, to the extent they create a compensation 
relationship for purposes of the physician self-referral law, may be 
illustrative for purposes of interpreting the scope of ``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.'' In the 
SSP waivers final rule (80 FR 66733), we stated that the following 
types of start-up arrangements

[[Page 77504]]

may qualify under the Shared Savings Program pre-participation waiver:
    <bullet> Infrastructure creation and provision.
    <bullet> Network development and management, including the 
configuration of a correct ambulatory network and the restructuring of 
existing providers and suppliers to provide efficient care.
    <bullet> Care coordination mechanisms, including care coordination 
processes across multiple organizations.
    <bullet> Clinical management systems.
    <bullet> Quality improvement mechanisms including a mechanism to 
improve patient experience of care.
    <bullet> Creation of governance and management structure.
    <bullet> Care utilization management, including chronic disease 
management, limiting hospital readmissions, creation of care protocols, 
and patient education.
    <bullet> Creation of incentives for performance-based payment 
systems and the transition from fee-for-service payment system to one 
of shared risk of losses.
    <bullet> Hiring of new staff, including care coordinators 
(including nurses, technicians, physicians, and/or non- physician 
practitioners), umbrella organization management, quality leadership, 
analytical team, liaison team, IT support, financial management, 
contracting, and risk management.
    <bullet> IT, including EHR systems, electronic health information 
exchanges that allow for electronic data exchange across multiple 
platforms, data reporting systems (including all payor claims data 
reporting systems), and data analytics (including staff and systems, 
such as software tools, to perform such analytic functions).
    <bullet> Consultant and other professional support, including 
market analysis for antitrust review, legal services, and financial and 
accounting services.
    <bullet> Organization and staff training costs.
    <bullet> Incentives to attract primary care physicians.
    <bullet> Capital investments, including loans, capital 
contributions, grants, and withholds.
    Many of these activities similarly facilitate a value-based 
enterprise's (and its VBE participants') transition 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.
    Comment: We received a number of comments regarding the selection 
criteria that may be used to choose a target patient population and, 
specifically, what it means for selection criteria to be legitimate and 
verifiable. Although several commenters supported the standard that 
selection criteria must be legitimate and verifiable, stating that it 
struck the right balance between encouraging innovation and protecting 
against fraud and abuse, other commenters expressed concern with the 
use of the term ``legitimate,'' asserting that it is ambiguous and may 
expose parties to litigation and enforcement risk. Some commenters 
requested that we instead prohibit the specific selection criteria that 
we believe are inappropriate, such as cherry-picking and lemon-
dropping, while others requested that we provide a list of selection 
criteria that would be deemed permissible. A few commenters asked 
whether specific selection criteria would be acceptable, such as 
identifying the target patient population by the MS-DRG assigned to the 
patient, geography, demographic criteria (for example, age or 
socioeconomic status), or payor (for example, Medicaid or non-Federal 
payor).
    Response: At final Sec.  411.351, ``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 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). We do not believe that it is necessary to 
further define the term ``legitimate.'' It has been used throughout the 
physician self-referral regulations for decades. For example, the 
exception for personal service arrangements includes a requirement at 
Sec.  411.357(d)(1)(iii) that the aggregate services covered by the 
arrangement do not exceed those that are reasonable and necessary for 
the legitimate business purposes of the arrangement. The term 
``legitimate'' does not carry a new or different definition for 
purposes of interpreting the value-based definitions or the exceptions 
at Sec.  411.357(aa). We refer readers to section II.B.2. of this final 
rule for further discussion of the term ``legitimate'' within our 
regulations. With respect to the commenters' requests for lists of 
impermissible and permissible selection criteria, it is not feasible to 
provide such an exhaustive list of selection criteria that we consider 
unacceptable. Similarly, we believe that providing a list of acceptable 
selection criteria could serve to interfere with or limit a value-based 
enterprise's or VBE participant's ability to identify and utilize 
selection criteria. Deeming provisions sometimes have a chilling effect 
because they are, in practice, interpreted by the regulated industry as 
mandatory or otherwise prescriptive rules. We believe the approach we 
have finalized balances the need for clear guidelines with the need for 
flexibility. Finally, with respect to the commenters' request for 
confirmation that specific selection criteria are permissible, we 
reiterate that the determination whether the selection criteria used to 
identify a target patient population are legitimate and verifiable is 
dependent on the facts and circumstances of the parties. If the 
criteria are selected primarily for their effect on the parties' 
profits or purely financial concerns, they will not be considered 
legitimate and, therefore, are impermissible. None of the selection 
criteria examples shared by the commenters are per se impermissible.
    Comment: Some commenters expressed concern with our statement in 
the proposed rule that choosing a target patient population in a manner 
driven by profit motive or purely financial concerns would not be 
legitimate (84 FR 55776). These commenters suggested that this calls 
into question proven cost-saving techniques, such as product 
standardization, aimed at reductions in cost or unnecessary care that 
impact financial performance. The commenters requested that CMS clarify 
the distinction between reducing costs and problematic criteria, and 
asked us to explicitly acknowledge that it is permissible to choose a 
target patient population that could generate cost reductions from 
activities like product standardization alone.
    Response: It appears to us that these commenters have conflated the 
acceptable criteria for selecting a target patient population and the 
requirements for selecting activities to be performed under a value-
based arrangement. The target patient population is the group of 
individuals for whom the parties to a value-based arrangement are 
undertaking value-based activities. Our statement regarding profit 
motive or purely financial concerns relates to choosing the patient 
population for which the parties will undertake value-based activities 
and not the value-based activities themselves. We reiterate that the 
selection of the target patient population may not be driven by profit 
motive or purely financial concerns. As we stated in the proposed rule, 
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 will not consider the selection criteria to be

[[Page 77505]]

legitimate (even if verifiable) (84 FR 55776). Choosing a target 
patient population solely because it appears likely to reduce the costs 
to one of the parties to a value-based arrangement would be suspect. As 
described earlier in this section and in our response to other 
comments, a value-based activity must be reasonably designed to achieve 
at least one value-based purpose of the value-based enterprise. With 
respect to the commenter's specific inquiry, we note that a value-based 
activity that requires a physician to utilize a standardized list of 
products, where appropriate, may be reasonably designed to achieve at 
least one value-based purpose of the value-based enterprise, depending 
on the enterprise's value-based purposes.
    Comment: A large number of commenters expressed concern with a 
requirement that the patients in the target patient population have at 
least one chronic condition to be addressed by the value-based 
arrangement and urged CMS to not limit the target patient population to 
chronic patients. The commenters stated that such a requirement would 
severely constrict the types of value-based arrangements protected 
under the new exceptions.
    Response: Although we sought comment as to whether we should 
incorporate a requirement that patients in the target patient 
population have at least one chronic condition in order to align with 
OIG's proposals, we are not including this provision in the final 
definition of ``target patient population'' at Sec.  411.351. As 
finalized, 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 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). We are not 
limiting a target patient population to patients with at least one 
chronic condition.
    Comment: A few commenters requested clarification that the 
definition of ``target patient population'' would include patient 
populations that are retroactively attributed, noting as an example the 
use of a retrospective claims-based methodology.
    Response: A target patient population must be selected based on 
legitimate and verifiable criteria that are set out in writing in 
advance of the commencement of the value-based arrangement. The 
commenter's concerns appear to relate to the requirement that selection 
criteria for the target patient population must be set out in writing 
in advance of the commencement of the value-based arrangement. Where a 
target patient population is ascribed to the value-based enterprise (or 
the VBE participants that are parties to the specific value-based 
arrangement) by the payor, the payor establishes the criteria for 
selecting the target patient population. However, this does not affect 
the obligation of the value-based enterprise or its VBE participants to 
select the target patient population for purposes of the physician 
self-referral law and qualification to use the exceptions at Sec.  
411.357(aa). The definition of ``target patient population'' at final 
Sec.  411.351 requires that the target patient population is selected 
by the 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 under which 
value-based activities are undertaken for the target patient population 
and that further the value-based enterprise's value-based purpose(s). 
Thus, where a target patient population is ascribed to the value-based 
enterprise (or the VBE participants that are parties to the specific 
value-based arrangement) by the payor, the value-based enterprise or 
its VBE participants must ensure that the requirements of the 
definition of ``target patient population'' are satisfied.
    In the circumstances described by the commenters, the selection 
criteria for the target patient population could be described as ``the 
target patient population to be identified by the payor in accordance 
with criteria established by the payor for retrospective attribution.'' 
The value-based enterprise or the VBE participants that are parties to 
the specific value-based arrangement under which value-based activities 
are undertaken for the target patient population must ensure that the 
payor's methodology for attribution of the target patient population 
are legitimate and verifiable and that they will further the value-
based enterprise's value-based purpose(s). In addition, the selection 
criteria must be documented in advance of the commencement of the 
value-based arrangement. It is not sufficient for the value-based 
enterprise or its VBE participants to merely state that the selection 
criteria will be determined by another party (in this case, the payor). 
The value-based enterprise or its VBE participants may need to 
collaborate with the payor to ensure that the patient population 
attributed meets the definition of ``target patient population.''
    Comment: Most commenters supported the proposed definition of ``VBE 
participant.'' A few commenters objected to the use of the term 
``entity'' in the definition of ``VBE participant,'' because the term 
``entity'' is ascribed a specific meaning at Sec.  411.351, but, as 
used in the definition of ``VBE participant,'' would not be limited to 
that meaning. Commenters noted that using the same term in two 
different ways within the same regulatory scheme creates unnecessary 
complexity and compliance concerns. Commenters sought clarity on this 
issue, and requested that we either revise the definition of ``entity'' 
at Sec.  411.351 or use a different term for purposes of the definition 
of ``VBE participant.''
    Response: Although we understand the commenter's concerns, we are 
not revising the definition of ``VBE participant'' to replace the term 
``entity'' with another term, nor are we revising the definition of 
``entity'' at Sec.  411.351. In the physician self-referral 
regulations, the term ``entity'' is used to indicate an entity (as 
defined at Sec.  411.351) furnishing designated health services and 
also to indicate its general meaning of an organization (such as a 
business) that has an identity separate from those of its members. As 
used in the final definition of ``VBE participant,'' the term 
``entity'' is not limited to an entity furnishing designated health 
services. Rather, it has its general meaning.
    Although we retain the term ``entity'' in the definition of ``VBE 
participant,'' we are replacing the term ``individual'' (as proposed) 
with the term ``person.'' Thus, under our final regulation, VBE 
participant means a person or entity that engages in at least one 
value-based activity as part of a value-based enterprise. We intend for 
``person or entity'' to refer to both natural and non-natural persons. 
Again, the term ``entity'' in this context is not limited to an entity 
that furnishes designated health services. Our review of the physician 
self-referral regulations indicates that the term ``person or entity'' 
is used numerous times throughout the regulations. For example, as 
defined at Sec.  411.351, a ``referring physician'' is a physician who 
makes a referral or who directs another person or entity to make a 
referral or who controls referrals made by another person or entity. 
The regulations regarding indirect compensation arrangements at Sec.  
411.354(c)(2) state that one element of an indirect compensation 
arrangement is that there exists between the referring physician (or a 
member of his or her immediate family member) and the entity furnishing 
designated health services an unbroken chain of any number (but not 
fewer than one) of persons or entities that have financial

[[Page 77506]]

relationships between them. The regulations also use this term in the 
context of the person or entity from whom the referring physician or 
immediate family member receives aggregate compensation under the 
arrangement. The exceptions for the rental of office space and the 
rental of equipment reference a person or entity in the exclusive use 
requirements at Sec.  411.357(a)(3) and (b)(2). For consistency with 
our existing regulations, we are including the term ``person or 
entity'' in our final definition of ``VBE participant.''
b. 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.
    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 in section I.B.2.a. of this final 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, 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, by design, 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 adding three 
exceptions for compensation arrangements that 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 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.
    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. 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, 
a one-size-fits-all approach to protection from the physician self-
referral law's prohibitions is not optimal. The design and structure of 
our 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, the final exceptions 
are intended to 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 
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 the 
proposed rule (84 FR 55776) and in more detail in this section 
II.A.2.b. of the final 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

[[Page 77507]]

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).
    The current exceptions to the physician self-referral law include 
requirements that may create significant challenges for parties that 
wish to develop novel financial arrangements to facilitate their 
successful participation in health care delivery and payment reform 
efforts (84 FR 55776 through 55778). 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 by the 
physician 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. 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, the comments to 
the proposed rule, and anecdotal information shared by stakeholders 
regarding the impact of the specific requirements that compensation 
must 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 by the physician, 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 remain 
concerned that the inclusion of such requirements in the exceptions for 
value-based arrangements at Sec.  411.357(aa) would conflict with our 
goal of addressing regulatory barriers to value-based care 
transformation. As discussed in more detail below, we are not including 
these requirements in the final exceptions for value-based arrangements 
at Sec.  411.357(aa). We note that two of the final exceptions for 
value-based arrangements are available to protect arrangements even 
when payments from the payor are made on a FFS basis. Even so, we are 
not finalizing a requirement 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 finalizing a 
carefully woven fabric of safeguards, including requirements 
incorporated through the applicable value-based definitions. 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 value-based definitions will operate in tandem with the 
requirements included in the exceptions and are sufficient to protect 
against program and patient abuse. This is especially true where a 
value-based enterprise assumes full or meaningful downside financial 
risk.
    The beneficiary's right to choose a provider of care 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, patients' rights to control who furnishes their care. 
For this reason, we are making 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 exceptions at 
Sec.  411.357(aa) for value-based arrangements. We are finalizing in 
all three exceptions at Sec.  411.357(aa) a separate requirement 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. Specifically, even if the applicable exception 
at Sec.  411.357(aa) does not require that the arrangement is set out 
in writing, any requirement to make referrals to a particular provider, 
practitioner, or supplier must be set out in writing and signed by the 
parties, and the requirement may 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.
    We believe that well-coordinated and managed patient care is the 
cornerstone of a value-based health care system. We solicited comments 
regarding whether it is necessary to include in the exceptions for 
value-based arrangements, 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 is reasonably 
designed, at a minimum, to coordinate and manage the care of the target 
patient population (84 FR 55780). We are not including such a 
requirement in the final exceptions at Sec.  411.357(aa). In our 
experience, and as confirmed by commenters, most arrangements that 
qualify as value-based arrangements, by their nature, have care 
coordination and management at their heart, eliminating the need for an 
explicit requirement. Moreover, we remain 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 new exceptions at Sec.  411.357(aa) and potentially unable to 
meet the requirements of any existing exception to the physician self-
referral law.
    Finally, we have endeavored to be as neutral as possible with 
respect to the types of value-based enterprises and value-based 
arrangements the final exceptions will 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. The final exceptions at 
Sec.  411.357(aa) are applicable to the compensation

[[Page 77508]]

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 exceptions at Sec.  411.357(aa). It 
is our expectation that the suite of value-based exceptions finalized 
here will eliminate the need for any new waivers of section 1877 of the 
Act for value-based arrangements. (We note that parties are not 
required to utilize the value-based exceptions and may elect to use the 
waivers applicable to the CMS-sponsored models, programs, or 
initiatives in which they participate.) However, the final exceptions 
are not limited to CMS-sponsored models (that is, Innovation Center 
models) or establish separate exceptions with different criteria for 
arrangements that exist outside of CMS-sponsored models.
    At Sec.  411.357(aa)(1), we are finalizing an exception that 
applies to a value-based arrangement where a value-based enterprise 
has, during the entire duration of the arrangement, assumed full 
financial risk from a payor for patient care services for a target 
patient population. At Sec.  411.357(aa)(2), we are finalizing an 
exception that applies 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 duration of the arrangement. Finally, at Sec.  
411.357(aa)(3), we are finalizing an exception that applies to any 
value-based arrangement, provided that the arrangement satisfies 
specified requirements.
    We received the following general comments on the value-based 
exceptions and our responses follow.
    Comment: Several commenters encouraged CMS and OIG to work together 
to more closely align their final rules. The commenters expressed 
concern that notable differences between the two rules, if finalized as 
proposed, would create a dual regulatory environment, where a value-
based arrangement could meet the requirements for protection under one 
law but not the other, which could hinder the transition to a value-
based health care delivery and payment system. These commenters 
expressed concern with administrative burden and compliance concerns in 
the event that the OIG and CMS final rules are not aligned. One 
commenter viewed the exceptions to the physician self-referral law as 
having little value if the safe harbors to the anti-kickback statute 
are not revised to mirror the exceptions noting that participants are 
likely to abide by the more stringent requirements included in the safe 
harbors.
    Response: We share the commenters' concerns about dual regulatory 
schemes and the challenges for stakeholders in ensuring compliance with 
both. We have worked closely with OIG to ensure consistency between our 
respective rules to reduce administrative burden on the regulated 
industry. As noted in section II.A.2.a. of this final rule, the final 
value-based definitions at Sec.  411.351 are aligned in nearly all 
respects with OIG's final value-based definitions. However, because of 
the fundamental differences in the statutory structure, operation, and 
penalties between the physician self-referral law and the anti-kickback 
statute, complete alignment between the exceptions to the physician 
self-referral law and safe harbors to the anti-kickback statute is not 
feasible. Reflecting these statutory differences, the regulations that 
CMS and OIG are finalizing include intentional differences that allow 
the anti-kickback statute to provide ``backstop'' protection for 
Federal health care programs and beneficiaries against abusive 
arrangements that involve the exchange of remuneration intended to 
induce or reward referrals under arrangements that could potentially 
satisfy the requirements of an exception to the physician self-referral 
law. In this way, the CMS and OIG regulations, operating together, 
balance the need for parties entering into arrangements that are 
subject to both laws to develop and implement value-based arrangements 
that avoid the strict liability referral and billing prohibitions of 
the physician self-referral law, while ensuring that law enforcement, 
including OIG, can take action against parties engaging in arrangements 
that are intentional kickback schemes.
    Comment: A few commenters recommended that we finalize one all-
inclusive exception to the physician self-referral law for any type of 
value-based arrangement rather than the three-exception structure 
proposed. These commenters asserted that replacing the three value-
based exceptions with one exception would reduce the complexity of the 
regulatory scheme and the burden associated with the transition to 
value-based health care delivery and payment.
    Response: We are finalizing our proposed structure with three 
exceptions to the physician self-referral law that apply based on the 
level of risk assumed by the value-based enterprise or the physician 
who is a party to the value-based arrangement and the characteristics 
of the value-based arrangement. We disagree with the commenters that 
one exception would be less complex and burdensome, and do not believe 
that a one-size fits all approach to exceptions to the physician self-
referral law to facilitate the transition to a value-based health care 
delivery and payment system is possible.
    Comment: The majority of commenters strongly urged CMS to not 
include in any of the final value-based exceptions the ``traditional'' 
requirements that compensation is 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 other business generated by the 
physician for the entity. Some commenters also requested that we not 
include a requirement that the value-based arrangement is commercially 
reasonable. The commenters opined that inclusion of these standards in 
the context of value-based health care delivery and payment is neither 
appropriate nor necessary, and asserted that inclusion of these 
standards would create a barrier to the transition to a value-based 
health care delivery and payment system, leaving the value-based 
exceptions of limited or no utility. These commenters noted that 
nonmonetary remuneration, in particular, that is provided under a 
value-based arrangement is not necessarily consistent with the fair 
market value of items or services provided by the recipient (or value-
based activities undertaken by the recipient) and asserted that 
requiring that such compensation is fair market value would impact the 
ability of parties to share necessary infrastructure, care 
coordination, and patient engagement tools. The commenters also stated 
that many value-based arrangements are, by nature, related to the 
volume or value of referrals, and requiring that compensation is not 
determined in any manner that takes into account the volume or value of 
a physician's referrals or other business generated by the physician 
would limit the utility of the exceptions. Finally, a few commenters 
asserted that there is no need for a commercial reasonableness standard 
in light of the definition of ``value-based purpose,'' which the 
commenters interpreted to serve the same function and require the same 
analysis as that of the commercial reasonableness of an arrangement. 
These commenters also asserted that value-based arrangements are, by 
their

[[Page 77509]]

nature, commercially reasonable. In contrast, a few commenters urged 
CMS to include requirements that the value-based arrangement is 
commercially reasonable, the compensation is not determined in any 
manner that takes into account the volume or value of a physician's 
referrals or other business generated by the physician, and the 
compensation is fair market value in order to protect against program 
or patient abuse. The commenters did not explain why omitting these 
requirements creates a risk of program or patient abuse.
    Response: As noted above and for the reasons described in the 
proposed rule, we are not including in the final exceptions at Sec.  
411.357(aa) the traditional requirements that compensation is set in 
advance, consistent with fair market value of the value-based 
activities provided under the value-based arrangement, 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. However, we are requiring that the 
compensation arrangement is commercially reasonable. As we stated in 
the proposed rule, disincentives for overutilization, stinting on 
patient care, and other harms the physician self-referral law was 
intended to address are built into the value-based definitions and will 
operate in tandem with the requirements included in the exceptions to 
protect against program and patient abuse (84 FR 55777). It is this 
framework that allows us to forgo the requirements in the current 
exceptions to the physician self-referral law that may create 
significant challenges to innovation in a value-based health care 
delivery and payment system.
    We are cognizant that requirements that remuneration be fair market 
value and not take into account the volume or value of a physician's 
referrals or the other business generated by a physician may inhibit 
the innovation necessary to achieve well-coordinated care that results 
in better health outcomes and reduced expenditures (or reduced growth 
in expenditures). We agree with the commenters that these standards, 
which play an important role in the other exceptions to the physician 
self-referral law, may be counter to the underlying policy goals of 
value-based health care delivery and payment. We also agree that 
compensation arrangements that qualify as value-based arrangements 
under the new value-based definitions at Sec.  411.351, satisfy all the 
requirements of an applicable exception at final Sec.  411.357(aa), and 
are aimed at reducing cost and improving quality are likely 
commercially reasonable. Even so, we believe that this additional 
program integrity safeguard is warranted. As defined at final Sec.  
411.351, ``commercially reasonable'' means that the particular 
arrangement furthers a legitimate business purpose of the parties to 
the arrangement and is sensible, considering the characteristics of the 
parties, including their size, type, scope, and specialty. The 
requirement at final Sec.  411.357(aa)(3)(vi) will ensure that parties 
to a value-based arrangement structure the arrangement in a manner 
intended to further their legitimate business purposes, which must 
include achievement of the value-based purpose(s) of the value-based 
enterprise of which they are participants.
    Comment: Several commenters urged us to create separate exceptions 
for CMS-sponsored model arrangements and CMS-sponsored model patient 
incentives consistent with existing waivers for these programs that 
would work in conjunction with or mirror the safe harbors at proposed 
42 CFR 1001.952(ii). Some commenters expressed concern over parties 
having to identify and comply with an applicable exception to the 
physician self-referral law and also comply with the safe harbor under 
the anti-kickback statute for CMS-sponsored programs. Several other 
commenters requested assurance that all existing fraud and abuse 
waivers for CMS-sponsored models, programs, and initiatives will remain 
in effect as implemented and will not be impacted by the new exceptions 
for value-based arrangements.
    Response: The commenters did not provide any specific examples of 
existing financial arrangements under a CMS-sponsored model, program, 
or other initiative between an entity and a physician (or immediate 
family member) to which none of the exceptions at final Sec.  
411.357(aa)(3) would apply. We carefully evaluated our final exceptions 
against the existing CMS-sponsored models, programs, and other 
initiatives, and are confident that at least one of the new exceptions 
at Sec.  411.357(aa) is applicable to the types of compensation 
arrangements contemplated under each model, program, or initiative. The 
design of the final exceptions should result in a smooth transition 
from participation in a CMS-sponsored model, program, or initiative if 
the parties wish to continue their compensation arrangements and rely 
on the new value-based exceptions at Sec.  411.357(aa). Thus, it is not 
necessary to establish an exception specific to arrangements undertaken 
pursuant to a CMS-sponsored model, program, or initiative as requested 
by the commenters. Importantly, the existing model-specific or program-
specific fraud and abuse waivers will remain in place and are not 
affected by the existence of the value-based exceptions. Also, the 
Secretary retains authority under section 1115A(d)(1) of the Act to 
waive certain fraud and abuse laws as necessary solely for purposes of 
testing payment and service delivery models developed by the Innovation 
Center, and this authority can be used to address future financial 
arrangements under Innovation Center models that may not fit within the 
final value-based exceptions framework. Finally, the final fraud and 
abuse waivers issued in connection with the Shared Savings Program are 
permanent waivers that are unaffected by the value-based exceptions 
finalized in this final rule.
    Comment: Some commenters sought clarification regarding the 
interaction between the value-based exceptions and existing exceptions 
to the physician self-referral law. A few commenters questioned whether 
an entity currently relies on the exception for bona fide employment 
relationships at Sec.  411.357(c) to protect compensation arrangements 
with employed physicians may continue to utilize the exception at Sec.  
411.357(c), or whether its compensation arrangements that qualify as 
value-based arrangements must satisfy the requirements of one of the 
new value-based exceptions at Sec.  411.357(aa). The commenters stated 
a desire to continue to utilize the exception at Sec.  411.357(c) for 
value-based arrangements with employed physicians rather than the new 
value-based exceptions. The commenters also sought guidance regarding 
whether the value-based exceptions could be utilized concurrently with 
``traditional exceptions'' when an entity has multiple compensation 
arrangements with the same physician and, if so, how requirements of 
the exceptions, such as the requirement that compensation is fair 
market value, would apply if the parties are utilizing multiple 
exceptions. A few commenters requested that we confirm that 
compensation for care coordination, quality improvement, and cost 
containment activities are not prohibited under the exception for bona 
fide employment relationships or the services exceptions at Sec.  
411.355.
    Response: Nothing in this final rule mandates the use of the value-
based exceptions. As we have stated before, parties may use any 
applicable exception to the physician self-referral law provided that 
all the requirements of the exception are satisfied (66 FR 916 and 72 
FR 51047). The value-based

[[Page 77510]]

exceptions, however, are only available to parties that qualify under 
the value-based definitions. Parties may utilize the exception at Sec.  
411.357(c) to protect a value-based arrangement, however, the value-
based arrangement must satisfy all the requirements of the exception in 
order to avoid the referral and billing prohibitions of the physician 
self-referral law. The same is true with respect to the availability of 
and compliance with any other existing exception that is applicable to 
the parties' financial relationship or the physician's referrals of 
designated health services. The exception for bona fide employment 
relationships includes requirements that the arrangement is 
commercially reasonable, the compensation paid to the physician is fair 
market value, and the compensation is not determined in any manner that 
takes into account the volume or value of the physician's referrals. 
None of these requirements are included in the final exceptions at 
Sec.  411.357(aa). Thus, depending on the terms and conditions of the 
value-based arrangement, the arrangement may be unable to satisfy all 
the requirements of the exception for bona fide employment 
relationships. That determination is, of course, fact-specific.
    Comment: Several commenters expressed concern that the requirements 
of the value-based definitions and exceptions could disadvantage rural 
providers and small physician practices that desire to participate in 
value-based arrangements, and that these providers and suppliers face 
greater challenges when transitioning to a value-based health care 
delivery and payment system. The commenters stated that these 
challenges include financial burdens, the complexity of the value-based 
exceptions and definitions, and inadequate resources to successfully 
implement value-based arrangements. Commenters urged CMS to make 
revisions to the proposed value-based exceptions to accommodate rural 
providers and small physician practices, specifically suggesting that 
we either limit the number of requirements under the value-based 
exceptions that would be applicable to rural providers and small 
physician practices to help alleviate the burden associated with 
complying with the exceptions or establish a separate, less onerous 
exception applicable only to these providers and suppliers.
    Response: We are not persuaded that an exception for value-based 
arrangements that is exclusively available to rural providers and small 
physician practices is necessary, nor are we revising the exceptions to 
limit the requirements under the value-based exceptions applicable to 
these providers and suppliers. We understand the challenges faced by 
rural providers and small physician practices, including resource 
limitations, and appreciate the important role of rural providers as a 
safety net for their communities. The value-based arrangements 
exception finalized at Sec.  411.357(aa)(3) is applicable to all value-
based arrangements, regardless of the size or nature of the parties to 
the arrangement, the financial risk undertaken by the value-based 
enterprise, or the financial risk undertaken by the physician who is a 
party to the value-based arrangement. We expect that this exception may 
be utilized by rural providers and small physician practices more 
frequently than the full financial risk and meaningful downside 
financial risk exceptions. As discussed elsewhere in this final rule, 
we are not requiring a financial contribution from the recipient of 
remuneration under any of our final value-based exceptions. We believe 
this addresses some of the commenters' concerns.
(1) Full Financial Risk (Sec.  411.357(aa)(1))
    We proposed at Sec.  411.357(aa)(1) an exception to the physician 
self-referral law (the ``full financial risk exception'') that applies 
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 such patient care 
items and services. For Medicare beneficiaries, we noted that we intend 
for 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 are finalizing the exception with one modification. We are 
extending the period of time during which the exception will be 
available prior to the value-based enterprise's financial 
responsibility for the cost of all patient care items and services 
covered by the applicable payor for each patient in the target patient 
population. Specifically, we are replacing the requirement that the 
value-based enterprise is contractually obligated to be financially 
responsible within the 6 months following the commencement date of the 
value-based arrangement with a 12-month timeframe. Thus, under this 
final rule, the value-based enterprise must be financially responsible 
(or must be contractually obligated to be financially responsible 
within the 12 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. As 
described in more detail below, we believe that extending this ``pre-
risk period'' to 12 months is consistent with the timeframe established 
in the Shared Savings Program pre-participation waiver (80 FR 66742), 
and, as with the Shared Savings Program pre-participation waiver, we do 
not believe that establishing a 12-month pre-risk period poses a risk 
of program or patient abuse.
    As we stated in the proposed rule, 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 (84 FR 55779). We noted that the full 
financial risk exception would not prohibit other approaches to full 
financial risk and sought comment on other approaches to full financial 
risk that may exist currently or that stakeholders anticipate for the 
future. We are not prescribing a specific manner for the assumption of 
full financial risk in this final rule.
    A value-based enterprise need not be a separate legal entity with 
the power to contract on its own (84 FR 55779). 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 different 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 that

[[Page 77511]]

contracts for the assumption of full financial risk on behalf of the 
value-based enterprise and its VBE participants. As explained in more 
detail below, we are not requiring that the value-based enterprise is a 
separate legal entity with contracting powers or requiring a particular 
structure for the value-based enterprise.
    The value-based enterprise's 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. We define ``prospective basis'' in this final rule at Sec.  
411.357(aa)(1)(vii) to mean 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. 
As noted in the proposed rule (84 FR 55780) and discussed more fully 
below, the final definition of ``full financial risk'' does 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 are also not prohibited. The final exception is available 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. As stated above, the final 
exception limits this period to the 12 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 12 
months following the commencement of the value-based arrangement.
    We believe that full financial risk is one of the 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. 
Accordingly, these kinds of payment limitations provide stronger and 
more effective safeguards against increases in the volume and costs of 
services than the physician self-referral law ever placed on the FFS 
system. Nonetheless, as a precaution, we proposed and are finalizing 
several important safeguards in the full financial risk exception.
    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 (84 FR 55780). Thus, the 
final exception will not protect arrangements that begin at some point 
during a period when the value-based enterprise has assumed full 
financial risk, but that continue into a timeframe when the safeguards 
intrinsic to full-financial risk payment, such as the disincentive to 
overutilize or stint on medically necessary care, no longer exist. 
However, one or both of the other exceptions finalized at Sec.  
411.357(aa)(2) and (3) may be available to protect value-based 
arrangements that exist during a period when the value-based enterprise 
is not at full financial risk (or contractually obligated to be at full 
financial risk within the 12 months following the commencement of the 
value-based arrangement) for the cost of all patient care items and 
services covered by the applicable payor for each patient in the target 
patient population.
    We also proposed and are finalizing 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. As we discussed in the 
proposed rule, 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 (84 FR 55780). We do not interpret the requirement at 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. 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 
addresses this issue. 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 (84 FR 55780). The final 
exception, therefore, will 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, it is our position that 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.
    In the proposed rule, we discussed the fact that 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 (84 FR 
55780). This is an important safeguard for patient safety and quality 
of care, regardless of whether Medicare is the ultimate payor for the 
services. Therefore, we proposed a requirement at Sec.  
411.357(aa)(1)(iii) that remuneration under a value-based arrangement 
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. We are finalizing this requirement at Sec.  
411.357(aa)(1)(iii). We note that 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.
    In addition, we proposed 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 (84 FR 55781). 
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, as discussed in the proposed rule, it is

[[Page 77512]]

intended to address a different concern. We are finalizing at Sec.  
411.357(aa)(1)(iv) the requirement that 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. The final exception does 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 will not protect a value-based 
arrangement between an entity and a physician that are VBE participants 
in the value-based enterprise if the entity requires 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 will not protect a value-based arrangement 
related to knee replacement services furnished to Medicare 
beneficiaries if the arrangement requires that the physician perform 
all his or her other orthopedic surgeries at the hospital.
    We also proposed and are finalizing a requirement at Sec.  
411.357(aa)(1)(v) related to directing a physician's referrals to a 
particular provider, practitioner, or supplier (84 FR 55781). Under 
final Sec.  411.357(aa)(1)(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 complies with 
both of the following conditions: (A) The requirement to make referrals 
to a particular provider, practitioner, or supplier must be set out in 
writing and signed by the parties; and (B) the requirement to make 
referrals to a particular provider, practitioner, or supplier may 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. See 
section II.B.4. of this final rule for a complete discussion of our 
interpretation of this requirement.
    Finally, we proposed 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 (84 FR 55781). We noted in 
the proposed rule that 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(e)(4)(iv), and the exception for assistance to compensate a 
nonphysician practitioner at Sec.  411.357(x)(2) (84 FR 55781). We are 
finalizing at Sec.  411.357(aa)(3)(xi) the requirement 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 expect that parties are familiar with these requirements and that 
the maintenance of such records is part of their routine business 
practices.
    As we discussed in the proposed rule (84 FR 55781), we consider the 
exception at Sec.  411.357(aa)(1) comparable, in some respects, to the 
exception at Sec.  411.357(n) for risk-sharing arrangements, which, as 
we noted in Phase II, is intended to be a broad exception with maximum 
flexibility, covering all risk-sharing compensation paid to a physician 
by any type of health plan, insurance company, or health maintenance 
organization (that is, any ``managed care organization'' (MCO)) or IPA, 
provided the arrangement relates to enrollees and meets the conditions 
set forth in the exception (69 FR 16114). A downstream arrangement that 
creates an indirect compensation arrangement between an MCO or IPA and 
a physician is included within the scope of the exception for risk-
sharing arrangements. (See section II.A.2.b.(4) of this final rule for 
a full discussion of the applicability or the exception for risk-
sharing arrangements at Sec.  411.357(n).) Although the final 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 section II.A. of this final rule, we 
believe that the flexibility provided in the exception for risk-sharing 
arrangements is also warranted in the full financial risk exception. 
Finally, like the exception at Sec.  411.357(n) for risk-sharing 
arrangements, we did not propose, nor are we finalizing, documentation 
requirements in the full financial risk exception. Nevertheless, it is 
a good business practice to reduce to writing any arrangement between 
referral sources as it allows the parties to monitor and confirm that 
an arrangement is operating as intended.
    We received the following comments and our responses follow.
    Comment: Several commenters urged CMS to expand the definition of 
``full financial risk'' at Sec.  411.357(aa)(1)(vii) to exclude defined 
sets of patient care items or services for a target patient population, 
or specific diseases or conditions, similar to episode-based bundled 
payment models. By way of example, commenters suggested that full 
financial risk should be limited to only the items and services 
required to treat patients with diabetes or during an episode of care 
for a knee replacement. Commenters perceived the full financial risk 
exception as having limited utility, asserting that the health care 
industry is currently not well-positioned to take on full financial 
risk for all patient care items and services covered by the applicable 
payor for each patient in the target patient population. Commenters 
suggested that allowing protection under the full financial risk 
exception for arrangements where the parties take on full financial 
risk for only a subset of items or services covered by the applicable 
payor, such as joint replacement surgery, would increase the utility of 
the full financial exception and help to facilitate the transition to a 
value-based health care delivery and payment system.
    Response: We are not revising the definition of ``full financial 
risk'' to mean a defined set of patient care items or services (similar 
to episode-based bundled payment models) or anything less than 
financial responsibility, 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. To do so could undermine 
the Secretary's policy goals of moving more health care providers and 
practitioners into two-sided risk payment structures. The full 
financial risk exception applies to value-based arrangements between 
VBE participants in a value-based enterprise that has assumed ``full 
financial risk'' 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. It also applies to a value-based arrangement between the value-
based enterprise (if it is an entity as defined at Sec.  411.351) and a 
physician who is a VBE participant in the value-based enterprise. The 
value-based enterprise must be financially responsible (or be 
contractually obligated to be financially responsible within the 12 
months following the commencement date of the value-based

[[Page 77513]]

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. As noted 
in the proposed rule and above, we believe that full financial risk is 
an important defining characteristic of a mature value-based health 
care delivery and payment system (84 FR 55780). When a value-based 
enterprise is at full financial risk for the cost of all patient care 
items and services, the incentives to order unnecessary services or 
steer patients to high-cost sites of services are diminished. Those 
same incentives are not necessarily present in episode-based bundled 
payment models. Expanding the applicability of the exception at Sec.  
411.357(aa)(1) to protect value-based arrangements under episode-based 
bundled payment models would result in heightened program integrity 
concerns, and therefore, would not fall within the Secretary's 
authority under section 1877(b)(4) of the Act upon which we relied to 
establish this exception. We recognize that providers may not be well-
positioned at this time to transition to a full financial risk model; 
however, it is our hope that, by reducing the burden of the physician 
self-referral law, we can provide a pathway for participants in the 
value-based system to evolve and more meaningfully participate in the 
value-based system. As discussed in detail in II.A.2.b.(3). of this 
final rule, we are finalizing at Sec.  411.357(aa)(3) an exception 
applicable to value-based arrangements where the value-based enterprise 
assumes less than full financial risk, including arrangements where 
neither the value-based enterprise nor the parties to the particular 
arrangement have assumed any financial risk. That exception may 
facilitate the entry of providers and suppliers into value-based health 
care delivery and payment with the goal of moving eventually to two-
sided risk models.
    Comment: Several commenters stated that the full financial risk 
exception would be of limited utility if high-cost or specialty items 
and services, such as organ transplants or pharmacy benefits, are not 
carved out of the definition of ``full financial risk.'' The commenters 
noted that, even in more advanced value-based arrangements, payors 
exclude high-cost or specialty items or services from the risk 
arrangement. The commenters urged CMS to permit a value-based 
enterprise to qualify as being at full financial risk without taking on 
the responsibility for high cost or specialty items and services. 
Similarly, these commenters requested clarification regarding the 
ability of the value-based enterprise to offset losses while still 
meeting the definition of full financial risk for purposes of the 
exception. Other commenters urged CMS to allow a value-based enterprise 
to enter into payor arrangements with risk mitigation terms to protect 
against catastrophic losses, such as risk corridors, global risk 
adjustments, reinsurance, stop loss agreements.
    Response: We decline to carve out high-cost or specialty items or 
services from the definition of ``full financial risk.'' In addition, 
we do not believe that revisions are necessary to specifically address 
mechanisms by which parties to a full financial risk payor arrangement 
may protect against significant or catastrophic losses. Further, the 
exclusion of high-cost or specialty items and services could 
potentially interfere with private payor contracts among health care 
providers, suppliers, and physicians. Importantly, nothing in the final 
full financial risk exception or the definition of ``full financial 
risk'' prohibits a value-based enterprise from contracting with a payor 
for stop-loss protection or applying risk corridors to limit exposure 
to significant losses related to such high-cost items or services or 
overall expenses. A payor arrangement may include risk mitigation terms 
such as risk corridors, global risk adjustments, reinsurance, or stop-
loss provisions to protect against significant and catastrophic losses. 
As noted above, the financial risk assumed by the value-based 
enterprise must be prospective; thus, the contract between the value-
based enterprise and the payor may not allow for any additional fee for 
service or other payments 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.
    Risk mitigation tools are not new to CMS-sponsored value-based 
initiatives. In fact, some of the initiatives of the Innovation Center, 
where Medicare is the payor, anticipate potential burdens on 
participants related to high cost items and services and the need for 
protection against significant and catastrophic losses. These 
Innovation Center initiatives include stop-loss provisions to mitigate 
the risk of overall costs being higher than expected. For instance, the 
Bundled Payment for Care Improvement, Next Gen ACO, and Comprehensive 
Care for Joint Replacement models all include some form of stop-loss 
assurance to mitigate financial risk.
    Finally, there is nothing in this final rule that will prohibit a 
value-based enterprise and a payor from negotiating and designing a 
full financial risk payor arrangement that would address the concerns 
raised by the commenters. We are not imposing a specific limit on the 
amount of loss coverage a value-based enterprise may have, but we 
caution that we will expect any stop-loss or other risk adjustment 
provisions to act as protection for the value-based enterprise against 
catastrophic losses and not a means by which to shift material 
financial risk back to the payor. To be clear, the definition of ``full 
financial risk'' would not permit the full offset of a value-based 
enterprise's losses.
    Comment: The majority of commenters agreed that the full financial 
risk exception should extend to compensation arrangements related to 
activities taken in preparation for the implementation of the value-
based enterprises' full financial risk payor contract, but requested 
that CMS extend the 6-month ``pre-risk'' period to a 12-month period. 
The commenters noted that at least 12 months of preparation are often 
necessary to develop and operationalize a successful value-based 
enterprise, even when it will not be assuming full financial risk. 
Commenters highlighted activities such as the development of care 
redesign protocols, implementation of IT infrastructure, and deployment 
of care coordinators as necessary for the successful undertaking of 
full financial risk by a value-based enterprise and its VBE 
participants.
    Response: We are persuaded to extend the ``pre-risk'' period under 
the full financial risk exception to 12 months. Under the regulation 
finalized in this final rule, the value-based enterprise must be 
financially responsible (or be contractually obligated to be 
financially responsible within the 12 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. Extending this pre-risk period to 12 months should 
allow parties sufficient time to work together in preparation for 
taking on full financial risk. A 12-month period is consistent with the 
Shared Savings Program pre-participation waiver, and we are not aware 
of any program integrity concerns with respect to the 12-month start-up 
period to date. We see no reason why providing for a 12-

[[Page 77514]]

month pre-risk period in the full financial risk exception would pose a 
risk of program or patient abuse.
    Comment: Some commenters explained that certain States, such as 
California, require providers or suppliers that assume full financial 
risk for health care items and services are required to become licensed 
as a health plan. The commenters noted that the expense and regulatory 
burden associated with becoming a licensed health plan would deter most 
providers or suppliers from taking that step, making the full financial 
risk exception of no utility to them. The commenters recommended that 
CMS modify the full financial risk exception to address this State law 
issue. Some of the commenters also noted that certain States prohibit a 
provider or supplier from assuming financial risk for items and 
services other than those typically provided by that provider or 
supplier type. For instance, a hospital could not assume financial risk 
for physician services and vice versa.
    Response: We are not prescribing a specific manner for the 
assumption of full financial risk by a value-based enterprise. The full 
financial risk exception applies to value-based arrangements between 
VBE participants in a value-based enterprise that has assumed full 
financial risk 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. Nothing 
in this final rule precludes the various VBE participants in the value-
based enterprise from aggregating the risk that each individual VBE 
participant assumes to reach full financial risk for the value-based 
enterprise as a whole. For instance, assume a value-based enterprise 
has as its VBE participants a hospital, skilled nursing facility, 
physicians, and a full complement of providers and suppliers that, 
together, provide all the patient care services covered by an 
applicable payor. If each of the VBE participants is at full financial 
risk for the cost of all patient care items or services that it 
furnishes, the VBE participants could aggregate their risk so that the 
value-based enterprise is, in total, at full financial risk for the 
cost of all patient care items or services covered by the applicable 
payor. Essentially, the hospital could assume full financial risk for 
hospital services, the skilled nursing facility could assume full 
financial risk for skilled nursing services, the physicians could 
assume full financial risk for physician services, etc. As long as 
there are no services covered by the applicable payor for which the VBE 
participants have not assumed full financial risk, the value-based 
enterprise will be at full financial risk for purposes of Sec.  
411.357(aa)(1). We see no reason why allocating the full financial risk 
among the VBE participants of the value-based enterprise--as opposed to 
a single organization (the value-based enterprise) assuming the full 
financial risk--would pose an additional risk of program or patient 
abuse. Finally, we note that nothing in this final rule preempts any 
applicable State law, and we remind parties that other exceptions may 
be available to protect arrangements where State law restrictions make 
satisfaction of certain requirements of an exception challenging or 
impossible.
    Comment: Many commenters acknowledged the importance of preserving 
patient choice but stressed that, in a value-based health care delivery 
and payment system, the ability to guide a patient to a high quality 
provider is imperative. The commenters requested that we include any 
patient choice requirements in the regulation text of the value-based 
exceptions rather than cross-referencing the requirements of the 
special rules on compensation at Sec.  411.354(d)(4)(iv).
    Response: As discussed above, 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. We are 
finalizing in the full financial risk exception a separate requirement 
to ensure that, regardless of the nature of the value-based arrangement 
and the value-based enterprise's 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. The final exception provides 
at Sec.  411.357(aa)(1)(v) that, if remuneration paid to the physician 
is conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier, the value-based 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; and (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. We have 
included this language in all three of the value-based exceptions.
    Comment: A few commenters questioned whether the full financial 
risk exception is even necessary, suggesting that CMS should instead 
modify the exception at Sec.  411.357(n) for risk-sharing arrangements 
to accommodate value-based arrangements where the value-based 
enterprise is at full financial risk.
    Response: We decline to modify the exception at Sec.  411.357(n) to 
accommodate value-based arrangements as requested by the commenters. As 
discussed more fully in section II.A.2.b.(4) of this final rule, the 
exception at Sec.  411.357(n) applies to compensation arrangements 
between an MCO or an IPA and a physician for services provided to 
enrollees of a health plan, provided that the compensation arrangement 
qualifies as a risk-sharing arrangement. The compensation arrangement 
between the MCO or IPA and the physician may be direct or indirect. The 
exception does not apply to a compensation arrangement--whether direct 
or indirect--between a physician and an entity that is anything other 
than an MCO or IPA. The value-based exceptions finalized in this final 
rule will apply to any value-based arrangement, direct or indirect, 
between a physician and any entity that furnishes designated health 
services to which the physician makes referrals. Thus, the value-based 
exceptions are broader in applicability than the exception for risk-
sharing arrangements. As discussed in the proposed rule and above, we 
have designed a carefully woven fabric of definitions and exceptions 
that protect against program and patient abuse while providing 
flexibility for experimentation in the design and implementation of 
value-based care arrangements (84 FR 55777). We believe that this 
framework is crucial to achieving the Department's goal of moving to a 
value-based health care delivery and payment system, and that most 
value-based arrangements between an entity and a physician in a value-
based enterprise that has assumed full financial risk should remain 
within this framework.
(2) Value-Based Arrangements With Meaningful Downside Financial Risk to 
the Physician (Sec.  411.357(aa)(2))
    As we stated in the proposed rule, a few CMS RFI commenters opined 
that the health care industry is in the early

[[Page 77515]]

stages of its transition to value-based health care delivery and 
payment (84 FR 55781). After reviewing the comments on the CMS RFI and 
the proposed rule, we acknowledge that, although CMS, non-Federal 
payors, and a significant segment of the health care industry have made 
advancements in value-based health care delivery and payment, many 
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, we are also aware that some physicians are 
participating in or considering participating in alternative payment 
models that provide for potential financial gain in exchange for the 
undertaking of some level of downside financial risk.
    Financial risk assumed directly by a physician will likely affect 
his or her practice and referral patterns in a way that curbs the 
influence of traditional FFS, volume-based payment. Further, financial 
risk is tied to the achievement or, or failure to achieve, value-based 
purposes incents 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 the costs to 
or 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 inherent protections against program or patient abuse. In 
recognition of this, we proposed an exception 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'') (84 FR 55781). Under the 
meaningful downside financial risk exception, 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 proposed 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 stated that 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 final rule (84 FR 55782). We related the definition of 
``meaningful downside financial risk'' to 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), and sought 
comment on whether defining meaningful downside financial risk as 25 
percent of the value of the remuneration the physician receives under 
the value-based arrangement is appropriate. Upon consideration of the 
public comments, we are revising the definition of ``meaningful 
downside financial risk'' to mean that the physician is responsible to 
repay or forgo no less than 10 percent of the total value of the 
remuneration the physician receives under the value-based arrangement. 
Because the exception does not limit the type of remuneration that may 
be provided, under the final regulation, the risk of repayment or the 
amount the physician must be at risk to forgo may be no less than 10 
percent of the value of the remuneration to account for remuneration 
that may be provided in-kind, such as infrastructure or care 
coordination services. In the proposed rule, we also provided an 
alternative definition to meaningful downside financial risk that would 
also include the physician's full financial risk to the entity, 
recognizing that a physician who assumes full financial risk for all or 
a defined set of patient care services for the target patient 
population would certainly be considered at ``meaningful downside 
financial risk'' (84 FR 55782). We are not finalizing our proposal for 
an expanded definition of ``meaningful downside financial risk.''
    As discussed in the proposed rule, because the exception at Sec.  
411.357(aa)(2) does not require the type of global risk to the value-
based enterprise that is required in the full financial risk exception, 
additional or different requirements are necessary to protect against 
program or patient abuse (84 FR 55782). We proposed requiring that the 
physician must be at meaningful downside financial risk for the entire 
duration of the value-based arrangement to curtail any gaming that 
could occur by adding meaningful downside financial risk to a physician 
during only a short portion of an arrangement. We are finalizing this 
requirement at Sec.  411.357(aa)(2)(i). To buttress our oversight 
ability and that of our law enforcement partners, we proposed a 
requirement that the nature and extent of the physician's financial 
risk is set forth in writing. We are finalizing this requirement at 
Sec.  411.357(aa)(2)(ii). We note that this is also 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 proposed to require 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. We noted that 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 are free to confirm 
satisfaction of the requirement another way. We are finalizing this 
requirement at Sec.  411.357(aa)(2)(iii).
    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 (84 FR 55782). This is an important safeguard for 
patient safety and quality of care, regardless of whether Medicare is 
the ultimate payor for the services, and we proposed including this 
safeguard in the meaningful downside financial risk exception by 
requiring 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. We are 
finalizing this requirement at Sec.  411.357(aa)(2)(v).
    For the reasons we explained with respect to the full financial 
risk exception, we proposed 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 conditioned on referrals of patients who are not 
part of the target patient population or business not covered 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

[[Page 77516]]

Secretary upon request. We are finalizing our proposals to include 
these requirements in the meaningful downside financial risk exception 
at Sec.  411.357(aa)(2)(iv), (vi), and (viii).
    We also proposed a requirement at Sec.  411.357(aa)(2)(vii) related 
to directing a physician's referrals to a particular provider, 
practitioner, or supplier (84 FR 55781). Under final Sec.  
411.357(aa)(2)(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 complies with 
both of the following conditions: (1) The requirement to make referrals 
to a particular provider, practitioner, or supplier must be set out in 
writing and signed by the parties; and (2) the requirement to make 
referrals to a particular provider, practitioner, or supplier may 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. See 
section II.B.4. of this final rule for a complete discussion of our 
interpretation of this requirement.
    We received the following comments on the proposed meaningful 
downside financial risk exception. Our responses follow.
    Comment: Several commenters disagreed with the design of the 
meaningful downside financial risk exception and the focus of the 
exception on the physician's level of risk rather than that of the 
entity. The commenters viewed the meaningful downside financial risk 
exception, as proposed, as being of limited utility and not reflective 
of current real-world financial risk arrangements. Some commenters 
urged CMS to modify the meaningful downside financial risk exception to 
protect arrangements where the entity assumes the financial risk noting 
that entities, such as hospitals, are better positioned to assume risk 
from payors. These commenters expressed concern as to whether physician 
behavior has evolved to the point of being able to assume meaningful 
downside financial risk as required by the exception. Some commenters 
requested that we permit an entity to assume meaningful downside 
financial risk and then allocate the risk down to the physician.
    Response: We are not making the modifications suggested by the 
commenters. These commenters appear to misunderstand the scope of the 
meaningful downside financial risk exception and the intent behind it. 
The meaningful downside financial risk exception covers individual 
compensation arrangements that qualify as value-based arrangements 
between an entity and a physician that are VBE participants in the same 
value-based enterprise, regardless of whether the value-based 
enterprise or the entity has assumed financial risk from a payor. The 
exception is available to protect value-based arrangements under which 
the physician has assumed financial risk from the entity that is party 
to the arrangement, and where such risk is tied to the achievement of 
the value-based purpose(s) of the value-based enterprise of which the 
physician and the entity are VBE participants. The value-based 
exceptions at Sec.  411.357(aa) are designed to accommodate movement 
toward two-sided financial risk. Although we recognize that many 
physicians may not be prepared or willing to assume full (or 
substantially full) financial risk, the exception at Sec.  
411.357(aa)(2) is available to protect those value-based arrangements 
under which either meaningful downside financial risk is incorporated 
into the physician's compensation. There is great potential for 
behavior-shaping when a physician's failure to achieve value-based 
purposes is tied to his or her remuneration. This behavior-shaping is 
critical to transforming our health care delivery system into one that 
improves patient outcomes, eliminates waste and inefficiencies, and 
reduces costs to or growth in expenditures of payors.
    Comment: Most of the commenters that addressed the proposed 
exception at Sec.  411.357(aa)(2), disliked the 25 percent threshold 
for qualification as meaningful downside financial risk. These 
commenters asserted that a 25 percent threshold is too high and would 
limit physician participation in value-based health care delivery and 
payment systems. Some of the commenters suggested that physicians who 
are new to value-based health care would be reluctant to put 25 percent 
of their compensation at risk. These commenters requested that we 
reduce the threshold to 10 percent, referencing a 2018 Deloitte Survey 
of U.S. physicians \5\ that surveyed 624 primary care and specialty 
physicians practicing in a variety of health care settings and found 
that most physicians are willing to tie approximately 10 percent of 
their compensation to quality and cost measures (the Deloitte Study). 
Several other commenters suggested a 5 percent threshold, noting that 
certain CMS payment systems or programs, such as advanced APMs and MIPS 
APMs, set financial risk percentages for physicians ranging from 5 to 9 
percent. A few commenters suggested that we adopt a threshold of 15 
percent for consistency with the contribution requirement under the 
exception for EHR items and services at Sec.  411.357(w). Some of the 
commenters suggested a scaled approach under which the exception 
initially would require a lower level of downside financial risk and 
increase to a higher level of downside financial risk as the physician 
acclimates to and participates in the value-based health care delivery 
and payment system. The commenters suggested that, in the alternative, 
CMS could set a lower threshold for meaningful downside financial risk 
in this final rule and increase the threshold in a future rulemaking. A 
few commenters viewed the 25 percent threshold as appropriate and 
consistent with the physician incentive plan rules applicable to 
Medicare and Medicaid managed care plans and federal health maintenance 
organizations.
---------------------------------------------------------------------------

    \5\ https://www2.deloitte.com/us/en/insights/industry/health-care/volume-to-value-based-care.html (last accessed June 18, 2020).
---------------------------------------------------------------------------

    Response: We find the commenters' statements and the Deloitte Study 
compelling, and our final regulation incorporates a lower threshold for 
meaningful downside financial risk of no less than 10 percent of the 
total value of the remuneration the physician receives under the value-
based arrangement. The Deloitte Study found that physicians are willing 
to tie a greater percentage of their compensation (10 percent) to cost 
and quality measures than they have been previously, but physicians 
still need cost and quality data and analytic tools that may not be 
readily available to all physicians to find success in a value-based 
health care delivery and payment system. We believe that the assumption 
by a physician of 10 percent downside financial risk is sufficient to 
curb the influences of traditional FFS payment systems. We reiterate 
that, the downside financial risk threshold, for purposes of the 
exception at Sec.  411.357(aa)(2), relates to remuneration from an 
entity to a physician. Therefore, we do not believe that it is 
appropriate to link this threshold to the level of risk related to 
payments for services from a payor, for example, by linking to risk 
levels under MIPS or the Medicare Access and CHIP Reauthorization Act 
(MACRA).
    Comment: Several commenters urged us to revise the definition of 
``meaningful downside financial risk'' to mirror the risk levels found 
in OIG's proposed safe harbor for value-based arrangements with 
substantial downside financial risk. The commenters suggested this 
would avoid the need for

[[Page 77517]]

parties to navigate different regulatory frameworks under the anti-
kickback statute and physician self-referral law. These commenters 
asserted that the lack of alignment between OIG and CMS could create 
unnecessary burden on the regulated industry.
    Response: It appears that the comments are based on a perception of 
the meaningful downside financial risk exception as a parallel to the 
OIG substantial downside financial risk safe harbor. It is not. Under 
the substantial downside financial risk safe harbor, the required 
financial risk is at the value-based enterprise level. That is, the 
value-based enterprise, either directly or through its VBE 
participants, must assume substantial downside financial risk in order 
for the safe harbor to be available. Under the meaningful downside 
financial risk exception, the focus is on the risk assumed by the 
individual physician to the value-based arrangement being assessed for 
satisfaction of the requirements of the exception. It would be 
incongruous to match the risk requirements in the exception and safe 
harbor as requested by the commenters.
    Comment: Some commenters questioned whether the meaningful downside 
financial risk exception applies only when a physician is required to 
repay remuneration already received or whether the exception would also 
apply to value-based arrangements under which a portion of the 
physician's compensation is withheld until achievement of the value-
based purpose(s) of the value-based enterprise. Other commenters asked 
whether the meaningful downside financial risk exception is applicable 
to value-based arrangements under which the physician is eligible to 
receive or would forgo incentive pay, depending on whether the 
physician satisfies the goals of the value-based arrangement or the 
performance or quality standards required under the value-based 
arrangement. A few commenters expressed concern that a repayment 
requirement could result in noncompliance where cash flow or other 
factors impact the ability of the physician to make repayment. The 
commenters also asserted that a ``repayment-only'' policy is 
inconsistent with the structure of many financial risk arrangements 
that permit payments to either be withheld, reduced, or repaid for not 
meeting stated goals or performance and quality standards.
    Response: We are clarifying the regulation at Sec.  
411.357(aa)(2)(ix) to explicitly state that meaningful downside 
financial risk means that the physician is responsible to repay or 
forgo no less than 10 percent of the total value of the remuneration 
the physician receives under the value-based arrangement. The scope of 
the meaningful downside financial risk exception is not limited to 
value-based arrangements under which a physician is required to repay 
remuneration already received from the entity. The structures of the 
financial terms of a value-based arrangement described by the 
commenters are permissible, provided that the arrangement otherwise 
complies with the value-based definitions and satisfies all the 
requirements of the meaningful downside financial risk exception. 
Withholds, repayment requirements, or incentive pay tied to meeting 
goals or outcome measures are all permissible options for structuring 
the financial terms of a value-based arrangement between an entity and 
a physician, provided that the physician's downside financial risk is 
tied to the achievement of the value-based purpose(s) of the value-
based enterprise and not the goals of the parties or the arrangement 
(unless the parties alone comprise the value-based enterprise). In 
addition, the meaningful downside financial risk exception applies only 
where the physician is at risk for failure to achieve the value-based 
purpose(s) of the value-based enterprise during the entire duration of 
the value-based arrangement. To illustrate, if a physician is entitled 
to a base payment of $50,000 with the ability to earn an additional 
$25,000 for performing certain value-based activities, meaningful 
downside financial risk equals at least 10 percent of the total 
compensation of $75,000, or $7,500. The $25,000 that is at risk for 
purposes of this example exceeds the 10 percent requirement. However, 
unless the receipt of the $25,000 is tied to the achievement of the 
value-based purpose(s) of the value-based enterprise, the arrangement 
will not satisfy the requirement at final Sec.  411.357(aa)(2)(i). By 
way of another example, assume that there exists a value-based 
arrangement between an entity and a physician that are the only VBE 
participants in the value-based enterprise (that is, they are a value-
based enterprise of two) under which the total remuneration potentially 
due to the physician is $100,000, but $20,000 is withheld and payable 
only upon successfully completing the value-based activities called for 
under the arrangement. Meaningful downside financial risk equals at 
least 10 percent of the total compensation of the $100,000 total 
available remuneration, or $10,000. The $20,000 withhold in this 
example exceeds the 10 percent requirement.
    Comment: Some commenters shared their confusion regarding the 
proposed alternative definition of meaningful downside financial risk 
under which a physician would be considered to be at meaningful 
downside financial risk if the physician 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. The commenters requested that CMS revise or omit the alternative 
definition. The commenters also questioned the utility of the 
definition, noting that it is unlikely that an individual physician 
would assume full financial risk from an entity (or a payor).
    Response: We agree with the commenters that it is unlikely that an 
individual physician would assume full financial risk from the entity 
with which the physician has the value-based arrangement 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. We are not finalizing this portion of the definition of 
``meaningful downside financial risk'' and have omitted the language 
from the final regulation. As set forth at final Sec.  
411.357(aa)(2)(ix), meaningful downside financial risk means that the 
physician is responsible to repay or forgo no less than 10 percent of 
the total value of the remuneration the physician receives under the 
value-based arrangement.
    Comment: A number of commenters requested that CMS adopt the same 
``pre-risk'' period during which the exception is applicable prior to 
the assumption of financial risk that was included in the proposed full 
financial risk exception, but did not explain the need for a pre-risk 
period under the meaningful downside financial risk exception, which 
applies only to a single arrangement between an entity and a physician. 
Most of the commenters requested a 12-month ``pre-risk'' period.
    Response: We are not permitting the use of the meaningful downside 
financial risk exception during the period prior to the physician's 
assumption of meaningful downside financial risk. We see no need to 
allow the use of the exception at Sec.  411.357(aa)(2) prior to the 
physician's assumption of meaningful downside financial risk and 
believe that it would be a program integrity risk to do so. The 
Secretary's authority at section

[[Page 77518]]

1877(b)(4) of the Act to issue exceptions to the physician self-
referral law is limited to only those financial relationships that the 
Secretary determines do not pose a risk of program or patient abuse. We 
are concerned that unscrupulous parties could ``front load'' the 
remuneration by providing high-value remuneration to the physician in 
the ``pre-risk'' period before the physician is required to assume 
meaningful downside financial risk. This concern is heightened in light 
of the final definition of ``meaningful downside financial risk,'' 
which sets the threshold for downside financial risk at 10 percent of 
the value of the remuneration rather than the 25 percent threshold 
proposed. Further, we note that financial risk in an arrangement 
between an entity and an individual physician, which is the foundation 
of the meaningful downside financial risk exception, is not an analog 
to the financial risk assumed by a value-based enterprise, which is the 
foundation of the full financial risk exception. As we explained in 
section II.A.2.b.(1). of this final rule, VBE participants may need to 
develop infrastructure and perform certain activities necessary to be 
successful in a full financial risk payment model before the 
enterprise's assumption of full financial risk. The same is not true 
with respect to a physician who assumes meaningful downside financial 
risk under an individual value-based arrangement with an entity.
    Comment: Several commenters asserted that the requirement that the 
methodology used to determine the amount of the remuneration under the 
value-based arrangement is set in advance of the undertaking of the 
value-based activities for which the remuneration is paid fails to 
provide sufficient flexibility. The commenters requested that we 
``soften'' the set in advance requirement to accommodate the change of 
compensation formulas or other requirements established by payors.
    Response: We decline to revise the requirement as requested by the 
commenters. As a safeguard against gaming or manipulating a value-based 
arrangement to reward referrals, we require in the final meaningful 
downside financial risk exception that the methodology used to 
determine the amount of the remuneration is set in advance of the 
undertaking of the value-based activities for which the remuneration is 
paid. We interpret this requirement in the same way as the requirement 
found throughout the exceptions to the physician self-referral law that 
compensation (or a formula for the compensation) is set in advance 
before the furnishing of the items or services for which the 
compensation is to be paid. In the final meaningful downside risk 
exception, we are requiring only that 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. Parties need 
not know the ultimate amount of remuneration under the value-based 
arrangement. Thus, prior to the commencement of a value-based 
arrangement, if the parties agree that a physician will be paid $10 for 
each completed patient assessment (assuming the completion of the 
patient assessment qualifies as a ``value-based activity''), the 
methodology for determining the amount of the physician's remuneration 
is set in advance. If the parties later determine to increase the 
payment to $12 for each completed patient assessment, the revised 
remuneration would be considered set in advance, provided that the new 
remuneration terms are effective on a prospective basis only. We 
explore our policies regarding compensation that is set in advance with 
respect to outcome measures in our discussion of the value-based 
arrangements exception at Sec.  411.357(aa)(3) in section 
II.A.1.2.b.(3). and more generally in section II.D.5. of this final 
rule.
(3) Value-Based Arrangements (Sec.  411.357(aa)(3))
    The transformation to a value-based health care delivery and 
payment system is heavily dependent on physician engagement. As we 
noted in the proposed rule, commenters on the CMS RFI 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 partnership between 
entities furnishing designated health services and physicians (84 FR 
55783). Those commenters noted that this alignment of financial 
interests is key to the behavior shaping necessary to succeed in a 
value-based payment system. They also 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 toward 
entering 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 proposed 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'') (84 FR 55783).
    As proposed, the value-based arrangement exception would permit 
both monetary and nonmonetary remuneration between the parties, 
although we considered whether to limit the scope of the exception to 
nonmonetary remuneration only and sought comment regarding the impact 
such a limitation may have on the transition to a value-based health 
care delivery and payment system (84 FR 55783). The final exception is 
not limited to the provision of only nonmonetary compensation. We also 
proposed to include in the value-based arrangement exception certain 
requirements that were included in the proposed meaningful downside 
financial risk exception, some of which were also included in the 
proposed full financial risk exception (84 FR 55783). We stated that we 
would interpret these requirements in the same way as in the proposed 
full financial risk and meaningful downside financial risk exceptions, 
and included them in the value-based arrangement exception for the same 
reasons articulated with respect to those exceptions. 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 (84 FR 
55783).

[[Page 77519]]

    Because the exception at proposed 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 stated that safeguards beyond those included in the meaningful 
downside financial risk exception are necessary to protect against 
program or patient abuse (84 FR 55783). To address this, we proposed to 
replace 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 with a 
requirement that remuneration is not conditioned on the volume or value 
of referrals of any patients, including patients in the target patient 
population, to the entity or the volume or value of any other business 
generated, including business covered by the value-based arrangement, 
by the physician for the entity. We did not propose to include 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 for the entity. We sought 
comments regarding this alternative proposal; the interplay of the 
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. We are finalizing the proposed safeguards that 
are also included in the meaningful downside risk exception at Sec.  
411.357(aa)(2), but we are not finalizing the alternative proposal 
regarding the conditioning of remuneration. Final Sec.  
411.357(aa)(3)(ix) requires that the remuneration under the value-based 
arrangement 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. However, we are finalizing a requirement 
regarding patient choice, which is included in the regulations for all 
three of the value-based exceptions. See section II.B.4. of this final 
rule for a complete discussion of our interpretation of this 
requirement.
    In addition, we proposed requirements in the exception 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 (84 FR 55783). We believe that 
the documentation requirements are self-explanatory. We stated that, 
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 Sec.  411.354(e)(3) (modified, in 
part, from existing Sec.  411.353(g)(1)(ii)) would apply. We are 
finalizing our proposal regarding the writing and signature 
requirements in the exception at Sec.  411.357(aa)(3). We remind 
readers that the value-based purpose of the arrangement must relate to 
the value-based enterprise as a whole (which, as noted previously in 
section II.A.2.a. of this final rule, may be the two parties to the 
value-based arrangement), and that the exception will 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.
    We also proposed to require that the performance or quality 
standards against which the recipient of the remuneration will be 
measured, if any, are objective and measurable, and that such standards 
must be determined prospectively, with any changes to the performance 
or quality standards set forth in writing and applicable only 
prospectively (84 FR 55784). Because commenters expressed concern 
regarding the term ``performance or quality standards,'' and in an 
effort to reduce burden on stakeholders by aligning our terminology 
with OIG, we are modifying this requirement to apply to ``outcome 
measures'' rather than ``performance or quality standards'' and 
defining ``outcome measure'' at Sec.  411.357(aa)(3)(xii) to mean a 
benchmark that quantifies: (A) Improvements in or maintenance of the 
quality of patient care; or (B) reductions in the costs to or 
reductions in growth in expenditures of payors while maintaining or 
improving the quality of patient care. Final Sec.  411.357(aa)(3)(ii) 
requires that the outcome measures against which the recipient of 
remuneration will be assessed, if any, are objective, measurable, and 
selected based on clinical evidence or credible medical support. To 
promote clarity, we discuss our proposals and respond to comments on 
our proposals regarding the performance or quality standards against 
which a recipient of remuneration will be assessed in terms of the 
``outcome measures'' against which the recipient of the remuneration 
will be assessed. We discuss this modification more fully below.
    We recognize that outcome measures 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 meet specific 
outcome measures in order to receive or keep the infrastructure items 
or services. However, if the value-based arrangement does include 
outcome measures 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 outcome measures must be determined in advance of their 
implementation. The exception would not protect arrangements where the 
outcome measures are set retrospectively (84 FR 55784). In the proposed 
rule, to align with OIG's proposals, we considered whether to require 
that outcome measures be designed to drive meaningful improvements in 
physician performance, quality, health outcomes, or efficiencies in 
care delivery (84 FR 55784). We sought comment regarding whether we 
should include this as a requirement of the value-based arrangement 
exception and the burden or cost of including such a requirement. As 
discussed more fully below, we are not including a requirement in this 
final rule that outcome measures must be designed to drive meaningful 
improvements in physician performance, quality, health outcomes,

[[Page 77520]]

or efficiencies in care delivery in this final rule.
    As we stated in the proposed rule, 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 (84 FR 55784). We explained that there is an implicit 
ongoing obligation for an entity to monitor each of its financial 
relationships 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 the 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. Thus, 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).
    In the proposed rule, we discussed at length the importance of 
monitoring arrangements that implicate the physician self-referral law 
(84 FR 55784). More specifically, we discussed the implicit ongoing 
compliance monitoring obligation for arrangements that would qualify 
for protection under the value-based arrangement exception at Sec.  
411.357(aa)(3). We provided a detailed example of appropriate 
monitoring of a value-based arrangement for compliance with the 
proposed exception at Sec.  411.357(aa)(3), including the consequences 
of value-based activities that can no longer be considered to be 
reasonably designed to achieve the value-based purpose(s) of a value-
based enterprise (84 FR 55784 through 55785). We considered whether to 
include program integrity safeguards that: (1) Require the value-based 
enterprise or the VBE participant providing the remuneration to 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, require the 
physician to 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 (84 FR 55785). We sought comment 
regarding whether we should include these as requirements of the 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 sought 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 
sought 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 
required under the arrangement.
    As explained in our response to comments below, we are including an 
explicit monitoring requirement at final Sec.  411.357(aa)(3)(vii). 
Parties seeking to utilize the value-based arrangement exception (or 
the value-based enterprise in which they participate) must monitor the 
value-based arrangement no less frequently than annually, or at least 
once during the term of the arrangement if the arrangement has a 
duration of less than 1 year, to determine whether the parties have 
furnished the value-based activities required under the arrangement, 
and whether and how continuation of the value-based activities is 
expected to further the value-based purpose(s) of the value-based 
enterprise. If the monitoring indicates that a value-based activity is 
not expected to further the value-based purpose(s) of the value-based 
enterprise, the parties must terminate the ineffective value-based 
activity. The parties may do so by terminating the value-based 
arrangement or by modifying the arrangement to terminate the 
ineffective value-based activity after completion of the monitoring. If 
the parties complete the required action within the applicable 
timeframe, the ineffective value-based activity is deemed to be 
reasonably designed to achieve at least one value-based purpose of the 
value-based enterprise during the entire period during which it was 
undertaken by the parties. In addition, during the same timeframes, 
either the value-based enterprise or one or more of the parties to the 
arrangement must monitor progress toward attainment of the outcome 
measure(s), if any, against which the recipient of the remuneration is 
assessed. If the monitoring indicates that an outcome measure is 
unattainable during the remaining term of the arrangement, the parties 
must terminate or replace the unattainable outcome measure within 90 
consecutive calendar days after completion of the monitoring. If the 
parties fail to monitor outcome measures within the prescribed 
timeframes, or fail to terminate or replace an unattainable outcome 
measure within the prescribed timeframe, the value-based arrangement 
will no longer satisfy the requirements of the exception at Sec.  
411.357(aa)(3). We emphasize that parties may amend their value-based 
arrangements to address identified deficiencies at any time, provided 
that the amendments are prospective only, including any amendments to 
the compensation terms of the arrangement. We refer readers to section 
II.E.1. of this final rule for a discussion of the provisions on 
amending arrangements newly codified at Sec.  411.354(d)(1).
    We believe that requiring immediate termination of a value-based 
arrangement due to an ineffective value-based activity would be 
counterproductive to the underlying goal of encouraging the transition 
to a value-based health care delivery and payment system. We are 
providing for the noted ``grace periods'' because we recognize that 
parties to a value-based arrangement may need time to address an 
ineffective value-based activity identified through their monitoring. 
As discussed in the proposed rule, the physician self-referral law 
would prohibit a physician from making referrals to an entity, and 
prohibit the entity from submitting claims for designated health 
services referred by the physician, if the value-based arrangement does 
not satisfy all the requirements of an applicable exception at the time 
of the referral. This includes the requirement that the value-based 
activities undertaken under the arrangement, by definition, are 
reasonably designed to achieve one or more value-base purposes of the 
value-

[[Page 77521]]

based enterprise (84 FR 55785). We believe that it is necessary to 
allow parties an appropriate amount of time to address the findings of 
their monitoring without fear of violating the physician self-referral 
law. We also believe that a policy under which parties that act quickly 
to rectify the ineffectiveness of their value-based activities will not 
run afoul of the physician self-referral law does not pose a risk of 
program or patient abuse. As described above, we are finalizing a 
policy under which a value-based activity will be deemed to be 
reasonably designed to achieve at least one value-based purpose of the 
value-based enterprise during the entire period during which it was 
undertaken by the parties if the parties terminate the arrangement 
within 30 consecutive calendar days after the completion of the 
required monitoring or modify their arrangement to terminate the 
ineffective value-based activity within 90 consecutive calendar days 
after completion of the monitoring. Similarly, we are finalizing a 
policy that provides for 90 consecutive calendar days for parties to 
terminate or replace an outcome measure that their monitoring indicates 
is unattainable.
    To illustrate the monitoring requirement at final Sec.  
411.357(aa)(3)(vii) with respect to monitoring of value-based 
activities, we apply it here in the context of the scenario described 
in the proposed rule (84 FR 55784 through 55785). 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 
beginning on January 1, 2021. 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. 
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 a physician satisfies all the requirements of Sec.  411.357(aa)(3), 
the physician'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 the physician would not violate the 
physician self-referral law. However, assume that during the first year 
of the arrangement, the hospital determines through its monitoring that 
its 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 the goal 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 compliance monitoring, 
which occurred in the first year of the arrangement, has identified 
that the continuation of the value-based activity, dual-modality 
screening, is no longer expected to further 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. Once the hospital has 
identified the ineffective value-based activity, the hospital has two 
options to maintain compliance with the physician self-referral law. 
Under final Sec.  411.357(aa)(3)(vii)(B), the parties could terminate 
the arrangement within 30 consecutive calendar days of the date of 
completion of the monitoring indicating that the value-based activity 
was ineffective, or the parties could modify the arrangement to 
terminate the ineffective value-based activity within 90 consecutive 
calendar days of completion of the monitoring and, if they choose, 
replace it with a different value-based activity with prospective 
applicability. If the parties fail to take one of these actions, the 
physician would be prohibited from making referrals of any designated 
health services to the hospital from the date the hospital became aware 
that its value-based arrangement no longer satisfied the requirements 
of Sec.  411.357(aa)(3) (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. The parties' lack of 
knowledge does not affect compliance with the physician self-referral 
law. The hospital's (or value-based enterprise's) failure to monitor as 
required under our final regulations for progress toward achievement of 
the value-based purpose of the value-based enterprise would not nullify 
the parties' noncompliance with the physician self-referral law. The 
physician's referrals would 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 
qualify as a ``value-based activity'' as that term is defined at final 
Sec.  411.351. In turn, the arrangement would not qualify as a ``value-
based arrangement'' and the exception at Sec.  411.357(aa)(3) would no 
longer be available to protect the physician's referrals.
    In the proposed rule, we also considered 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 (84 FR 55785 through 55786). We stated 
that 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 of the value-based purpose(s) of the value-based 
enterprise, as well as ensuring

[[Page 77522]]

that the recipient will actually use the nonmonetary remuneration. 
However, we also stated our concern that such a requirement could 
inhibit the adoption of value-based arrangements. As discussed in 
section II.D.11.d.(1). of this final rule, even though many commenters 
asserted 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 
retaining the 15 percent contribution requirement for the existing EHR 
exception as an important program integrity safeguard where the 
compensation arrangement between the parties is not a value-based 
arrangement. We are concerned, however, that requiring a 15 percent 
contribution from the recipient of nonmonetary compensation under a 
value-based arrangement could inhibit the goal of transitioning to a 
value-based health care delivery and payment system. We are not 
including a contribution requirement in the value-based arrangement 
exception finalized in this final rule.
    We received the following comments and our responses follow.
    Comment: The vast majority of commenters supported the adoption of 
a value-based arrangement exception and urged CMS to finalize the 
exception without modification in order to support the transition to a 
value-based health care delivery and payment system. Commenters 
expressed appreciation for the creation of a value-based exception with 
no downside risk, asserting that the exception will be beneficial to 
rural providers, small practices, and others wanting to explore value-
based health care delivery and payment, but not yet well-positioned to 
take on meaningful financial risk. A few commenters suggested that the 
value-based arrangement exception is complex and burdensome, and could 
act as a deterrent to participation in value-based health care. A small 
number of commenters urged us not to finalize the value-based 
arrangement exception, citing program integrity concerns.
    Response: We agree with the commenters that the exception at Sec.  
411.357(aa)(3) is necessary to facilitate robust participation in a 
value-based health care delivery and payment system. We are finalizing 
the exception with the modifications discussed above and in our 
response to other comments in this section II.A.2. Although we 
appreciate the program integrity concerns raised by some commenters, we 
are confident that the integrated approach to safeguards against 
program and patient abuse found in the value-based definitions and 
exceptions will ensure that even ``no risk'' value-based arrangements 
that satisfy all the requirements of the definitions and the 
requirements of Sec.  411.357(aa)(3) will not pose a risk of program or 
patient abuse.
    Comment: The majority of commenters urged CMS not to limit the 
value-based arrangement exception to nonmonetary remuneration. The 
commenters pointed to value-based arrangements commonplace in the 
industry, such as payment for adherence to care protocols or shared 
savings models that utilize cash incentives to shape physician 
behavior, improve quality, and reduce waste. One commenter expressed 
concern that, by limiting the type of remuneration permissible under 
the exception, CMS would create a complicated patchwork of protections 
depending on the type of remuneration at issue.
    Response: We are not limiting the value-based arrangement exception 
to nonmonetary remuneration only. Limiting the exception to nonmonetary 
remuneration could undermine the Secretary's goal of robust 
participation in a value-based health care delivery and payment system 
by artificially restricting the types of arrangements that are 
appropriate for protection from the prohibitions of the physician self-
referral law.
    Comment: Commenters nearly universally opposed the inclusion of a 
contribution requirement for nonmonetary remuneration provided under a 
value-based arrangement. Commenters asserted that such a contribution 
requirement would create a barrier to widespread participation in a 
value-based health care delivery and payment system. Many commenters 
echoed our concerns in the proposed rule that a contribution 
requirement for nonmonetary remuneration would unfairly impact small 
and rural physician practices, providers, and suppliers that cannot 
afford the contribution (84 FR 55786).
    Response: We agree with the commenters that requiring a 15 percent 
contribution for nonmonetary remuneration provided under a value-based 
arrangement could create barriers to the transition to a value-based 
health care delivery and payment system, particularly for small and 
rural physician practices, providers, and suppliers. The final value-
based arrangement exception does not require a contribution for 
nonmonetary remuneration.
    Comment: A few commenters expressed concern regarding the 
requirement that a value-based arrangement must be set forth in writing 
and signed by the parties. These commenters viewed these documentation 
requirements as unnecessary and creating an administrative burden. A 
few commenters requested confirmation that the writing requirements of 
Sec.  411.357(aa)(3) may be satisfied through a collection of 
contemporaneous documents evidencing the conduct between the parties 
and that a single, formal contract is not required. These same 
commenters also requested confirmation that the special rule for 
signature requirements at Sec.  411.354(e) (formerly at Sec.  
411.353(g)) would apply to value-based arrangements. One commenter 
requested that we eliminate the signature requirement from the value-
based arrangement exception to avoid what the commenter called 
``technical violations.''
    Response: We do not consider the documentation requirements under 
the final value-based arrangement exception burdensome. As discussed 
above, we view the documentation requirements as self-explanatory and a 
necessary program integrity safeguard. As we have stated in prior 
rulemakings, we believe that it is a usual and customary business 
practice to document and sign arrangements and the requirements of the 
exceptions to the physician self-referral law do not add burden to 
these practices. (See, for example, 83 FR 59993.) Nothing in the final 
value-based arrangement exception at Sec.  411.357(aa)(3)--or any other 
exception to the physician self-referral law--requires a single formal 
contract to satisfy the writing requirement of the exceptions.
    Comment: Several commenters raised concerns with our discussion in 
the proposed rule that parties have an implicit obligation to monitor 
their arrangements for compliance with the physician self-referral law 
(84 FR 55784). These commenters asserted that the use of the term 
``implicit'' introduces ambiguity that is not appropriate for a strict 
liability statute. The commenters requested that any monitoring 
obligations, including the scope and frequency of the monitoring, be 
clearly stated in the regulations. A few of the commenters suggested 
that CMS provide flexibility in monitoring and assessing progress of a 
value-based arrangement, asserting that the monitoring requirement 
should be tailored to the resources and sophistication of the parties 
to the value-based arrangement. Some commenters stated that monitoring 
for compliance with the requirements of an

[[Page 77523]]

applicable exception at the outset of an arrangement and upon renewal 
of the arrangement is a common industry practice and suggested that we 
adopt a similar policy for monitoring value-based arrangements.
    Response: The commenters' statements regarding parties' obligations 
to monitor for ongoing compliance with the physician self-referral law 
are surprising, as are their statements that references to this 
implicit obligation would introduce ambiguity into their ability to 
utilize the value-based arrangement exception. Our expectation of 
monitoring for ongoing compliance in the context of the physician self-
referral law is not a new concept. As we stated in Phase II, section 
1877 of the Act is clearly intended to make entities responsible for 
monitoring their compensation arrangements with physicians (69 FR 
16112). As discussed above, the core principle of the physician self-
referral law is that, if a physician has a financial relationship with 
an entity that does not satisfy all the 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 relationships with an applicable 
exception at the time the physician makes a referral for designated 
health service(s).
    We agree with the commenters that the government's expectations 
regarding monitoring of value-based arrangements should be explicitly 
stated in regulation text, and we are including at final Sec.  
411.357(aa)(3)(vii) a monitoring requirement that provides the 
guidelines requested by the commenters. Under the final regulation, the 
value-based enterprise or one or more of the parties to a value-based 
arrangement must monitor the arrangement no less frequently than 
annually, or at least once during the term of the arrangement if the 
arrangement has a duration of less than 1 year. This timeframe 
coincides with that proposed by OIG in its safe harbors for value-based 
arrangements and finalized elsewhere in this issue of the Federal 
Register. To facilitate the assessment of ongoing compliance with the 
physician self-referral law, we are finalizing our proposal to require 
that the value-based enterprise or one or more of the parties to the 
value-based arrangement must monitor whether the parties have furnished 
the value-based activities required under the arrangement and whether 
and how continuation of the value-based activities is expected to 
further the value-based purpose(s) of the value-based enterprise. If 
the monitoring indicates that a value-based activity is not expected to 
further the value-based purpose(s) of the value-based enterprise, the 
parties must terminate the ineffective value-based activity. In 
addition, during the same timeframes, either the value-based enterprise 
or one or more of the parties to the arrangement must monitor progress 
toward attainment of the outcome measure(s), if any, against which the 
recipient of the remuneration is assessed. If the monitoring indicates 
that an outcome measure is unattainable during the remaining term of 
the arrangement, the parties must terminate or replace the unattainable 
outcome measure.
    As discussed in response to the comment below, the final regulation 
at Sec.  411.357(aa)(3)(vii) sets forth specific timeframes in which 
the parties must take action following completion of monitoring that 
identifies an ineffective value-based activity or that an outcome 
measure is unattainable during the remaining term of the arrangement. 
If the parties take action within the timeframe specific to the chosen 
action (that is, termination or modification of the value-based 
arrangement), a value-based activity will be deemed to be reasonably 
designed to achieve at least one value-based purpose of the value-based 
enterprise for the entire period during which it was undertaken by the 
parties. Similarly, the arrangement will not fail to satisfy the 
requirements of the exception at Sec.  411.357(aa)(3) if, within 90 
consecutive calendar days after completion of the monitoring, the 
parties terminate or replace an outcome measure determined to be 
unattainable. We are not prescribing in this final rule how value-based 
enterprises, entities, and physicians should monitor their value-based 
arrangements; rather, we expect value-based enterprises, entities, and 
physicians to design their monitoring and other compliance efforts in a 
manner that is appropriate for the particular value-based arrangement.
    Comment: Several commenters urged us not to require termination of 
a value-based arrangement due to a value-based activity no longer 
furthering the value-based purpose of the value-based enterprise. These 
commenters recommended that we establish a timeframe for ``curing'' 
noncompliance or create a transition period that allows the parties to 
the value-based arrangement to redesign or replace the deficient value-
based activity, with a couple commenters suggesting 90 days for that 
timeframe. A few commenters suggested giving parties the option of 
terminating the arrangement in its entirety or allowing them to 
implement a written plan to remediate the noncompliance no later than 
60 days from the date they determine that the value-based activities 
are unable to achieve the value-based purposes. One commenter requested 
that we adopt a policy that an arrangement would not lose protection 
under the value-based arrangement exception for a period of 12 months 
from the date of commencement of the arrangement as long as the value-
based activities were reasonably designed to achieve the value-based 
purpose at its outset. Some commenters suggested that a policy under 
which a physician's referrals are considered to violate the physician 
self-referral law if value-based activities do not immediately succeed 
in achieving the value-based purpose(s) of the value-based enterprise 
would create a ``fear of failure'' that would dissuade parties from 
attempting to deliver health care in new and innovative value-based 
ways. These commenters asserted that allowing parties to cure defects 
in arrangements would remove the ``fear of failure'' and promote value-
based health care delivery. A different commenter requested that we 
establish a specific timeframe for a value-based arrangement to achieve 
its value-based purpose without risking violation of the physician 
self-referral law.
    Response: As discussed above, if parties to a value-based 
arrangement, through monitoring efforts or otherwise, determine that a 
value-based activity no longer furthers the value-based purpose(s) of 
the value-based enterprise, the parties may either terminate the 
arrangement or modify the arrangement to remove the ineffective value-
based activity. The commenters mistakenly assumed that termination of a 
value-based arrangement is required if a value-based activity is no 
longer reasonably designed to further the value-based purpose(s) of the 
value-based enterprise. Our proposal required the cessation of the 
physician's referrals of designated health services, either immediately 
or within 60 days of the determination that the value-based activities 
would be

[[Page 77524]]

unable to achieve the value-based purpose(s) of the value-based 
enterprise. We did not intend to prohibit modification of arrangements 
that would allow continuation of physician referrals.
    We recognize that the design and implementation of value-based 
arrangements require a certain level of fluidity, although we are not 
persuaded to implement a 12-month ``deeming'' timeframe under which a 
value-based arrangement would be deemed to satisfy the requirement that 
its value-based activities are reasonably designed to further the 
value-based purpose(s) of the value-based enterprise for a period of 12 
months from their implementation. Such a policy would permit parties 
with actual knowledge that the value-based activities will be unable to 
achieve the value-based purpose(s) to make referrals and submit claims 
for designated health services potentially much longer than we believe 
is necessary to make appropriate modifications to their arrangement.
    We agree with the commenters that identified 90 days as the amount 
of time that parties would need to make adjustments to their value-
based arrangements when they are aware that a value-based activity will 
no longer further the value-based purpose(s) of the value-based 
enterprise. We note that this timeframe is consistent with other 
timeframes for remediating temporary noncompliance, documentation 
deficiencies, and other discrepancies in our regulations. We do not 
believe that parties that elect to terminate their value-based 
arrangement would need as much time. Accordingly, we have established 
in our final regulation timeframes in which the parties to a value-
based arrangement may address any identified deficiencies with their 
value-based activities without running afoul of the physician self-
referral law. Under the final regulations at Sec.  
411.357(aa)(3)(vii)(B)(1) and (2), a value-based activity will be 
deemed to be reasonably designed to achieve at least one value-based 
purpose of the value-based enterprise for the entire period during 
which it was undertaken if the parties terminate the arrangement within 
30 consecutive calendar days or modify the arrangement within 90 
consecutive calendar days after completion of the monitoring. We 
believe that parties to a value-based arrangement that identify 
ineffective value-based activities should be able to decide whether to 
terminate the entire arrangement and effectuate such a termination 
within 30 consecutive calendar days of identifying the ineffective 
value-based activities. In order to protect against program and patient 
abuse that could arise with an unlimited timeframe in which to 
terminate specific value-based activities, we are establishing at Sec.  
411.357(aa)(3)(vii)(B)(2) a 90-day timeframe for the termination of 
value-based activities that are not expected to further the value-based 
purpose(s) of the value-based enterprise. To maintain consistency with 
other regulations that require remedial action within certain 
timeframes, the regulation requires that the termination of the 
arrangement or the ineffective value-based activity must occur within 
the specified number of consecutive calendar days. The provisions of 
final Sec.  411.357(aa)(3)(vii)(B)(1) and (2) should address the 
concerns raised by the commenters without risking program or patient 
abuse.
    Comment: Several commenters inquired about the proposed requirement 
that performance or quality standards against which the recipient of 
the remuneration will be measured, if any, are objective and 
measurable. The commenters generally supported a requirement that 
performance or quality standards must be objective and measurable, but 
requested additional guidance regarding what qualifies as a 
``performance or quality standards.'' The commenters generally opposed 
our alternative proposal to require that performance or quality 
standards must be designed to drive meaningful improvements in 
physician performance, quality, health outcomes, or efficiencies in 
care delivery. Commenters asserted that this alternative proposal and 
the use of the language ``designed to drive meaningful improvements'' 
created ambiguity that would hinder participation in value-based 
arrangements.
    Response: The final regulations at Sec.  411.357(aa)(3)(i)(F) and 
(ii) replace the term ``performance and quality standards'' with the 
term ``outcome measures.'' The final exception requires at Sec.  
411.357(aa)(3)(ii) that the outcome measures against which the 
recipient of remuneration under a value-based arrangement will be 
measured, if any, are objective and measurable, and any changes to the 
outcome measures must be made prospectively and set forth in writing. 
We have also added a new paragraph (xii) that defines ``outcome 
measure,'' for purposes of the value-based arrangement exception, to 
mean a benchmark that quantifies: (A) Improvements in or maintenance of 
the quality of patient care; or (B) reductions in the costs to or 
reductions in growth in expenditures of payors while maintaining or 
improving the quality of patient care. This definition is intended to 
align with OIG's final regulations. We are sympathetic to commenters' 
concerns regarding the difficulty in ascertaining that a measure is 
designed to drive meaningful improvements in physician performance, 
quality, health outcomes, or efficiencies in care delivery. We are not 
adopting our alternative proposal to require that outcome measures 
against which recipients of remuneration are measured are designed to 
drive meaningful improvements in physician performance, quality, health 
outcomes, or efficiencies in care delivery.
    Comment: Many commenters appear to have misinterpreted the meaning 
of the requirement at Sec.  411.357(aa)(3)(ii) that the outcome 
measures against which the recipient of the remuneration will be 
measured, if any, are objective and measurable, and any changes to the 
outcome measures must be made prospectively and set forth in writing. 
The commenters interpreted this provision to require the inclusion of 
outcome measures in all value-based arrangements and questioned whether 
that is practical. Some of the commenters noted that preventive care 
and primary care services do not necessarily lend themselves to outcome 
measures, asserting that benefits of these services may not be 
immediately measureable.
    Response: The requirements at final Sec.  411.357(aa)(3)(i)(F) and 
(ii) specifically include the language ``if any'' to indicate that 
outcome measures are not required in every value-based arrangement. We 
recognize that outcome measures may not be available for or applicable 
to certain value-based activities. For instance, the adoption of the 
same EHR system or the completion of training on the EHR system are 
potential value-based activities that likely would not have an 
associated outcome measure. However, if outcome measures are included 
as part of the value-based arrangement, those outcome measures must be 
objective and measurable and determined prospectively. In addition, 
under final Sec.  411.357(aa)(3)(vii), either the value-based 
enterprise or one or more of the parties to the arrangement must 
monitor progress toward attainment of the outcome measure(s) against 
which the recipient of the remuneration is assessed. If the monitoring 
indicates that an outcome measure is unattainable during the remaining 
term of the arrangement, the parties must terminate or replace the 
unattainable outcome measure within 90 consecutive calendar days after 
completion of the monitoring.

[[Page 77525]]

    Comment: A few commenters stated that they interpreted the 
requirement that the outcome measures against which the recipient of 
the remuneration will be measured, if any, are objective and 
measurable, and any changes to the outcome measures must be made 
prospectively and set forth in writing to mean that constant 
improvement or the achievement of the outcome measures is required. 
Some of the commenters also interpreted this requirement to mean that 
parties to a value-based arrangement may not substitute outcome 
measures or make other adjustments to the outcome measures during the 
term of the value-based arrangement. These commenters asserted that it 
is common for parties to value-based arrangements to reevaluate outcome 
measures and make modifications necessary to continue moving towards 
achievement of the purposes of the value-based enterprise. The 
commenters sought confirmation that parties are permitted to modify 
their arrangements, including making changes to outcome measures, and 
make other necessary adjustments over the course of a value-based 
arrangement without losing the protection of the exception.
    Response: The commenters may have misinterpreted the requirements 
of the proposed exception. We are defining ``outcome measure'' in this 
final rule to mean a benchmark that quantifies: (A) Improvements in or 
maintenance of the quality of patient care; or (B) reductions in the 
costs to or reductions in growth in expenditures of payors while 
maintaining or improving the quality of patient care. Outcome measures 
are used to evaluate the provision and effectiveness of value-based 
activities to ensure that the value-based activities are continuing to 
further the value-based purposes of the value-based enterprise. Nothing 
in this final rule prohibits the replacement or substitution of outcome 
measures against which the recipient of the remuneration is measured 
under a value-based arrangement, provided that any changes to the 
outcome measures are made prospectively and set forth in writing.
    For example, assume that a physician can earn incentive pay under a 
value-based arrangement for providing certain post-discharge follow-up 
services to patients in a target patient population following their 
discharge from the hospital, and that the value-based purpose of the 
value-based enterprise is to improve the quality of patient care by 
facilitating a smooth transition from an acute care setting to the 
appropriate post-acute care setting and lowering readmissions to the 
hospital. The physician's remuneration for providing post-discharge 
follow-up services under the arrangement may be, in whole or in part, 
dependent on whether the hospital reduces its readmission rate to 65 
percent or lower for patients treated by the physician. The ``outcome 
measure'' is the readmission rate. If the parties wish to revise this 
outcome measure--for example, because the hospital realizes that a 
readmission rate of 65 percent or lower is too easily attainable or is 
unrealistic given the severity of the medical conditions of the 
patients in the target patient population and, specifically, the 
patients treated by the physician--they may make necessary adjustments 
to the readmission measure, provided any changes to the measure are 
prospective only and set forth in writing. It would not be permissible 
to change the outcome measure to a lower, more attainable readmission 
percentage and apply that new outcome measure retroactively in order to 
allow the physician to earn the incentive payment under the value-based 
arrangement as originally designed. To the extent that commenters were 
concerned that parties may not amend their value-based arrangements to 
require more or different value-based activities than those included in 
the arrangement as originally designed, we emphasize that nothing in 
final Sec.  411.357(aa)(3) prohibits termination or substitution of 
value-based activities to be undertaken under a value-based 
arrangement, provided that all modifications to the value-based 
arrangement are effective prospectively and comply with any applicable 
regulations regarding the modification of compensation arrangements.
(4) Indirect Compensation Arrangements to Which the Exceptions at Sec.  
411.357(aa) Are Applicable (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 (66 FR 864). For purposes of applying these 
regulations, in the FY 2009 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 (73 FR 48693). 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. In addition, if the entity with which the 
physician has the indirect compensation arrangement is a MCO or IPA, 
the exception at Sec.  411.357(n) is also available to protect the 
compensation arrangement. If all the requirements of one of the 
applicable exceptions 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.
    As we stated in the proposed rule (84 FR 55786), an unbroken chain 
of financial relationships described in Sec.  411.354(c)(2)(i) may 
include a value-based arrangement as defined at Sec.  411.351 in this 
final rule. 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. Unless the entity furnishing the designated health services 
is a MCO or IPA, the parties would have to rely on the exception at 
Sec.  411.357(p), which includes requirements not found in the 
exceptions for value-based arrangements at Sec.  411.357(aa), in order 
to ensure the permissibility of all the physician's referrals to the 
entity (assuming no other financial relationships exist between the 
parties). (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 claims submission 
for the

[[Page 77526]]

particular designated health service that satisfied the requirements of 
the exception.) As commenters on the CMS RFI noted and commenters on 
the proposed rule confirmed, because compensation to the physician 
under a value-based arrangement 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, an indirect compensation arrangement that 
includes a value-based arrangement in the unbroken chain of financial 
relationships that forms the indirect compensation arrangement may be 
unable to satisfy the requirements of Sec.  411.357(p). To avoid a 
blanket prohibition on indirect compensation arrangements that enhance 
value-based health care delivery and payment, we are finalizing our 
proposal to make additional exceptions available to certain indirect 
compensation arrangements that include a value-based arrangement in the 
unbroken chain of financial relationships described in Sec.  
411.354(c)(2)(i).
    As described in section II.A.2.b. of this final rule, we are 
finalizing exceptions available only to compensation arrangements that 
qualify as value-based arrangements. Although the exceptions do not 
limit their applicability 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'' finalized at 
Sec.  411.351 establishes that the only potential parties to a value-
based arrangement are the value-based enterprise and VBE participants. 
In order to fully support the transition to a value-based health care 
delivery and payment system, we believe that it is important to make 
the exceptions at Sec.  411.357(aa) applicable to certain indirect 
compensation arrangements that include a value-based arrangement in the 
unbroken chain of financial relationships described in Sec.  
411.354(c)(2)(i). Following review of the comments on our proposed 
alternative approaches for addressing indirect compensation 
arrangements in which one link in the unbroken chain of financial 
relationships between an entity and a physician is a value-based 
arrangement, with technical revisions to the proposed regulation text, 
we are finalizing our primary proposal to make the exceptions at Sec.  
411.357(aa) applicable to certain indirect compensation arrangements 
that include a value-based arrangement in the unbroken chain of 
financial relationships described in Sec.  411.354(c)(2)(i). 
Specifically, under the regulation finalized at Sec.  
411.354(c)(4)(iii), the exceptions at Sec.  411.357(aa) are available 
to protect the physician's referrals to the entity when an indirect 
compensation arrangement (as defined at Sec.  411.354(c)(4)(2)) 
includes a value-based arrangement (as defined at Sec.  411.351) to 
which the physician (or the physician organization in whose shoes the 
physician stands) is a direct party. 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 finalized at Sec.  411.351.
    Under this final rule, parties would first determine if an indirect 
compensation arrangement exists and, if it does, determine whether the 
compensation arrangement to which the physician (or the physician 
organization in whose shoes the physician stands) is a direct party 
qualifies as a value-based arrangement. If so, the exceptions at 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 arrangement 
exists between the physician and the hospital, under Sec.  
411.354(c)(2)(ii), we would 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 Sec.  411.351 in this final rule). 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 the final regulation at Sec.  411.354(c)(4)(iii), if 
the compensation arrangement in this example between the physician 
practice and the physician qualifies as a value-based arrangement (as 
defined at Sec.  411.351 in this final rule), the exceptions at 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 the requirements of Sec.  
411.357(p) would be satisfied in this hypothetical fact pattern.)
    In the proposed rule, we described an alternative proposal under 
which we would define ``indirect value-based arrangement'' and specify 
in regulation that the exceptions at Sec.  411.357(aa) would be 
available to protect an indirect value-based arrangement (84 FR 55787). 
Under our alternative 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). We 
proposed that, if an unbroken chain of financial relationships between 
a physician and an entity qualifies as an ``indirect value-based 
arrangement,'' the exceptions 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. 
Following review of the comments on our alternative approach for 
addressing indirect compensation arrangements in which one link in the

[[Page 77527]]

unbroken chain of financial relationships between an entity and a 
physician is a value-based arrangement, we are not finalizing the 
alternative proposal.
    We also stated in the proposed rule that we were 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 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 
stated that we were 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. Finally, we stated that we were 
considering whether to include health technology companies in any such 
exclusion in order to align our policies with policies proposed by OIG 
(84 FR 55786 through 55787). We sought comment on these approaches and 
their effectiveness in enhancing program integrity. We are not 
finalizing any of the proposed restrictions on the identity of the 
parties to the financial relationships in the unbroken chain of 
financial relationships between an entity and a physician.
    We received the following comments and our responses follow.
    Comment: The majority of the commenters that commented on this 
proposal preferred our primary approach for addressing indirect 
compensation arrangements in which one of the financial relationships 
between a physician (or the immediate family member of the physician) 
and the entity to which the physician refers patients for designated 
health services is a value-based arrangement. Commenters noted that an 
indirect compensation arrangement that involves a value-based 
arrangement may not satisfy the requirements of the exception at Sec.  
411.357(p) because the compensation paid to the physician may take into 
account the volume or value of the physician's referrals or the other 
business generated by the physician for the entity, or the compensation 
may not meet the fair market value requirement of the exception.
    Response: We are finalizing regulations at Sec.  411.354(c)(4)(iii) 
to provide that the exceptions at Sec.  411.357(aa) are applicable when 
an unbroken chain described in Sec.  411.354(c)(2)(i) 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) is 
a direct party. In order to determine whether the physician's referrals 
to the entity with which the physician has the indirect compensation 
arrangement do not violate the physician self-referral law, parties 
would determine whether the value-based arrangement to which the 
physician (or the physician organization in whose shoes the physician 
stands) is a direct party satisfies all the requirements of one of the 
exceptions finalized at Sec.  411.357(aa) (or another applicable 
exception). If the value-based arrangement to which the physician is a 
direct party is with an entity (as defined at Sec.  411.351) other than 
the entity with which the physician has the indirect compensation 
arrangement, that direct compensation arrangement must also satisfy the 
requirements of an applicable exception in order for the physician to 
make referrals to that entity.
    Comment: A few commenters expressed concern regarding our statement 
in the proposed rule that, besides the exception at Sec.  411.357(p), 
no other exception in Sec.  411.357 is applicable to indirect 
compensation arrangements (84 FR 55786). The commenters requested that 
we confirm that the exception at Sec.  411.357(n) for risk-sharing 
arrangements is applicable to indirect compensation arrangements, 
including an indirect compensation arrangement that involves a value-
based arrangement. One of the commenters noted that the exception for 
risk-sharing arrangements expressly references compensation conveyed 
``directly or indirectly'' to a physician. This commenter and others 
asserted that the exception for risk-sharing arrangements should remain 
available to entities, such as hospitals, that have indirect 
compensation arrangements with physicians resulting from risk-sharing 
arrangements.
    Response: Some of the commenters misunderstand the application of 
the exception for risk-sharing arrangements. The exception at Sec.  
411.357(n) applies to compensation arrangements between a MCO or an IPA 
and a physician for services provided to enrollees of a health plan, 
provided that the compensation arrangement qualifies as a risk-sharing 
arrangement. In Phase I, we established the exception at Sec.  
411.357(n) for remuneration provided pursuant to a risk-sharing 
arrangement between a physician and a health plan. There, we stated 
that physicians generally are compensated for services to managed care 
enrollees in one of three ways, the first two of which do not vary 
based on the volume or value of referrals: (1) A salary, in the case of 
a physician who is an employee; (2) a ``fee-for-service'' contractual 
arrangement under which the physician assumes no risk; or (3) a risk-
sharing arrangement, under which the physician assumes risk for the 
costs of services, either through a capitation arrangement, or through 
a withhold, bonus, or risk-corridor approach. We noted that the first 
two types of compensation arrangements are eligible for the statutory 
exceptions for bona fide employment relationships and personal service 
arrangements,\6\ while the third is potentially eligible for the 
exception for risk-sharing arrangements at Sec.  411.357(n). The 
exception at Sec.  411.357(n) does not apply to a compensation 
arrangement--whether direct or indirect--between a physician and an 
entity that is anything other than a MCO or IPA.
---------------------------------------------------------------------------

    \6\ In and since the publication of Phase I, we established 
additional regulatory exceptions that may be applicable to the first 
two types of compensation arrangements discussed at 66 FR 912.
---------------------------------------------------------------------------

    The risk-sharing arrangement between the MCO or IPA and the 
physician may be direct or indirect. An indirect risk-sharing 
arrangement would run MCO or IPA--subcontractor--physician; for 
example, MCO--(compensation arrangement)--hospital--(compensation 
arrangement)--physician. In this example, if the MCO is an ``entity'' 
(as defined at Sec.  411.351), the unbroken chain of financial 
relationships may constitute an indirect compensation arrangement under 
Sec.  411.354(c)(2). If so, the exception at Sec.  411.357(n) would be 
available to protect the physician's referrals to the MCO, provided 
that all the requirements of the exception are satisfied. The exception 
for indirect compensation arrangements at Sec.  411.357(p) would also 
apply. If the MCO or IPA is not itself furnishing designated health 
services (as described in Sec.  411.351), it would not be an ``entity'' 
and, in the example above, would not have a direct or indirect 
compensation arrangement with the physician. (Note that, in Phase I, we 
clarified and significantly narrowed the situations in which a MCO will 
be considered an entity furnishing designated health services by 
refocusing the definition on the party submitting a claim to Medicare 
rather than the party ``providing for'' or ``arranging for'' the 
furnishing of designated health services

[[Page 77528]]

for which a claim is submitted to Medicare.)
    To be clear, the exception for risk-sharing arrangements at Sec.  
411.357(n) is not applicable to all risk-sharing arrangements between 
entities and physicians that provide services to enrollees of the same 
health plan. Contrary to commenters' stated understanding of the 
application of Sec.  411.357(n), the exception for risk-sharing 
arrangements does not apply to indirect compensation arrangements 
between hospitals and physicians, even if both are contractors (or 
subcontractors) of the same MCO or IPA. In Phase II, a commenter 
requested confirmation that the exception at Sec.  411.357(n) is meant 
to cover all risk-sharing compensation paid to physicians by an entity 
downstream of any type of health plan, insurance company, or health 
maintenance organization. We confirmed the commenter's understanding of 
the applicability of the exception (69 FR 16114), and stated that all 
downstream entities are included. We purposefully declined to define 
the term ``managed care organization'' so as to create a broad 
exception with maximum flexibility. Although we did not in Phase II (or 
any subsequent rulemaking) modify the text of Sec.  411.357(n) to 
extend the applicability of the exception to compensation pursuant to a 
risk-sharing arrangement (directly or indirectly) between a physician 
and any entity other than a MCO or IPA, we recognize why the commenters 
on the proposed rule could be under the impression that our response in 
the Phase II preamble was intended to do so. For this reason, we are 
finalizing revisions to the exception at Sec.  411.357(n) to clarify 
the scope and application of the exception. The revisions are effective 
as of the date set forth in this final rule and apply prospectively 
only.
    Comment: A few commenters requested that we include a reference to 
Sec.  411.357(n) in the regulation text identifying which exceptions 
are applicable to indirect compensation arrangements that involve 
value-based arrangements.
    Response: To clarify the applicability of the exception for risk-
sharing arrangements, we are finalizing regulations at Sec.  
411.354(c)(4)(ii) and (iii)(B) that expressly state that the exception 
at Sec.  411.357(n) is applicable in the case of an indirect 
compensation arrangement in which the entity furnishing designated 
health services described in Sec.  411.354(c)(2)(i) is a MCO or IPA. If 
the entity with which the physician has an indirect compensation 
arrangement is not a MCO or IPA, the exception for risk-sharing 
arrangements is not applicable to the indirect compensation 
arrangement.
(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 \7\ 
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 in two ways. First, by finalizing price transparency 
requirements in the CY 2020 OPPS final rule (84 FR 65524) to improve 
the availability of meaningful pricing information to the public by 
requiring hospitals to make public a machine-readable file that 
contains a hospital's gross charges and payer-specific negotiated 
charges, plus discounted cash prices, the de-identified minimum 
negotiated charge, and the de-identified maximum negotiated charge for 
all items and services provided by the hospital beginning January 1, 
2021. Second, through the Transparency in Coverage final rule (85 FR 
72158), HHS, along with the Departments of Labor and Treasury, 
finalized requirements for

[[Page 77529]]

health insurance issuers and plans in the individual and group markets 
to make health care prices and expected out-of-pocket costs for 
enrollees available to the general public to help facilitate more 
informed health care purchasing decisions with the goal of driving down 
health care costs. We continue to 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. As we stated in the proposed rule, 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 (84 FR 55788).
---------------------------------------------------------------------------

    \7\ Executive Order on Improving Price and Quality Transparency 
in American Healthcare to Put Patients First, June 24, 2019, 
available at: https://www.whitehouse.gov/presidential-actions/executive-order-improving-price-quality-transparency-american-healthcare-put-patients-first/.
---------------------------------------------------------------------------

    We remain 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 continue to believe that 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. As stated in the proposed 
rule, 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 (84 FR 
55788). 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.
    It remains CMS' goal to establish policies that facilitate 
consumers' ability to participate actively and meaningfully in 
decisions relating to their care. At the same time, we continue to be 
cognizant that including requirements regarding price transparency in 
the exceptions to the physician self-referral law raises certain 
challenges for the regulated industry. In the proposed rule, we sought 
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 (84 FR 55788). Specifically, we requested 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 sought comment regarding 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 participation of patients in selecting their health care 
providers and suppliers.
    In furtherance of our goal of price transparency for all patients, 
we solicited comments regarding whether to consider a requirement 
related to price transparency in every exception for value-based 
arrangements at Sec.  411.357(aa) (84 FR 55789). While we did not 
propose regulatory changes, we considered 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 continue to believe that 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. We further explained 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 stated our expectation 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 sought 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 stated that we would not require public notice in advance 
of referrals for emergency hospital services to avoid delays in 
urgently needed care. We solicited comment on other options for price 
transparency requirements in the value-based exceptions to the 
physician self-referral law, 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.
    We received several comments from both consumers of health care and 
entities that provide health care services. Nearly all the commenters 
were united in their support that patients should have access to clear, 
accurate, and actionable cost-sharing information and recognized the 
important role price transparency has in patient care. However, many 
supportive commenters also asserted that requiring price transparency 
disclosures as a requirement of an exception to the physician self-
referral law is not an appropriate mechanism for promoting price 
transparency objectives given the strict liability nature of the law. 
We continue to believe that health care markets work more efficiently 
and provide consumers with higher-value health care if we promote 
policies that encourage choice and competition. We thank the commenters 
for their thoughtful responses, which will help inform future agency 
policy making on this important objective. We are not finalizing any 
price transparency provisions in this rulemaking.

B. Fundamental Terminology and Requirements

1. Background
    As described in the proposed rule and in greater detail in this 
section of the final rule, many of the statutory and regulatory 
exceptions to the physician self-referral law include one, two, or all 
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

[[Page 77530]]

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 included in 
an exception. As we stated in the proposed rule, the regulated industry 
and its complementary parts, such as the health care valuation 
community, have sought additional guidance from CMS regarding whether 
compliance with one of the requirements is dependent on compliance with 
one or both of the others (84 FR 55789). In addition, these and other 
stakeholders have requested 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. 
According to stakeholders and commenters on the proposed rule, False 
Claims Act (31 U.S.C. 3729 through 3733) case law has exacerbated the 
challenge of complying with these three fundamental requirements. 
Endeavoring to establish bright-line, objective regulations for each of 
these fundamental requirements, we proposed a new definition of 
``commercially reasonable'' at Sec.  411.351, proposed to establish 
special rules that identify the universe of circumstances under which 
compensation would be considered to take into account the volume or 
value of a physician's referrals or the other business generated by a 
physician for the entity paying the compensation, and proposed to 
revise the definitions of ``fair market value'' and ``general market 
value'' in our regulations at Sec.  411.351. Our overall intention with 
these policies is to reduce the burden of compliance with the physician 
self-referral law, provide clarification where possible, and achieve 
the goals of the Regulatory Sprint. As we stated in the proposed rule, 
we believe that clear, bright-line rules would enhance both stakeholder 
compliance efforts and our enforcement capability. We believe that the 
policies finalized here will provide the clarity that will benefit the 
regulated industry, CMS, and our law enforcement partners (84 FR 
55789).
    In developing our proposals for guidance on the fundamental 
terminology and requirements, we considered three basic questions--
    <bullet> Does the arrangement make sense as a means to accomplish 
the parties' goals?
    <bullet> How did the parties calculate the remuneration?
    <bullet> 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 final rule, we provide detailed descriptions of 
our final definitions and special rules. Importantly, our final 
policies 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 policies finalized in this 
final rule do not affect or in any way bind 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 final policies do not 
affect or apply to the Quality Payment Program.
    We received the following general comment on our discussion of the 
three key requirements in the exceptions to the physician self-referral 
law, and our response follows. We respond to comments specific to each 
of the key requirements in sections II.B.2. through II.B.4. of this 
final rule.
    Comment: Several commenters requested that CMS' articulation of the 
``big three'' requirements should be preserved in the final rule. 
Specifically, commenters described as ``cornerstones'' of exceptions to 
the physician self-referral law the requirements that: (1) The 
compensation arrangement is commercially reasonable; (2) the 
compensation is not determined in any manner that takes into account 
the volume or value of a physician's referrals (the volume or value 
standard) or the other business generated by a physician for the entity 
(the other business generated standard); and (3) the amount of 
compensation is fair market value for the items or services furnished 
under the arrangement. Commenters strongly agreed with our statements 
that these requirements are separate and distinct and should be 
disentangled from each other.
    Response: We agree with the commenters that it is important to 
reiterate that the statutory and regulatory requirements regarding 
compensation arrangements that are commercially reasonable, 
compensation that 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 a physician, and compensation that is fair market 
value for items or services actually furnished are separate and 
distinct requirements, each of which must be satisfied when included in 
an exception to the physician self-referral law.
2. Commercially Reasonable (Sec.  411.351)
    In the proposed rule, we proposed 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(y) for timeshare 
arrangements, which the Secretary established in regulation using his 
authority at section 1877(b)(4) of the Act, requires that the 
arrangement would be commercially reasonable even if no referrals were 
made between the parties. Despite the prevalence of this requirement 
(in one form or another), as we stated in the proposed rule (84 FR 
55790), 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). Until now, the physician self-
referral regulations themselves lacked a codified

[[Page 77531]]

definition for the term commercially reasonable.
    As discussed previously in this section II.B.2., 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. The determination of commercial 
reasonableness is not one of valuation. We continue to believe that 
this determination should be made from the perspective of the 
particular parties involved in the arrangement. In addition, the 
determination that an arrangement is commercially reasonable does not 
turn on whether the arrangement is profitable; compensation 
arrangements that do not result in profit for one or more of the 
parties may nonetheless be commercially reasonable. In the proposed 
rule, we described numerous examples of compensation arrangements that 
commenters on the CMS RFI asserted 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. We acknowledge 
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. Examples of reasons why 
parties would enter into such transactions include 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.
    To provide the certainty requested by stakeholders, we proposed to 
codify in regulation the definition of ``commercially reasonable'' at 
Sec.  411.351. We proposed two alternative definitions for the term. 
First, we proposed 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 proposed 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 sought comment 
on each of these 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 also proposed 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 (84 FR 
55790). After considering the comments on the definition of 
``commercially reasonable,'' we are finalizing in our regulation at 
Sec.  411.351 that commercially reasonable means that the particular 
arrangement furthers a legitimate business purpose of the parties to 
the arrangement and is sensible, considering the characteristics of the 
parties, including their size, type, scope, and specialty. The final 
regulation also states that an arrangement may be commercially 
reasonable even if it does not result in profit for one or more of the 
parties.
    Finally, 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. 
Although we did not include this language in the final definition of 
``commercially reasonable,'' it remains an important constraint when 
determining whether an arrangement satisfies the requirements of an 
applicable exception. As described elsewhere in this final rule, we 
have revised the exception for fair market value compensation to 
include this important constraint in the requirement at Sec.  
411.357(l)(4) that a compensation arrangement is commercially 
reasonable. In addition, we included this requirement in the new 
exception for limited remuneration to a physician that we are 
finalizing at Sec.  411.357(z).
    We received the following comments and our responses follow.
    Comment: Most commenters supported our proposal to define the term 
``commercially reasonable'' in regulation, stating a preference for one 
of the two alternative definitions that we proposed. A few commenters 
offered alternative definitions of ``commercially reasonable,'' such as 
an arrangement that is ``appropriately designed to meet the parties' 
legitimate business goals from the perspective of the parties to the 
arrangement'' and an arrangement that is ``entered into for a 
legitimate business interest and is reasonably structured to achieve 
the legitimate business interest.'' A small number of commenters urged 
us not to finalize the proposed definition so that parties could rely 
on CMS' statements in the 1998 proposed rule, noting that it has been 
workable for industry stakeholders for many years.
    Several commenters requested that, if we finalize the first 
alternative proposed definition, we strike the limitation that the 
arrangement is on similar terms and conditions as like arrangements. 
These commenters asserted that parties to an arrangement would not have 
access to data to identify ``like arrangements'' or be aware of their 
terms and conditions. In addition, parties may enter into a novel 
compensation arrangement that bears minimal, if any, resemblance to 
existing arrangements against which it could be compared for ``similar 
terms.'' The commenters also highlighted the burden associated with 
obtaining third party opinions in order to satisfy this requirement. 
Other commenters preferred the second alternative definition because of 
its focus on the comparison to other similarly situated providers, 
suppliers, and physicians, although one of these commenters noted that 
the requirement that an arrangement makes ``commercial sense'' could 
exclude arrangements for noncommercial purposes, such as meeting 
community needs. A few other commenters suggested combining the two 
proposed definitions in order to emphasize that the determination of 
commercial reasonableness should be from the perspective of, and 
further a legitimate business need of, the particular parties to the 
arrangement, and also that the arrangement should be compared to 
arrangements with similarly situated parties. One of these commenters 
also suggested that the definition of ``commercially reasonable'' 
should reflect the importance of evaluating the market conditions 
relevant to the arrangement. A few other commenters offered that CMS 
should finalize a policy under which an arrangement would be 
commercially reasonable if it meets either of the proposed alternative 
definitions. Another commenter urged CMS to ensure that the definition 
of ``commercially reasonable'' does not shelter abusive arrangements.
    Response: We agree that a definition requiring a compensation 
arrangement to be on similar terms as like arrangements in order to be 
commercially reasonable does not provide for the clarity that we and 
stakeholders seek and, in fact, could increase the burden on parties 
that must seek the expertise of outside

[[Page 77532]]

organizations to ensure compliance with the requirement that their 
arrangement is commercially reasonable. We are finalizing a modified 
definition of ``commercially reasonable'' to address commenters' 
concerns. In line with the suggestion of some commenters, the final 
definition of ``commercially reasonable'' incorporates aspects of each 
of the proposed alternative definitions. Under the definition finalized 
at Sec.  411.351, commercially reasonable means that the particular 
arrangement furthers a legitimate business purpose of the parties to 
the arrangement and is sensible, considering the characteristics of the 
parties, including their size, type, scope, and specialty. We believe 
that the definition of ``commercially reasonable'' at final Sec.  
411.351 is consistent with the guidance we provided in the 1998 
proposed rule, appropriately considers the characteristics of the 
parties to the actual arrangement being assessed for its commercial 
reasonableness, and will adequately ensure that parties cannot protect 
abusive arrangements under the guise of ``commercial reasonableness.''
    Comment: One commenter asked us to confirm that the test of 
commercial reasonableness relates primarily to the non-financial 
elements of an arrangement.
    Response: We understand the commenter to be inquiring whether the 
existence of the compensation arrangement must be commercially 
reasonable as opposed to whether the precise compensation terms of the 
arrangement must be commercially reasonable. That is, we understand the 
commenter to be seeking confirmation that the concept of commercial 
reasonableness does not relate to the amount of or formula for 
compensation paid under an arrangement, but rather whether the entire 
arrangement is commercially reasonable. As we stated in the proposed 
rule and previously in this final rule, when determining the commercial 
reasonableness of an arrangement, the question to ask is whether the 
arrangement makes sense as a means to accomplish the parties' goals. 
The test is not whether the compensation terms alone make sense as a 
means to accomplish the parties' goals; however, the compensation terms 
of an arrangement are an integral part of the arrangement and impact 
its ability to accomplish the parties' goals (84 FR 55790).
    Comment: One commenter urged us to adopt a policy under which an 
arrangement would be presumed to be commercially reasonable if, 
contemporaneously with the commencement of the arrangement, the 
governing body of the entity (or its designee) documents in writing 
that the arrangement furthers the legitimate business purpose of the 
parties. Another commenter urged us to adopt an irrebuttable 
presumption that, if the purpose of an arrangement is documented and 
achieved, the commercial reasonableness of the arrangement cannot be 
contradicted by extrinsic evidence. The commenter asserted that, in the 
absence of such a presumption, entities are left susceptible to the 
potential for False Claims Act litigation predicated on an unsupported 
inference of ill intent on behalf of the contracting parties.
    Response: We do not believe that merely documenting in writing that 
an arrangement furthers a legitimate business purpose of the parties is 
sufficient to ensure that the arrangement is commercially reasonable, 
even if the identified purpose is achieved. Moreover, our final 
definition of ``commercially reasonable'' requires more than 
furtherance of a legitimate business purpose of the parties. The 
arrangement must also be sensible, considering the characteristics of 
the parties, including their size, type, scope, and specialty. If the 
only requirement to demonstrate that an arrangement is commercially 
reasonable is contemporaneous written documentation stating that it is 
commercially reasonable, unscrupulous parties could satisfy the 
requirement simply by including sufficient template language in their 
documentation, even if, in reality, the arrangement could not further 
the legitimate business purposes of the parties (assuming they have a 
legitimate business need for the arrangement) or is not sensible, 
considering the characteristics of the parties, including their size, 
type, scope, and specialty. Further, the fact that an arrangement 
ultimately achieved a legitimate business purpose of the parties does 
not necessarily mean that it was a commercially reasonable arrangement. 
Where a financial relationship exists between a physician (or an 
immediate family member of a physician) and an entity to which the 
physician makes referrals for designated health services, compliance 
with the physician self-referral law requires substantive compliance, 
not merely documentary (or ``paper'') compliance, with the requirements 
of an applicable exception. An irrebuttable presumption of commercial 
reasonableness that ensures that parties are shielded from allegations 
of violation of the False Claims Act if their documentation includes 
specific language or their arrangement ultimately achieved its intended 
purpose would pose a risk of program or patient abuse.
    Comment: A few commenters requested that we include in regulation 
text a non-exhaustive list of legitimate business purposes for purposes 
of applying the definition of ``commercially reasonable.'' One 
commenter specifically referenced our discussion in the proposed rule 
of examples of compensation arrangements that CMS RFI commenters 
believed would be commercially reasonable even if they did not result 
in profit for one or more of the parties.
    Response: As we stated in the proposed rule, we find compelling the 
comments of commenters on the CMS RFI regarding the types of 
arrangements they believed would be commercially reasonable even if 
they did not result in profit for one or more of the parties (84 FR 
55790). However, these types of arrangements do not depict the entire 
universe of arrangements that could be commercially reasonable. We 
decline to provide examples in regulation text of arrangements that may 
be commercially reasonable, because the determination of whether a 
compensation arrangement is commercially reasonable is dependent on the 
facts and circumstances of the parties. Even a non-exhaustive list of 
the types of arrangements that are potentially commercially reasonable 
could inadvertently limit or otherwise proscribe the types of 
arrangements that parties undertake. Moreover, it is not possible to 
know definitively that, in every instance, a particular type of 
arrangement would be commercially reasonable. An arrangement that is 
commercially reasonable for one set of parties may not be commercially 
reasonable for another.
    Comment: One commenter that asked us to provide examples of 
arrangements that would be considered commercially reasonable asserted 
that examples are necessary so that parties may avoid unintentional 
noncompliance with the commercial reasonableness requirement, 
particularly in the context of value-based arrangements for which the 
commercial reasonableness of the arrangement is required. Another 
commenter stated its assumption that CMS ``expects that value-based 
payments must still be tested for commercial reasonableness'' and asked 
us to confirm its belief. The commenter specifically requested us to 
confirm that, for any new exceptions for value-based arrangements, the 
determination of commercial reasonableness may be based on more than 
just cost savings to the value-based enterprise. The commenter asserted 
that, in

[[Page 77533]]

arrangements where cost savings are negligible, enhanced access to 
care, increased care coordination, and improved quality of care may 
support a determination of the value-based arrangement's commercial 
reasonableness.
    Response: As we explained in section II.A.2. of this final rule, 
the new exceptions for value-based arrangements finalized at Sec.  
411.357(aa) do not include a requirement that the value-based 
arrangement is commercially reasonable. Of course, parties may utilize 
any applicable exception to demonstrate compliance with the physician 
self-referral law. If the exception upon which parties to a value-based 
arrangement rely includes a requirement that the arrangement is 
commercially reasonable, the arrangement must further a legitimate 
business purpose of the parties. In addition, it must be sensible, 
considering the characteristics of the parties, including their size, 
type, scope, and specialty. However, as we stated in the proposed rule, 
the determination of whether the arrangement is commercially reasonable 
is not one of valuation (84 FR 55790), and an arrangement may be 
commercially reasonable even if it does not result in profit for one or 
more of the parties.
    Comment: A few commenters expressed concern that the term 
``legitimate business purpose'' does not provide enough certainty for 
stakeholders. Another commenter asked how the requirement that an 
arrangement must further a legitimate business purpose of the parties 
in order to be commercially reasonable is different from a query into 
the subjective intent of the parties (that is, whether a purpose of the 
arrangement is to induce or reward referrals).
    Response: The term ``legitimate business purpose'' appears in both 
the statutory and regulatory exceptions to the physician self-referral 
law. The commenter did not clearly explain how the use of this term in 
the definition of ``commercially reasonable'' is any less clear or 
appropriate than its use in the special rule at Sec.  411.354(d)(4)(v) 
or the exceptions for the rental of office space at Sec.  
411.357(a)(3), the rental of equipment at Sec.  411.357(b)(2), personal 
service arrangements at Sec.  411.357(d)(1)(iii), and fair market value 
compensation at Sec.  411.357(l)(4) (prior to its revision in this 
final rule). Given that the language finalized in our definition of 
``commercially reasonable'' is identical to that used in longstanding 
statutory and regulatory exceptions and our special rule at Sec.  
411.354(d)(4)(v), we see no reason why stakeholders would be suddenly 
unable to ascertain the meaning of the term. We see great benefit in 
using consistent terminology throughout our regulations where we intend 
an identical policy or standard. With respect to the second commenter's 
question, we believe that the requirement represents an objective 
standard. This requirement in the definition of ``commercially 
reasonable'' is similar to the requirements in the exceptions 
referenced, all of which represent objective standards. Although 
identifying the business purpose of an arrangement may entail an 
inquiry into the parties' intent for the arrangement, the requirement 
in the definition of ``commercially reasonable'' that the arrangement 
furthers a legitimate business purpose of the parties would be 
considered only after the determination that there actually exists a 
legitimate business purpose for the arrangement. As we stated in the 
proposed rule, conduct that violates a criminal law, such as inducing 
or rewarding referrals in violation of the anti-kickback statute, would 
not be a legitimate business purpose for an arrangement (84 FR 55791). 
Thus, the arrangement would not be commercially reasonable, and the 
question of whether the arrangement furthers a legitimate business 
purpose would not be reached.
    Comment: One commenter agreed that an arrangement does not further 
the legitimate business purposes of the parties if, for example, a 
hospital engages more medical directors than it needs to furnish 
required medical direction, but asked for additional guidance on our 
interpretation of the term ``legitimate business purpose.'' Another 
commenter expressed concern that unscrupulous parties could identify 
the goal of attracting a physician's business as a ``legitimate 
business purpose'' of its compensation arrangement with the physician. 
This commenter also suggested that an arrangement that is unprofitable 
should have discrete and well-documented factors establishing that it 
furthers a legitimate business purpose of the parties (such as a 
regulatory or licensure requirement or a patient access issue) in order 
to qualify as commercially reasonable.
    Response: As we noted in the proposed rule, 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 (84 FR 55790). 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.
    In the proposed rule, we discussed numerous examples of 
compensation arrangements described by CMS RFI commenters as 
commercially reasonable, in their opinions, 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 (84 FR 55790). The underlying purposes of the 
compensation arrangements described by the CMS RFI commenters included 
addressing 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. We believe that all of these purposes could qualify as 
``legitimate business purposes'' of the parties to an arrangement, 
depending on the facts and circumstances of the parties.
    We share the second commenter's concern that unscrupulous parties 
could claim that a compensation arrangement is commercially reasonable 
by claiming that attracting a physician's business is a ``legitimate 
business purpose'' for their arrangement. In the proposed rule, we 
explained that we were not proposing to include the phrase ``even if no 
referrals were made'' in the definition of ``commercially reasonable'' 
because this qualifying phrase (or similar language) appears in the 
regulation text of many exceptions that require an arrangement to be 
commercially reasonable (84 FR 55791). Thus, it would be redundant to 
include the language in the definition of ``commercially reasonable'' 
itself. We were clear that we were not proposing to remove this 
qualifying language from the exceptions in which it appears. We believe 
that this qualifying language provides critical protection against

[[Page 77534]]

program or patient abuse, as an arrangement must be commercially 
reasonable even if no referrals were made by the physician. As 
described in greater detail in sections II.D.10. and II.E.1. of this 
final rule, we are adding this language where it had not previously 
been included in the exception for fair market value compensation at 
Sec.  411.357(l) and in the new exception for limited remuneration to a 
physician finalized at Sec.  411.357(z). An arrangement whose purpose 
is to attract a physician's business, even if the parties claim this 
purpose, would not be commercially reasonable in the absence of the 
physician's referrals and, thus, would not satisfy this important 
requirement of the exceptions generally applicable to compensation 
arrangements that call for items or services to be provided by a 
physician.
    Finally, in the proposed rule, we also discussed our review of 
Internal Revenue Service (IRS) Revenue Ruling 97-21 and its conclusion 
that a hospital may not engage in substantial unlawful activities and 
maintain its tax-exempt status because the conduct of an unlawful 
activity is inconsistent with charitable purposes (84 FR 55790). In 
this final rule, we are similarly taking the position that an activity 
that is in violation of a criminal law would not be a legitimate 
business purpose of the parties 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.
    Comment: Several commenters addressed our preamble discussion 
regarding the requirement in our regulations that a compensation 
arrangement must be commercially reasonable even if no referrals were 
made between the parties. One commenter suggested that, if CMS intends 
that an arrangement should be commercially reasonable even in the 
absence of referrals, that phrase should be added to the exceptions or, 
if referrals may be considered, CMS should so state. These commenters 
requested that we expressly confirm that the term ``referral'' in these 
references in our exceptions has the meaning set forth in Sec.  411.351 
of our regulations. Another commenter asserted that the ``even if no 
referrals were made'' requirement is an integral part of commercial 
reasonableness in applying the physician self-referral law. This 
commenter suggested that we add this limiting phrase to Sec.  
411.357(l)(4).
    Response: We agree with the commenters regarding the inclusion of 
the language ``even if no referrals were made between the parties'' 
and, for the reasons explained in our response to the previous comment, 
have added this language to the exception for fair market value 
compensation at Sec.  411.357(l) and the new exception for limited 
remuneration to a physician at Sec.  411.357(z). Unless the context 
indicates otherwise, the term ``referral'' has the meaning set forth in 
Sec.  411.351 throughout the physician self-referral regulations, 
including in this limiting phrase.
    Comment: Most commenters that addressed the definition of 
``commercially reasonable'' expressed appreciation for the 
clarification in the proposed rule of our position that compensation 
arrangements that do not result in profit for one or more of the 
parties may nonetheless be commercially reasonable (84 FR 55790), and 
supported the inclusion of this policy statement at proposed Sec.  
411.351. Commenters echoed the potential reasons set forth in the 
proposed rule why an arrangement may not be profitable, but yet still 
commercially reasonable, and added that, despite the parties' 
prediction of profitability at the onset of an arrangement, an 
arrangement may simply not ``pan out.'' Many of these commenters 
requested that we extend our policy regarding the effect that the 
profitability of a compensation arrangement has on the arrangement's 
ability to satisfy the requirement that it is commercially reasonable 
to state that commercial reasonableness is unrelated, wholly unrelated, 
or irrelevant to the profitability of the arrangement to one or more of 
the parties. One commenter suggested that we state in regulation text 
that profitability is not a requirement for an arrangement to be 
commercially reasonable. Another commenter expressed concern that the 
use of the word ``may'' does not provide a bright-line rule for 
stakeholders. One commenter noted that the concept of commercial 
reasonableness has been used as an enforcement tool for business 
decisions that might not have turned out to be good business decisions, 
but were made in good faith, or that are strategic in nature without 
making absolute ``commercial sense.'' In contrast, a few commenters 
asserted that there are circumstances under which it would not be 
commercially reasonable for parties to enter into an arrangement that 
they know would result in substantial losses to one or more of the 
parties. One commenter, while agreeing that the issue of commercial 
reasonableness is not solely determined by physician practice 
profitability, stated that physician practice losses may indicate 
arrangements that should be further scrutinized as possible fraud and 
abuse risks.
    Response: We decline to adopt the commenters' suggestions regarding 
the extension of our policy. Although we believe that compensation 
arrangements that do not result in profit for one or more of the 
parties may nonetheless be commercially reasonable, we are not 
convinced that the profitability of an arrangement is completely 
irrelevant or always unrelated to a determination of its commercial 
reasonableness, for instance, in a case where the parties enter into an 
arrangement aware of its certain unprofitability and there exists no 
identifiable need or justification--other than to capture the 
physician's referrals--for the arrangement.
    We agree with the commenters that it is appropriate and helpful to 
include in regulation text our policy regarding the impact of an 
arrangement's profitability on its ability to satisfy the requirement 
that it is commercially reasonable. We are not adopting the alternative 
characterization of our policy as ``profitability is not a requirement 
for an arrangement to be commercially reasonable'' because we do not 
believe that this language is as clear or precise as the language we 
proposed. We are finalizing in regulation text at Sec.  411.351 our 
policy that ``an arrangement may be commercially reasonable even if it 
does not result in profit for one or more of the parties.''
    Comment: One commenter asked for confirmation that any definition 
of ``commercially reasonable'' finalized by CMS will not apply to 
regulations enforced by the IRS, OIG or pursuant to state law.
    Response: The commenter is correct. The introductory language to 
Sec.  411.351 where the definition of ``commercially reasonable'' 
appears in our regulation text states that the definitions in [Title 
42, part 411, Subpart J] apply only for purposes of section 1877 of the 
Act and [Subpart J].
    Comment: One commenter asked how CMS interprets the requirements at 
Sec.  411.357(a)(3) and (b)(2) in the exceptions for the rental of 
office space and equipment, respectively, that the leased office space 
or equipment does not exceed that which is reasonable and necessary for 
the legitimate business purposes of the lease arrangement. The 
commenter noted that this requirement and a requirement that the 
compensation arrangement is commercially reasonable are included in 
each of these statutory (and regulatory) exceptions. The commenter 
expressed confusion about our

[[Page 77535]]

description in the proposed rule of the requirement in the statutory 
exception for personal service arrangements that the aggregate services 
contracted for do not exceed those that are reasonable and necessary 
for the legitimate business purposes of the arrangement as another form 
of the requirement that an arrangement is commercially reasonable (84 
FR 55790).
    Response: We believe that the requirement that the leased office 
space or equipment does not exceed that which is reasonable and 
necessary for the legitimate business purposes of the lease arrangement 
is intended to prevent sham lease arrangements under which a lessee 
pays remuneration to the lessor under the guise of rental charges where 
the rental charges are for office space or equipment for which the 
lessee has no genuine or reasonable use. The statutory and regulatory 
exceptions for the rental of office space and the rental of equipment 
also include a requirement that the lease arrangement would be 
commercially reasonable even if no referrals were made between the 
lessee and the lessor. The new definition of ``commercially 
reasonable'' at final Sec.  411.351 applies for purposes of 
interpreting this requirement. Thus, the particular lease arrangement 
must further a legitimate business purpose of the parties to the 
arrangement and must be sensible, considering the characteristics of 
the parties, including their size, type, scope, and specialty.
    The statutory exception at section 1877(e)(3)(A) of the Act for 
personal service arrangements includes a requirement that the aggregate 
services contracted for under the personal service arrangement do not 
exceed those that are reasonable and necessary for the legitimate 
business purposes of the arrangement. We included this requirement in 
the regulatory exception for personal service arrangements at Sec.  
411.357(d)(1)(iii). Unlike the exceptions for the rental of office 
space and the rental of equipment, the exception for personal service 
arrangements does not include--either in the statute or our 
regulations--a separate requirement that the arrangement is 
commercially reasonable. The commenter raises a valid point regarding 
our statement in the proposed rule that, with respect to the exception 
for personal services, the ``does not exceed what is reasonable and 
necessary'' requirement is a different form of the requirement that the 
arrangement is commercially reasonable. Upon further review of the 
similarities and differences in the requirements in the statutory and 
regulatory exceptions for the rental of office space, the rental of 
equipment, and personal service arrangements, we are retracting our 
statement from the proposed rule that the requirement at section 
1877(e)(3)(A) of the Act (incorporated at Sec.  411.357(d)(1)(iii)) 
equates to a requirement that the personal service arrangement is 
commercially reasonable.
    As we stated in this section II.B.2., with respect to lease 
arrangements for office space and equipment, we interpret the ``does 
not exceed what is reasonable and necessary'' requirement as a 
protection against sham lease arrangements under which a lessee pays 
remuneration to the lessor under the guise of rental charges where the 
rental charges are for office space or equipment for which the lessee 
has no genuine or reasonable use. We similarly interpret this 
requirement in the context of the exception for personal service 
arrangements as a protection against sham arrangements for the services 
of a physician for which the entity has no genuine or reasonable use. 
In the proposed rule, we stated that 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 (84 FR 55790). We provided the example of a 
hospital that enters into multiple arrangements for medical director 
services for a single department even though the hospital needs only 
one medical director for the department. We stated that the commercial 
reasonableness of multiple arrangements for the same services is 
questionable. Multiple arrangements for the same personal services may 
also result in the failure of the duplicate arrangements to satisfy the 
``reasonable and necessary'' requirement in the exception for personal 
services at section 1877(e)(3)(A) of the Act and Sec.  
411.357(d)(1)(iii). In the proposed rule, we also discussed our view 
that an activity that is in violation of criminal law would not be a 
legitimate business purpose of the parties and, therefore, would not be 
commercially reasonable for purposes of the physician self-referral law 
(84 FR 55791). Activity that is in violation of criminal law would also 
fail to satisfy the requirement in the exception for personal service 
arrangements that the services to be furnished under the arrangement do 
not involve the counseling or promotion of a business arrangement or 
other activity that violates any Federal or State law. Thus, although 
the exception for personal service arrangements does not include a 
requirement that the arrangement is commercially reasonable, the other 
requirements in the exception guard against program or patient abuse in 
an important and essentially equivalent way.
    We note that the exception for personal service arrangements at 
Sec.  411.357(d)(1) includes a requirement that the arrangement covers 
all the services to be furnished by the physician (or an immediate 
family member of the physician) to the entity. The exception permits 
the use of a master list of contracts that is maintained and updated 
centrally and available for review by the Secretary upon request. In 
addition, a personal service arrangement must have a duration of at 
least 1 year in order to qualify for protection under the exception at 
Sec.  411.357(d)(1). We are aware that, because personal service 
arrangements may not satisfy these requirements, parties often rely on 
the exception at Sec.  411.357(l) for fair market value compensation to 
protect their arrangements for the personal services of physicians and 
their immediate family members. We remind readers that the exception 
for fair market value compensation includes a requirement that the 
arrangement is commercially reasonable, and as explained in section 
II.D.10. of this final rule, we are revising the regulation text of 
that exception to require that the arrangement is commercially 
reasonable even if no referrals were made between the parties.
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 any 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 any 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,

[[Page 77536]]

including the CMS RFI, identified their lack of a clear understanding 
as to whether 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 False Claims Act, entities are 
susceptible to both government and whistleblower actions that can 
result in significant penalties through litigation or settlement. In 
the proposed rule, we proposed regulations 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. We also provided a brief history 
of the guidance to date on the volume or value standard and the other 
business generated standard. We believe it is useful to repeat that 
history in this final rule.
    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 through 1700). 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 could 
compensate its members on the basis of non-Medicare and non-Medicaid 
referrals, but 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 
final rule for a discussion of the historical inclusion of Medicaid 
referrals in our regulations and our 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 the proposals included 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 
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 a comment 
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 unit-based 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 unit-based compensation will be 
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 of 
designated health services. Unit-based 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 for items or services actually provided 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. We 
note that the special rules use the phrase ``takes into account 
referrals'' (or other business generated) rather than ``takes into 
account the volume or value of referrals'' (or other business 
generated). Both special rules apply to time-based or per-unit of 
service-based (``per-click'') compensation formulas. However, as we 
later noted in Phase II, the special rules on unit-based 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-
sum 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 a 
determination whether the compensation does, in fact, take into account 
or otherwise reflect the volume or value of referrals will

[[Page 77537]]

require a case-by-case examination based on the facts and 
circumstances. (We note that the language ``otherwise reflects'' was 
determined to be superfluous and removed from our regulation text in 
Phase III (72 FR 51027).)
    Until now, we had not codified regulations defining the volume or 
value standard or the other business generated standard, although the 
special rule at Sec.  411.354(d)(4) sets forth the circumstances under 
which a physician's compensation under a bona fide employment 
relationship, personal service arrangement, or managed care contract 
may be conditioned on the physician's referrals to a particular 
provider, practitioner, or supplier without running afoul of the volume 
or value standard. For the reasons explained in more detail below and 
in our responses to comments, in this final rule, we are finalizing 
special rules at Sec.  411.354(d)(5) and (6) that supersede our 
previous guidance, including guidance with which they may be (or appear 
to be) inconsistent. Our final policies relate to the volume or value 
and other business generated standards 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 exception for academic medical centers at Sec.  
411.355(e)(1)(ii), and various exceptions for compensation arrangements 
in section 1877(e) of the Act and Sec.  411.357 of our regulations, 
including the new exception established in this final rule for limited 
remuneration to a physician at Sec.  411.357(z). In addition, the 
regulation at final Sec.  411.354(d)(5)(i) applies for purposes of 
section 1877(h)(4) of the Act and the group practice regulations at 
Sec.  411.352(g) and (i). The final policies do not apply for purposes 
of applying the exceptions at Sec.  411.357(m), (s), (u), (v), and (w), 
or for purposes of applying the new exception finalized in this final 
rule at Sec.  411.357(bb) for cybersecurity items and services. We are 
including regulation text at Sec.  411.354(d)(5)(iv) and (6)(iv) 
regarding the application of the volume or value standard and the other 
business generated standard for purposes of applying these exceptions. 
Given the revisions to our regulations at Sec.  411.354(c)(2) and 
(d)(1), which eliminate language regarding compensation that is 
determined in any manner that takes into account the volume or value of 
referrals or other business generated by a physician, the final special 
rules at Sec.  411.354(d)(5) and (6) do not apply for purposes of 
determining the existence of an indirect compensation arrangement under 
Sec.  411.354(c)(2) or applying the special rule on compensation that 
is deemed to be set in advance at Sec.  411.354(d)(1). For the reasons 
discussed below in response to comments, the final special rules at 
Sec.  411.354(d)(5) and (6) do not apply for purposes of applying the 
special rules for unit-based compensation at Sec.  411.354(d)(2) and 
(3). We are including regulation text at Sec.  411.354(d)(5)(iv) and 
(6)(iv) regarding the application of the volume or value standard and 
the other business generated standard for purposes of applying the 
special rules for unit-based compensation.
    As we stated in the proposed rule, 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 (84 FR 55793). Our final rules establish such a test. We are 
finalizing 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 final regulations, which we believe 
create the bright-line rule sought by commenters and other 
stakeholders, outside of the circumstances at Sec.  411.354(d)(5) and 
(6), compensation will 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 referrals or other business generated as a 
variable, 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 that our 
final regulations are 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).
    In the proposed rule, we explained that, even with 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 and regulatory schemes, we find it impossible to establish a 
single definition for the volume or value and other business generated 
standards (84 FR 55793). Therefore, instead of a definition at Sec.  
411.351, we proposed special rules for compensation arrangements that 
would apply regardless of the exact language used to describe the 
standards in the statute and our regulations. We also explained that, 
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 
that 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 
proposed two separate special rules for the volume or value standard 
and two separate special rules for the other business generated 
standard.
    Under our proposals, compensation from an entity to a physician (or 
immediate family member of the physician) would take 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. In the proposed rule, we stated that, 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 
(84 FR 55793). For the reasons explained in our response to comments 
below, we are retracting this statement. Under the

[[Page 77538]]

policies set forth in this final rule, as described in our response to 
comments below, the special rules at Sec.  411.354(d)(2) and (3) are 
not applicable to compensation that takes into account the volume or 
value of referrals under final Sec.  411.354(d)(5)(i) or (6)(i) or to 
compensation that takes into account other business generated by a 
physician under final Sec.  411.354(d)(5)(ii) or (6)(ii). We have 
revised the regulation text at Sec.  411.354(d)(2) and (3) accordingly. 
If compensation takes into account the volume or value of referrals or 
the volume or value of other business generated under final Sec.  
411.354(d)(5) or (6), that determination is final. The special rules at 
Sec.  411.354(d)(2) and (3) may not be applied to then deem the 
compensation not to take into account the volume or value of referrals 
or other business generated.
    To illustrate our proposed policy, in the proposed rule, we 
provided an example under which a physician organization does not 
qualify as a group practice under Sec.  411.352 of the physician self-
referral regulations. Under the example, the physician organization 
pays its physicians a percentage of collections attributed to the 
physician, including personally performed services and services 
furnished by the physician organization (the physician's ``pool''). If 
a physician's pool includes amounts collected for designated health 
services furnished by the physician organization that he ordered but 
did not personally perform, the physician's compensation takes into 
account the volume or value of his referrals to the physician 
organization. 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 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 (84 FR 55793).
    Analogously, we proposed that 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 a physician (or immediate family member) pays less 
compensation as the number or value of the physician's referrals to the 
entity increases, the compensation from the physician to the entity 
would negatively correlate with the number or value of the physician's 
referrals. In the proposed rule, we stated that, 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 (84 FR 55793). We 
are retracting this statement. Under the policies set forth in this 
final rule, as described above and in our response to comments below, 
the special rules at Sec.  411.354(d)(2) and (3) are not applicable to 
compensation that takes into account the volume or value of referrals 
under final Sec.  411.354(d)(5)(i) or (6)(i) or to compensation that 
takes into account the volume or value of other business generated by 
the physician under final Sec.  411.354(d)(5)(ii) or (6)(ii). If 
compensation takes into account the volume or value of referrals or the 
volume or value of other business generated under final Sec.  
411.354(d)(5) or (6), that determination is final. The special rules at 
Sec.  411.354(d)(2) and (3) may not be applied to then deem the 
compensation not to take into account the volume or value of referrals 
or other business generated.
    To illustrate our proposed policy, in the proposed rule, we 
provided an example under which a physician leases medical office space 
from a hospital. Our example assumed that the rental charges are $5,000 
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 
our proposal, 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 to the hospital would be: Compensation = $5,000-
($5 x the number of designated health services referrals). The proposed 
policy 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 (84 FR 55793 
through 55794).
    We are finalizing our proposals with modifications to the structure 
of the regulations. The final regulations are designated at Sec.  
411.354(d)(5)(i), (ii), and (iii) (with respect to compensation from an 
entity to a physician (or immediate family member of a physician)) and 
Sec.  411.354(d)(6)(i), (ii), and (iii) (with respect to compensation 
from a physician (or immediate family member of a physician) to an 
entity). As set forth at final Sec.  411.354(d)(5)(iv) and (6)(iv), 
these special rules do not apply for purposes of applying the 
exceptions at Sec.  411.357(m), (s), (u), (v), and (w), or for purposes 
of applying the new exception established in this final rule at Sec.  
411.357(bb) for cybersecurity items and services. Although our final 
regulations are ``special rules'' on compensation, we 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 is not considered to take into account the volume or value 
of the physician's referrals or other business generated by the 
physician, as appropriate, for purposes of the physician self-referral 
law.
    We also proposed additional policies at proposed Sec.  
411.354(d)(5)(i)(B) and (ii)(B), and at proposed Sec.  
411.354(d)(6)(i)(B) and (ii)(B), outlining narrowly-defined 
circumstances under which fixed-rate compensation (for example, a fixed 
annual salary or an unvarying per-unit rate of compensation) would be 
considered 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. For the reasons described in 
response to comments below and in section II.B.4. of this final rule, 
we are not finalizing the proposed regulations. However, to address the 
concerns prompting the policy described in the proposed rule with 
respect to referrals of designated health services, we are revising 
Sec.  411.354(d)(4), which sets forth requirements that must be met if 
a physician's compensation is conditioned on the physician's referrals 
to a particular provider, practitioner, or supplier; that is, if, under 
the bona fide employment relationship, personal service arrangement, or 
managed care contract the physician's referrals are directed to a 
particular provider, practitioner, or supplier. The final

[[Page 77539]]

policy is designated at Sec.  411.354(d)(4)(vi) and states that, 
regardless of whether the physician's compensation takes into account 
the volume or value of referrals by the physician, neither the 
existence of the compensation arrangement nor the amount of the 
compensation may be contingent on the volume or value of the 
physician's referrals to the particular provider, practitioner, or 
supplier. See section II.B.4. of this final rule for further discussion 
of Sec.  411.354(d)(4)(vi).
    In the proposed rule, we stated that 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 (84 FR 55794). We are finalizing our proposal to 
remove the modifier from the regulations where it appears in connection 
with the standards and the related requirements. We also highlighted 
that, 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 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 solicited comment on 
the need for additional guidance or regulation text that includes 
deeming provisions related to the volume or value standard in these 
exceptions. Based on the comments we received, we are not revising our 
regulations to provide further guidance on the deeming provisions 
(except as provided in section II.D.11. of this final rule with respect 
to the deeming provision in the exception at Sec.  411.357(w) for EHR 
items and services).
    Finally, in the proposed rule, we discussed 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). We acknowledged stakeholder concerns 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. (792 F.3d 364) (Tuomey), CMS may no 
longer endorse this policy. We stated that we believe that the 
objective tests for determining whether compensation takes into account 
the volume or value of referrals or the volume or value of other 
business generated may address these concerns; however, for clarity, we 
reaffirmed the position we took in the Phase II regulation. We stated 
that, 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 also clarified 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 in 
the special rule at Sec.  411.354(d)(2) (see 69 FR 16067). This is true 
whether the compensation arrangement is analyzed under an exception 
applicable to compensation arrangements directly between an entity and 
a physician or is an indirect compensation arrangement analyzed under 
the exception at Sec.  411.357(p). Our position has not changed since 
the publication of Phase II, and we reaffirm here our statements in the 
proposed rule. An association between personally performed physician 
services and designated health services furnished by an entity does not 
convert compensation tied solely to the physician's personal 
productivity into compensation that takes into account the volume or 
value of a physician's referrals to the entity or the volume or value 
of other business generated by the physician for the entity. Although 
commenters requested that we codify these policies in regulation text, 
we decline to do so, as we do not believe that it is necessary given 
the policies set forth in the final regulations at Sec.  411.354(d)(5) 
and (6). However, as described below in our response to comments, we 
are revising the regulations at Sec.  411.354(c)(2) regarding the 
existence (that is, definition) of an indirect compensation 
arrangement. We believe the revisions to Sec.  411.354(c)(2) may 
alleviate the commenters' concerns.
    We received the following comments and our responses follow.
    Comment: Most commenters supported the proposed special rules on 
the volume or value standard and the other business generated standard. 
Some commenters requested modification of the standards, as described 
in other comments below. The commenters in support of our proposed 
special rules generally appreciated the clarification of terms that 
they asserted have been a source of confusion among providers, 
physicians, qui tam relators, and courts. The commenters stated that 
the objective tests established in the proposed special rules are 
easily understood, which, in turn, will greatly ease the burden on 
providers and suppliers attempting to ensure compliance with the volume 
or value and other business generated standards, as well as make a 
clear path for law enforcement and the regulated industry. Commenters 
urged CMS to finalize objective standards for this critical 
terminology. In contrast, one commenter asserted that the proposed 
special rules do not adequately explain what is meant by ``includes the 
physician's referrals to the entity as a variable'' and would create 
significantly more confusion than the current standard. This commenter 
asserted that this lack of clarity could allow for abusive compensation 
arrangements and hamper enforcement efforts.

[[Page 77540]]

    Response: We are finalizing most of our proposals to establish 
objective tests for whether compensation takes into account the volume 
or value of a physician's referrals to an entity or the volume or value 
of other business generated by a physician for an entity. We agree with 
the commenters that our final policies will establish a clear path for 
parties to design compensation arrangements that comply with the volume 
or value standard and other business generated standard found in many 
of the exceptions to the physician self-referral law. In turn, the 
objective standards should assist in law enforcement efforts by making 
it clear whether compensation paid to or from a physician takes into 
account the volume or value of a physician's referrals to an entity or 
the volume or value of other business generated by a physician for an 
entity. As discussed more fully in our response to other comments, we 
are also clarifying in regulation text that, if compensation takes into 
account the volume or value of a physician's referrals to an entity or 
the volume or value of other business generated by a physician for an 
entity under final Sec.  411.354(d)(5) or (6), no special rule, 
including those at Sec.  411.354(d)(2) and (3), may be applied to 
reverse that determination.
    We disagree with the commenter that asserted that the proposed 
special rules would create significantly more confusion related to the 
volume or value standard and the other business generated standard, and 
note that nearly all other commenters that addressed these specific 
proposals asserted that the proposed special rules would provide 
clarity for parties seeking to ensure that compensation 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 a physician. 
With respect to the meaning of ``includes the physician's referrals to 
the entity as a variable'' as included in the regulation text at final 
Sec.  411.354(d)(5)(i) and (6)(i), we refer readers to the examples 
provided in the proposed rule and restated above that illustrate the 
mathematical formulas for determining compensation that takes into 
account the volume or value of a physician's referrals. The term 
``variable'' has the meaning it does with respect to general 
mathematical principles--a symbol for a number we do not yet know. 
Thus, if an entity pays a physician one-fifth of a bonus pool that 
includes all collections from a set of services furnished by an entity, 
including those from designated health services referred by a physician 
to the entity, the formula used to calculate the physician's 
compensation is: (.20 x the value of the physician's referrals of 
designated health services) + (.20 x the value of the other business 
generated by the physician for the entity) + (.20 x the value of 
services furnished by the entity that were not referred or generated by 
the physician). The value of the physician's referrals to the entity is 
a variable in this formula, as is the value of the other business 
generated by the physician.
    Comment: A small number of commenters did not support our proposals 
for special rules that identify the universe of compensation formulas 
that take into account the volume or value of a physician's referrals 
or the other business generated by the physician for an entity. One of 
the commenters asserted that the standards were too narrow to protect 
the Medicare program from abuse, noting that, under our proposals, a 
hospital could make payment to a physician in anticipation of future 
referrals without a mathematical formula explicitly delineating it. 
Other commenters opposed CMS finalizing any of its proposals, while not 
specifically opposing the proposed special rules for the volume or 
value and other business generated standards.
    Response: Although we agree with the commenters regarding the 
importance of program integrity, we believe that the certainty afforded 
by the objective standards we are finalizing is critical to reduce the 
burden associated with compliance with the physician self-referral 
law's volume or value and other business generated standards. We 
believe that the policies finalized at Sec.  411.354(d)(5) and (6), 
coupled with the new condition at Sec.  411.354(d)(4)(vi) prohibiting 
an entity from making the existence of a compensation arrangement or 
the amount of the compensation contingent on the volume or value of the 
physician's referrals to the particular provider, practitioner, or 
supplier (as well as the other requirements of our exceptions) 
mitigates the potential for program or patient abuse asserted by the 
commenters. We remind parties that arrangements that involve 
remuneration from an entity to a physician (or vice versa) implicate 
the anti-kickback statute. An arrangement under which a hospital makes 
a payment to a physician in anticipation of future referrals would be 
suspect under the anti-kickback statute. Moreover, our revised 
definition of ``referral'' at Sec.  411.351 clarifies that referrals 
are not items or services to be protected under the exceptions to the 
physician self-referral law, regardless of whether or not it is 
possible to ascribe a fair market value to them.
    Comment: A large number of commenters requested that CMS 
specifically address personal productivity compensation by finalizing 
in regulation text the interpretations we described in the proposed 
rule (84 FR 55795). Some commenters requested that CMS confirm that 
personal productivity compensation is permissible in all settings. 
Others requested that we revise the exceptions for personal service 
arrangements, fair market value compensation, and indirect compensation 
arrangements to expressly permit compensation formulas based on a 
physician's personal productivity. All of the commenters noted that 
productivity pay for personally performed services is among the most 
prevalent compensation methodologies used by hospitals and other 
entities to compensate surgeons and other proceduralists, as well as 
physicians who do not attend to patients in a hospital setting. 
Commenters stated that, despite our affirmative statements in the 
proposed rule that, 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) (84 FR 55795), 
they remain concerned that an entity may still have to defend its 
compensation practices in the event of a False Claims Act allegation 
because satisfaction of all the requirements of an applicable exception 
to the physician self-referral law is an affirmative defense.
    Response: We decline to revise the text of the regulations as 
requested by the commenters. We reaffirm our statements in the proposed 
rule, including those with respect to productivity-based compensation 
under a bona fide employment relationship. We also confirm that our 
policy applies to indirect compensation arrangements. To be clear, 
under a bona fide employment relationship, personal service 
arrangement, or indirect compensation arrangement, a physician may be 
compensated for his or her personally performed services using a unit-
based compensation formula--even when the entity with which the 
physician has a direct or indirect compensation arrangement bills for 
designated health services that

[[Page 77541]]

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 unit-based compensation meets the conditions of the 
special rule at Sec.  411.354(d)(2). Similarly, under a personal 
service arrangement or indirect compensation arrangement, a physician 
may be compensated for his or her personally performed services using a 
unit-based compensation formula--even when the entity with which the 
physician has a direct or indirect compensation arrangement bills for 
other business that correspond to such personally performed services--
and the compensation will not take into account other business 
generated by the physician if the unit-based compensation meets the 
conditions of the special rule at Sec.  411.354(d)(3).
    We note that the policies described in the proposed rule (84 FR 
55795) and in this response regarding the application of the special 
rules for unit-based compensation have been superseded by the policies 
finalized in this final rule. However, these policies would be applied 
when analyzing compensation arrangements for compliance with the 
physician self-referral law during periods prior to the effective date 
of this final rule. They have never applied and will continue not to 
apply for purposes of analyzing ownership or investment interests for 
compliance with the physician self-referral law, as none of our 
exceptions in Sec.  411.356 include a requirement identical or 
analogous to the volume or value standard or other business generated 
standard. To reiterate, neither the special rules at Sec.  
411.354(d)(2) and (3) nor any guidance regarding our interpretation of 
the volume or value standard or other business generated standard are 
relevant for purposes of applying the exceptions at Sec.  411.356(c)(1) 
and (3), both of which incorporate the requirements of Sec.  411.362, 
including the requirement at Sec.  411.362(b)(3)(ii)(B) that a hospital 
must not condition any physician ownership or investment interests 
either directly or indirectly on the physician owner or investor making 
or influencing referrals to the hospital or otherwise generating 
business for the hospital.
    Comment: A significant number of commenters requested that we 
clarify that the positions CMS took in prior litigation, including 
Tuomey, and the discussion in the proposed rule regarding productivity-
based compensation were based on its then-current policy, not on the 
policies finalized here. Commenters asserted that this is necessary to 
avoid confusing the special rules on the volume or value standard and 
other business generated standard that we are finalizing in this final 
rule--under which productivity compensation would not trigger the 
volume or value standard of the exceptions for bona fide employment 
relationships, personal service arrangements, or fair market value 
compensation--with Tuomey's ``correlation theory.'' The commenters also 
asserted that, under the policies finalized here, there would no longer 
be a need for the productivity bonus ``safe harbor'' at Sec.  
411.357(c)(4).
    Response: Productivity compensation based solely on a physician's 
personally performed services does not take into account the volume or 
value of the physician's referrals or other business generated by a 
physician under the policies finalized in this final rule. Such 
compensation would satisfy the volume or value standard and the other 
business generated standard, where it appears, in the exceptions for 
bona fide employment relationships, personal service arrangements, and 
fair market value compensation, all of which apply to direct 
compensation arrangements between entities and physicians. Although the 
productivity bonus ``safe harbor'' at Sec.  411.357(c)(4) would not be 
necessary to protect productivity compensation based solely on a 
physician's personally performed services under this final rule, the 
provision is included in section 1877(e)(2) of the Act and, therefore, 
we are not removing it from our regulations. Prior to this final rule, 
productivity compensation based solely on a physician's personally 
performed services would not take into account the volume or value of a 
physician's referrals if the conditions of the special rule at Sec.  
411.354(d)(2) were met. Thus, even prior to this final rule, the 
productivity bonus ``safe harbor'' at Sec.  411.357(c)(4) would not 
have been necessary to ensure that a physician's referrals to his or 
her employer did not violate the physician self-referral law due to the 
fact that the physician received productivity compensation from the 
employer based solely on the physician's personally performed services. 
As we stated in the proposed rule and repeated above, the special rules 
at Sec.  411.354(d)(5) and (6), as finalized, supersede our previous 
guidance, including guidance with which they may be (or appear to be) 
inconsistent (84 FR 55792). The policies finalized here are prospective 
only and represent CMS policy regarding the volume or value standard 
and the other business generated standard going forward from the 
effective date of this final rule.
    Comment: Two commenters asked us to confirm whether a ``tiered'' 
compensation model would take into account the volume or value of a 
physician's referrals. The commenters both presented the following 
example: For the first 50 procedures that a physician performs at a 
hospital, the physician is paid $X per procedure. For the next 25 
procedures that the physician performs at the hospital, the physician 
is paid $X + $20. The commenters did not specify whether the physician 
made the referrals for the corresponding designated health services 
furnished by the hospital.
    Response: The commenters did not provide sufficient facts to enable 
us to respond to their request. Parties may use the process set forth 
in our regulations at Sec. Sec.  411.370 through 411.389 to request an 
advisory opinion on whether a specific referral or referrals relating 
to designated health services (other than clinical laboratory services) 
is prohibited under section 1877 of the Act.
    Comment: One commenter expressed support for the approach of 
identifying the universe of circumstances in which compensation will be 
considered to take into account the volume or value of referrals or 
other business generated, rather than the current approach that 
identifies limited circumstances in which compensation is deemed to not 
take into account the volume or value of a physician's referrals or 
other business generated by the physician for an entity. The commenter 
asserted that the regulatory certainty provided under our approach will 
allow hospitals to encourage physicians to improve quality, reduce 
cost, and provide leadership by permitting quality and outcomes-based 
bonuses payable to physicians, bonuses to physician leaders based on 
system success, and unit-based compensation based on personally 
performed services that sometimes, but not always, result in referrals 
of designated health services. Another commenter asked whether 
incentive compensation paid only in the event of the hospital's 
achievement of overall financial performance goals would take into 
account the volume or value of a particular physician's compensation. 
The commenter gave the example of a physician receiving a 15 percent 
bonus if the system has a 2 percent margin, and a 20 percent bonus if 
the system has a 4 percent margin.
    Response: We agree that identifying for stakeholders the universe 
of circumstances in which we believe compensation is determined in a

[[Page 77542]]

manner that takes into account the volume or value of a physician's 
referrals or other business generated by the physician is preferable to 
our former policy, which articulated a general rule that compensation 
may not be determined in any manner that takes into account the volume 
or value of referrals (or other business generated by a physician) and 
provided a single ``safe harbor'' for assurance that the specific 
compensation does not violate the general rule. We caution that 
outcomes-based bonuses, as described by the commenter, could fall 
within the circumstances of the special rules at final Sec.  
411.354(d)(5) and (6), depending on how they are structured and whether 
referrals to the entity or other business generated by the physician 
for the entity are variables anywhere in the mathematical formula for 
determining the compensation. Although bonus compensation based on 
``system success'' may not include referrals to or other business 
generated for the entity as a variable in many instances, the 
determination of whether the formula to determine the compensation 
includes such variables must be made on a case-by-case basis. As we 
explain above and in our response to other comments, unit-based 
compensation based solely on personally performed services would not 
include the physician's referrals to or the other business generated by 
the physician for the entity as a variable and, regardless of whether 
an entity furnishes designated health services in conjunction with the 
physician's personally performed services, would not take into account 
the volume or value of the physician's referrals or other business 
generated by the physician.
    Comment: Many commenters noted that our proposed interpretations of 
the volume or value and other business generated standards do not 
readily translate in the context of nonmonetary compensation such as 
the donation of EHR items and services or medical staff incidental 
benefits. These commenters requested that we not apply the special 
rules at Sec.  411.354(d)(5) and (6) to the exceptions where the 
remuneration to or from a physician generally is not calculated as a 
mathematical formula.
    Response: We agree with the commenters in part. The final special 
rules at Sec.  411.354(d)(5) and (6) do not apply for purposes of 
applying the exceptions for medical staff incidental benefits at Sec.  
411.357(m), professional courtesy at Sec.  411.357(s), community-wide 
health information systems at Sec.  411.357(u), electronic prescribing 
items and services at Sec.  411.357(v), electronic health records items 
and services at Sec.  411.357(w), and cybersecurity technology and 
related services at new Sec.  411.357(bb). These exceptions have 
``volume or value'' requirements that are somewhat unique and the 
special rules are not a perfect fit. We have included language at final 
Sec.  411.354(d)(5)(iv) and (6)(iv) to indicate the inapplicability of 
the special rules for purposes of applying these particular exceptions 
to the physician self-referral law. However, the requirement in the 
exception for nonmonetary compensation at Sec.  411.357(k)(1)(i), which 
requires that the nonmonetary compensation is not determined in any 
manner that takes into account the volume or value of referrals or 
other business generated by the referring physician, is similar to 
those in the exceptions where cash remuneration may be provided and the 
special rules at final Sec.  411.354(d)(5) and (6) can be easily 
applied.
    Comment: A few commenters requested that CMS confirm that the 
proposed special rules at Sec.  411.354(d)(5) and (6) would apply to 
the determination of whether an indirect compensation arrangement 
exists. Another commenter requested confirmation that the special rules 
set forth at final Sec.  411.354(d)(5) and (6) would apply to the 
determination of whether a 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 (Sec.  411.352(g)) and the 
requirements under the special rules for profit shares and productivity 
bonuses at Sec.  411.352(i).
    Response: Except as specified in Sec.  411.354(d)(5)(iv) and 
(6)(iv), the proposed special rules interpreting the volume or value 
standard at Sec.  411.354(d)(5)(i) and (6)(i) apply in all instances 
where our regulations require an analysis of whether compensation is 
determined in any manner that takes into account the volume or value of 
a physician's referrals. Likewise, except as specified in Sec.  
411.354(d)(5)(iv) and (6)(iv), the proposed special rules interpreting 
the other business generated standard at Sec.  411.354(d)(5)(ii) and 
(6)(ii) apply in all instances where our regulations require an 
analysis of whether compensation is determined in any manner that takes 
into account the volume or value of other business generated by a 
physician. Given the revisions to the regulations at Sec.  
411.354(c)(2) finalized in this final rule, and because the special 
rules at final Sec.  411.354(d)(5) and (6) have only prospective 
application, the special rules at Sec.  411.354(d)(5) and (6) do not 
apply to the determination of whether an indirect compensation 
arrangement exists under Sec.  411.354(c)(2). For the reasons explained 
in the response to a comment below, the special rules at final Sec.  
411.354(d)(5) and (6) do not apply for purposes of applying the special 
rules on unit-based compensation at Sec.  411.354(d)(2) and (3). As 
described in section II.C.1. of this final rule, the terms ``based on'' 
and ``related to'' exist in the regulation text at Sec.  411.352(g) and 
(i). We interpret these terms to equate to ``takes into account'' when 
referring to the volume or value of referrals. Thus, the special rule 
at final Sec.  411.354(d)(5)(i) applies for purposes of interpreting 
and applying the group practice regulations at Sec.  411.352(g) and 
(i), which apply only to compensation from the group practice to the 
physician and the physician's referrals (but do not apply to the other 
business generated by the physician for the group practice).
    Comment: Citing concerns related to recent False Claims Act 
litigation, many commenters asked CMS to refrain from using the term 
``correlation'' in the final regulations. Commenters suggested that we 
use the term ``causal relationship'' in lieu of ``correlation'' in the 
special rules. The commenters were concerned that the term 
``correlation'' could create an inference that compensation could 
violate the volume or value or other business generated standards 
without a causal relationship between referrals or other business 
generated and the compensation to or from the physician.
    Response: We have provided definitions for ``positive correlation'' 
and ``negative correlation'' to indicate specifically what mathematical 
formulas will be problematic under the final rules. We believe that our 
regulations, as finalized, are clear and express the agency's 
interpretation of the volume or value standard and the other business 
generated standard.
    Comment: A few commenters requested that CMS require that the 
physician's referrals are a written or otherwise expressly articulated 
variable in the formula for calculating the compensation paid to a 
physician. The commenters asserted that, under the proposed special 
rule, it is not clear how the formula would be assessed, and 
recommended language would signify that, for purposes of applying Sec.  
411.357(d)(5), the test is not one of subjective intent. The commenters 
made the same request, for the same reasons, with respect to the other 
business generated standard. Another commenter suggested that we 
require that the compensation formula has a ``direct and explicit'' 
variable that results in an increase or decrease in the physician's

[[Page 77543]]

compensation that ``directly, explicitly and'' positively (or 
negatively) correlates with the number of value of the physician's 
referrals to (or other business generated for) the entity in order to 
take into account the volume or value of referrals (or other business 
generated).
    Response: We decline to adopt the commenter's suggestions. We 
believe that the special rules finalized at Sec.  411.354(d)(5) and (6) 
sufficiently articulate objective tests for assessing whether 
compensation takes into account the volume or value of a physician's 
referrals or the other business generated by a physician for an entity. 
We disagree that the final special rules lack clarity or imply that the 
volume or value standard and other business generated standard are 
subjective tests. Compensation paid to a physician takes into account 
the volume or value of referrals 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, regardless of whether the formula 
is written in a particular place or manner. The same applies to 
compensation that takes into account other business generated by the 
physician for the entity making the payment to the physician.
    Comment: A large number of commenters requested that we not 
finalize our proposal to consider fixed-rate compensation for which 
there is a predetermined, direct correlation to the physician's prior 
referrals to the entity or the other business previously generated by 
the physician for the entity to take into account the volume or value 
of referrals or other business generated by the physician. Noting that 
fixed rate compensation (for example, $200,000 per year) qualifies as 
unit-based compensation, some commenters asserted that, even if we were 
to finalize this proposal, once the special rules for unit-based 
compensation at Sec.  411.354(d)(2) and (3) are applied, fixed-rate 
compensation that fails the proposed test(s) would nonetheless be 
deemed not to take into account the volume or value of referrals or 
other business generated under the existing regulations at Sec.  
411.354(d)(2) and (3). Other commenters stated that the proposal 
regarding fixed-rate compensation would not establish the objective 
rule we sought and would continue the uncertainty that the industry 
currently faces.
    Response: We agree with the commenters that the special rules for 
unit-based compensation at Sec.  411.354(d)(2) and (3) essentially 
nullify the proposed special rule regarding fixed-rate compensation 
that takes into account the volume or value of a physician's referrals 
or other business generated by the physician for an entity. We are not 
finalizing our proposals for additional special rules outlining the 
circumstances under which we would consider fixed-rate 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.
    In the proposed rule, we stated that 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 other business generated by the 
physician for the entity; however, we also stated that we are concerned 
with an ``if X, then Y'' correlation between compensation in the 
current term and prior referrals or previous other business generated 
by a physician (84 FR 55794). Our proposed policy focused on fixed-rate 
compensation under a current arrangement where there is a 
predetermined, direct correlation between the volume or value of a 
physician's prior referrals or the other business previously generated 
for the entity and the rate of compensation paid to or by the physician 
(or immediate family member of the physician). We provided examples of 
objectionable tiered compensation structures that condition a 
physician's compensation on the volume or value of his or her referrals 
to an entity. The conditioning of the existence of a compensation 
arrangement would also fall within such a structure; for example, ``if 
the value of the physician's referrals does not equal $1,000,000 in the 
prior period, the physician's employment arrangement will be terminated 
and his compensation from the entity will equal $0.'' We believe that 
there is a risk of program or patient abuse when a physician will 
receive no future compensation if he or she fails to refer as required. 
The same is true if the amount of the physician's compensation 
conditioned on the volume or value of a physician's referrals to an 
entity (or another provider, practitioner, or supplier). Therefore, in 
lieu of the proposed policies treating ``if X, then Y'' compensation 
methodologies as potential concerns under the volume or value standard 
and other business generated standard, we are revising the special rule 
at Sec.  411.354(d)(4) to address our concerns when 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 (including the entity providing the compensation to the 
physician)--in other words, when the physician's referrals are directed 
to a particular provider, practitioner, or supplier. Under the policy 
at final Sec.  411.354(d)(4)(vi), regardless of whether the physician's 
compensation takes into account the volume or value of referrals by the 
physician as set forth at paragraph (d)(5) of this section, neither the 
existence of the compensation arrangement nor the amount of the 
compensation is contingent on the volume or value of the physician's 
referrals to the particular provider, practitioner, or supplier. We 
discuss this revision in more detail in section II.B.4. of this final 
rule.
    Comment: A few commenters requested clarification of the examples 
in the proposed rule regarding fixed-rate tiered compensation set using 
a predetermined, ``if X, then Y'' methodology. One commenter suggested 
that our statement in the proposed rule that the tiered compensation 
methodology in the example provided (84 FR 55794) is at odds with our 
confirmation that a productivity bonus will not take into account the 
volume or value of referrals solely because corresponding hospital 
services (that is, designated health services) are billed each time the 
employed physician personally performs a service.
    Response: The example of tiered compensation referenced by the 
commenter related to our proposal regarding fixed-rate compensation. We 
are not finalizing our proposal to consider fixed-rate compensation to 
take into account the volume or value of referrals or other business 
generated by a physician. Therefore, it is unnecessary to further 
address the examples as requested by the commenters in the context of 
the volume or value standard. We note that the regulation at final 
Sec.  411.354(d)(4)(vi) regarding making the existence of a 
compensation arrangement or the amount of a physician's compensation 
contingent on the volume or value of a physician's referrals to a 
particular provider, practitioner, or supplier may apply to the 
commenter's examples. See section II.B.4. of this final rule for a 
further discussion of final Sec.  411.354(d)(4)(vi).

[[Page 77544]]

    Comment: A few commenters asserted that the existing special rules 
at Sec.  411.354(d)(2) and (3) regarding per-unit compensation create 
confusion when considered in light of the new special rules 
interpreting the volume or value standard and other business generated 
standard. Some of the commenters suggested that CMS should remove the 
regulations at Sec.  411.354(d)(2) and (3), because they would no 
longer be necessary if we finalize our proposals at Sec.  411.354(d)(5) 
and (6). The commenters suggested revisions to Sec.  411.354(d)(2) and 
(3) in the event CMS does not finalize the proposals for special rules 
at interpreting the volume or value standard and other business 
generated standard Sec.  411.354(d)(5) and (6). One commenter described 
a hypothetical arrangement under which a hospital contracts with a 
surgeon for professional services, the surgeon performs surgeries at 
the hospital, and the hospital pays the surgeon a fixed amount per 
personally-performed relative value unit (RVU) that is consistent with 
the fair market value of the physician's services. Assuming that the 
compensation would be viewed as not taking into account the volume or 
value of the physician's referrals to the hospital or other business 
generated by the physician for the hospital, the commenter asked 
whether this is the case based on the application of the special rules 
at final Sec.  411.354(d)(5) and (6) or whether it is because the unit-
based compensation satisfies the requirements of the special rules for 
per-unit compensation at Sec.  411.354(d)(2) and (3). The commenter 
then questioned whether the special rules for unit-based compensation 
at Sec.  411.354(d)(2) and (3) would continue to be necessary if we 
finalize our proposals.
    Response: We agree with the commenters that, under the policies 
finalized here, there is effectively no longer a need for the ``unit-
based deeming provision'' at Sec.  411.354(d)(2). The same is true for 
the deeming provision at Sec.  411.354(d)(3). Unit-based compensation 
that does not include a physician's referrals to the entity as a 
variable in the formula used to calculate the physician's (or immediate 
family member's) compensation would not take into account the volume or 
value of the physician's referrals and, therefore, there would be no 
need to apply the special rule at Sec.  411.354(d)(2). Similarly, unit-
based compensation that does not include other business generated by a 
physician for the entity as a variable in the formula used to calculate 
the physician's (or immediate family member's) compensation would not 
take into account the volume or value of other business generated and, 
therefore, there would be no need to apply the special rule at Sec.  
411.354(d)(3). If the formula used to calculate a physician's (or 
immediate family member's) compensation does include the physician's 
referrals to the entity or other business generated by the physician 
for the entity as a variable (for example, a payment of $50 to the 
immediate family member of a physician for each patient who receives 
items or services furnished by the DMEPOS supplier making the payment, 
including items or service referred by the physician), the compensation 
would take into account the volume or value of the physician's 
referrals or other business generated and, under the revisions to Sec.  
411.354(d)(2) and (3) finalized here, the special rules for unit-based 
compensation would not apply.
    On and after the effective date of this final rule, the special 
rules at Sec.  411.354(d)(2) and (3) will be either unnecessary or 
inapplicable to deem unit-based compensation not to take into account 
the volume or value of a physician's referrals or other business 
generated by a physician. However, it is important to preserve the 
regulations at Sec.  411.354(d)(2) and (3) to assist parties, CMS, and 
law enforcement in applying the historical policies in effect at the 
time of the existence of the compensation arrangement being analyzed 
for compliance with the physician self-referral law. Therefore, we are 
not removing the regulations at Sec.  411.354(d)(2) and (3) from the 
physician self-referral regulations, although we are adding language to 
both Sec.  411.354(d)(2) and (3) to make clear that the regulations may 
not be applied to deem unit-based compensation not to take into account 
the volume or value of referrals or other business generated by a 
physician if the compensation formula used to calculate the physician's 
(or immediate family member's) compensation is determined to take into 
account the volume or value of referrals or other business generated 
under final Sec.  411.354(d)(5) or (6). Because the special rules at 
final Sec.  411.354(d)(5) and (6) have prospective application only, we 
are confirming in regulation text at Sec.  411.354(d)(5)(iv) and 
(6)(iv) that they do not apply for purposes of applying the special 
rules on unit-based compensation at Sec.  411.354(d)(2) and (3), which, 
as we explained, remain in our regulations only for historical purposes 
to assist parties, CMS, and law enforcement in applying the historical 
policies in effect at the time of the existence of the compensation 
arrangement being analyzed for compliance with the physician self-
referral law.
    Comment: Several commenters expressed strong support for the 
proposal to remove the term ``varies with'' from the regulations at 
Sec.  411.354(c)(2)(ii) and (iii) identifying when an indirect 
compensation arrangement exists, stating that this would be consistent 
with CMS' expressed intent for the volume or value standard and other 
business generated standard to have the same meaning wherever they 
occur in our regulations. Using the same example from the immediately 
previous comment, one commenter asked whether, under the regulation at 
proposed Sec.  411.354(c)(2), the compensation arrangement would 
constitute an indirect compensation arrangement if the compensation was 
paid to the physician by an affiliate of the hospital with which the 
hospital has a financial relationship, forming an unbroken chain of 
financial relationships between the hospital and the physician. Other 
commenters questioned whether any unbroken chain of financial 
relationships would create an indirect compensation arrangement if CMS 
finalizes its proposals to remove the term ``varies with'' from the 
regulations at Sec.  411.352(c)(2) and establish the special rules 
interpreting the volume or value standard and other business generated 
standard at Sec.  411.354(d)(5) and (6).
    Response: As we stated in the proposed rule, we proposed 
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 (84 FR 55793). Our proposal to 
remove the term ``varies with'' from the regulation at Sec.  
411.354(c)(2) originated with our attempt at standardizing this 
language. Upon consideration of the comments and after developing our 
responses, we are not finalizing our proposal to remove the term 
``varies with'' from Sec.  411.354(c)(2). If finalized as proposed, the 
regulatory scheme outlining the conditions under which an indirect 
compensation arrangement exists would have eliminated most unbroken 
chains of financial relationships between entities that furnish 
designated health services and the physicians who refer to them from 
the scrutiny of the physician self-referral law without affording CMS 
the opportunity to confirm that the compensation paid to the physician 
does not pose a risk of the harm section 1877 of the Act is intended to 
avoid, namely, that the compensation could improperly influence the 
physician's

[[Page 77545]]

medical decision making. We continue to believe in the importance of 
ensuring that compensation paid to a physician by someone (or some 
organization) that has a financial relationship with an entity does not 
improperly influence the physician's medical decision making, resulting 
in the overutilization of designated health services, patient steering, 
or other program or patient abuse. However, we believe that the 
regulatory scheme that casts a wide net to include the vast majority of 
unbroken chains of financial relationships between an entity and a 
physician and then weeds out most of those unbroken chains through a 
showing of compliance with the requirements of the special rules at 
Sec.  411.354(d)(2) and (3) and the exception at Sec.  411.357(p) is 
unnecessarily burdensome. The identification of truly problematic 
physician compensation may be achieved at an earlier stage of analysis. 
Therefore, we are revising Sec.  411.354(c)(2) to more precisely 
identify compensation arrangements that may pose a risk of program or 
patient abuse.
    As we stated in Phase I, the existence of a financial relationship 
between an entity and a physician (or the immediate family member of a 
physician) is the factual predicate triggering the application of 
section 1877 of the Act (66 FR 864). (For a similar discussion in Phase 
II, see 69 FR 16057.). Because section 1877 of the Act expressly 
contemplates that a financial relationship and, specifically, a 
compensation arrangement, may be directly or indirectly between an 
entity and a physician (or an immediate family member of a physician), 
in Phase I, we established a three-part test for determining when an 
indirect compensation arrangement exists (66 FR 865 through 866). Once 
all three parts of the test are met, there exists an indirect 
compensation arrangement that must satisfy the requirements of an 
applicable exception in order to avoid the referral and billing 
prohibitions of the physician self-referral law. Also in Phase I, we 
finalized the exception at Sec.  411.357(p) for indirect compensation 
arrangements that would apply to unbroken chains of financial 
relationships that result in indirect compensation arrangements. In 
Phase I, we explained that some of the statutory and regulatory 
exceptions operate to exclude certain categories of services from the 
reach of section 1877 of the Act when certain requirements are 
satisfied. In effect, services described in those exceptions are not 
designated health services for purposes of the physician self-referral 
law (66 FR 867). The service-based exceptions are found in Sec.  
411.355 of our regulations. Thus, even if there is an indirect 
compensation arrangement between an entity and a physician, the 
service-based exceptions may apply to and protect referrals of the 
particular services described in the exception. However, referrals for 
designated health services that do not satisfy the requirements of an 
applicable service-based exception would be prohibited unless the 
indirect compensation arrangement satisfies all the requirements of the 
exception for indirect compensation arrangements at Sec.  411.357(p) 
(66 FR 867) or, if the entity is a MCO or IPA, the exception at Sec.  
411.357(n) for risk-sharing arrangements. (We refer readers to section 
II.A.2.b.(4). of this final rule for a discussion of the applicability 
of the exception at Sec.  411.357(n) to indirect compensation 
arrangements.) In Phase I, we also finalized special rules related to 
unit-based compensation at Sec.  411.354(d)(2) and (3) to be applied 
when analyzing compliance with the requirements of the exceptions in 
Sec.  411.357, including the exception for indirect compensation 
arrangements at Sec.  411.357(p) (66 FR 876 through 878).
    Following the publication of Phase I, we received comments 
regarding the interplay of the definition of ``indirect compensation 
arrangement,'' the exception at Sec.  411.357(p) for indirect 
compensation arrangements, and the special rules that deem unit-based 
compensation not to take into account the volume or value of referrals 
or other business generated at Sec.  411.354(d)(2) and (3), 
respectively, when certain conditions are met. The commenters 
questioned whether an indirect compensation arrangement exists at all 
if a referring physician receives time-based or unit-of-service based 
compensation that is fair market value and does not vary over the term 
of the arrangement--that is, compensation that, by definition, does not 
take into account the volume or value of referrals or other business 
generated under Sec.  411.354(d)(2) and (3). Commenters noted that, 
similarly, the exception for indirect compensation arrangements at 
Sec.  411.357(p), like Sec.  411.354(d)(2) and (3), does not look to 
aggregate compensation and incorporates a fair market value test. Given 
this, the commenters pointed out that the ultimate result would be the 
same whether time-based and unit-of-service based compensation 
arrangements are initially excluded from the definition of ``indirect 
compensation arrangement'' at Sec.  411.354(c)(2) or included in the 
definition and then excepted under Sec.  411.357(p) after applying the 
special rules at Sec.  411.354(d)(2) and (3). In response, we stated 
that, although we agree that the ultimate result may be the same--time, 
unit-of-service, or other ``per click'' based arrangements are 
generally permitted if they are at fair market value without reference 
to referrals--we believe that [the Phase I regulatory] construct more 
closely corresponds to the statutory treatment of direct compensation 
arrangements (69 FR 16059). We elected to retain the regulatory 
structure finalized in Phase I, noting a two-fold intent. We stated 
that we intended to include in the definition of ``indirect 
compensation arrangement'' any compensation arrangements (including 
time-based or unit-of-service based compensation arrangements) where 
the aggregate compensation received by the referring physician varies 
with, or otherwise takes into account, the volume or value of referrals 
or other business generated between the parties, regardless of whether 
the individual unit of compensation qualifies under Sec.  411.354(d)(2) 
and (3) (69 FR 16059). We continued that we intended to exclude under 
the exception at Sec.  411.357(p) that subset of indirect compensation 
arrangements where the compensation is fair market value and does not 
reflect the volume or value of referrals or other business generated 
(and the other requirements of the exception are satisfied). We stated 
that per-unit compensation will meet this test if it complies with the 
conditions of Sec.  411.354(d)(2) and (3).
    In developing our response to the commenters to the proposed rule, 
we revisited the regulatory construct for determining which unbroken 
chains of financial relationships between entities and physicians (or 
immediate family members of a physician) establish indirect 
compensation arrangements and how to determine if they pose a risk of 
program or patient abuse. One of the driving goals of this final 
rulemaking, which is a shared goal of the Patients over Paperwork 
initiative and the Regulatory Sprint, is to reduce unnecessary burden 
on providers and suppliers. As we discussed in section I.D. of this 
final rule, our final policies are intended to balance genuine program 
integrity concerns against the considerable burden of the physician 
self-referral law's referral and billing prohibitions. We see no need 
to continue to treat compensation arrangements that may qualify as 
``indirect compensation arrangements'' in the exact same way that the 
statute treats direct compensation arrangements

[[Page 77546]]

when that construct creates unnecessary burden on the regulated 
industry. We believe that it is possible to simplify the analysis of 
whether an unbroken chain of financial relationships between an entity 
and a physician (or immediate family member of a physician) poses a 
risk of program or patient abuse without raising program integrity 
concerns, and we are finalizing revisions to the regulations at Sec.  
411.354(c)(2) that we believe achieve the same result as the Phase I 
regulatory construct in protecting against program or patient abuse but 
reduce unnecessary burden on the regulated industry.
    We are revising our regulations at Sec.  411.354(c)(2)(ii) to 
effectively incorporate and apply the conditions of the special rules 
on unit-based compensation at the definitional level when determining 
whether an indirect compensation arrangement exists that must satisfy 
the requirements of an applicable exception in order to avoid the 
prohibitions of the physician self-referral law. Unless all the 
elements of final Sec.  411.354(c)(2)(i), (ii) and (iii) exist, the 
unbroken chain of financial relationships between an entity furnishing 
designated health services and a physician (or immediate family member 
of a physician) will not be considered an indirect compensation 
arrangement. Nor will the unbroken chain of financial relationships be 
considered a direct compensation arrangement under Sec.  411.354(c)(1). 
Therefore, the referral and billing prohibitions of the physician self-
referral law will not apply. Under the regulations finalized in this 
final rule, an unbroken chain of financial relationships between an 
entity and a physician will be considered an indirect compensation 
arrangement if the physician (or immediate family member of the 
physician) receives aggregate compensation from the person or entity in 
the chain with which the physician (or immediate family member) has a 
direct financial relationship that varies with the volume or value of 
referrals or other business generated by the physician for the entity 
furnishing the designated health services, and any of the following are 
true: (1) The individual unit of compensation received by the physician 
(or immediate family member) is not fair market value for items or 
services actually provided; (2) the individual unit of compensation 
received by the physician (or immediate family member) is calculated 
using a formula that includes the physician's referrals to the entity 
furnishing designated health services 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 (3) the individual unit of 
compensation received by the physician (or immediate family member) is 
calculated using a formula that includes other business generated by 
the physician for the entity furnishing designated health services 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. In 
addition, the entity must have actual knowledge of, or act in reckless 
disregard or deliberate ignorance of, the fact that the referring 
physician (or immediate family member) receives aggregate compensation 
that varies with the volume or value of referrals or other business 
generated by the referring physician for the entity.
    We acknowledge that our final policies will reduce the number of 
unbroken chains of financial relationships that fall within the ambit 
of the physician self-referral law as indirect compensation 
arrangements (although they may still implicate the anti-kickback 
statute, depending on the facts and circumstances). We also acknowledge 
that, by analyzing unit-based compensation at the definitional stage at 
final Sec.  411.354(c)(2)(ii), many unbroken chains of financial 
relationships will no longer be required to satisfy the writing 
requirement at Sec.  411.357(p)(2), potentially limiting our and law 
enforcement's visibility into the compensation received by physicians 
who make referrals for designated health services to the entities at 
the other end of the unbroken chain of financial relationships between 
them. However, as we have stated many times in previous rulemakings and 
in this final rule, we believe that it is a common practice (if not the 
best practice), and required by other Federal and State statutes and 
regulations, for parties to reduce their arrangements to writing, 
including the compensation and other terms of their arrangements. Also, 
we remind readers that compliance with the physician self-referral law 
is a prerequisite for submitting a claim to Medicare for a designated 
health service referred by a physician who has (or whose immediate 
family member has) a financial relationship with the entity submitting 
the claim. Included in the burden of proof to show that a claim for 
designated health services is permissible is the burden to show either 
that the physician self-referral law does not apply because the parties 
do not have a financial relationship within the meaning of the 
physician self-referral law or, if the law does apply because the 
parties have a financial relationship within the meaning of the 
physician self-referral law, that all the requirements of an applicable 
exception are satisfied. An entity's mistaken belief that no indirect 
compensation arrangement exists does not eliminate the need to satisfy 
the requirements of an applicable exception to the physician self-
referral law.
    Comment: One commenter requested that we deem certain compensation 
formulas that do include the physician's referrals to an entity or 
other business generated by a physician for the entity as a variable to 
nonetheless not take into account the volume or value of referrals or 
other business generated if the compensation arrangement is consistent 
with value-based care goals but does not qualify for or satisfy the 
requirements of the new exceptions at Sec.  411.357(aa).
    Response: We decline to permit any arrangement under which 
compensation is determined using a formula that includes a physician's 
referrals to or other business generated for the entity as a variable 
and creates the positive or negative correlation with the compensation 
paid to or from the physician, as applicable. If a compensation 
arrangement does not qualify for or does not satisfy all the 
requirements of an exception at new Sec.  411.357(aa), the compensation 
paid under the arrangement may not take into account the volume or 
value of the physician's referrals or other business generated by the 
physician for the entity. Although the new exceptions at Sec.  
411.357(aa) do not include a requirement that the compensation does not 
take into account the volume or value of a physician's referrals or 
other business generated by the physician, they include substitute 
safeguards against program or patient abuse through their limited 
application and included requirements. Permitting an arrangement to 
circumvent those safeguards and the volume or value and other business 
generated standards of the traditional exceptions would pose a risk of 
program or patient abuse.
    Comment: One commenter requested clarification of the term ``other 
business generated.'' The commenter stated that industry guidance 
suggests that other business generated means services that are not 
designated health services. The commenter proposed that the definition 
of ``other business generated'' should include only services paid by 
government payors, and should not

[[Page 77547]]

extend to services paid by private or commercial payors.
    Response: Our interpretation of the term ``other business 
generated'' is longstanding and settled. In Phase I, we stated that, 
based on our review of the legislative history, we believe that the 
Congress intended the ``other business generated'' language to be a 
limitation on the compensation or payment formula parallel to the 
statutory and regulatory prohibition on taking into account referrals 
of designated health services. We further stated that, in the 
provisions in which the phrase appears, affected payments cannot be 
based or adjusted in any way on referrals of designated health services 
or on any other business referred by the physician, including other 
Federal and private pay business (66 FR 877). We see no reason to 
revisit this interpretation as suggested by the commenter.
    Comment: A few commenters objected to our proposals to establish 
special rules on the volume or value standard and the other business 
generated standard based on what appear to be fair market value 
concerns. The commenters provided the example of a hospital that 
determines the amount of fixed-rate compensation at a higher level than 
a physician practice might pay the physician because the hospital knows 
that it can direct the physician's referrals to the hospital and its 
affiliates to ``make up the difference'' in billings for those 
services.
    Response: We assume the commenters are referring to compensation 
that is based on the physician's personally performed services and not 
referrals of designated health services or other business generated by 
the physician for the entity paying the compensation, for instance, a 
salary of $300,000 per year. Although the formula for calculating 
fixed-rate compensation for a physician's personally performed services 
would not include the physician's referrals to the entity or other 
business generated by the physician for the entity as variables--in our 
example, the physician's compensation would be $300,000 x the number of 
years of the arrangement's duration--the compensation arrangement must 
satisfy all the requirements of an applicable exception in order not to 
trigger the referral and billing prohibitions of the physician self-
referral law. Compensation that is inflated to recognize the ability of 
the hospital to receive payment under the IPPS and OPPS for designated 
health services that it requires the physician to refer to the hospital 
or a specific provider, practitioner, or supplier within the hospital's 
health system may not be fair market value for the physician's 
personally performed services under our existing definition of ``fair 
market value'' and the revised definition of ``fair market value'' 
finalized in this final rule. See section II.B.5. of this final rule 
for a detailed discussion of our final policies with respect to the 
definition of ``fair market value.'' Also, as described above and in 
more detail in section II.B.4. of this final rule, if any compensation 
paid to the referring physician is conditioned on the physician's 
referrals to a particular provider, practitioner, or supplier, the 
arrangement must satisfy the conditions of Sec.  411.354(d)(4).
4. Patient Choice and Directed Referrals (Sec.  411.354(d)(4))
    Historically, when the conditions of the special rule at Sec.  
411.354(d)(4) are met, compensation from a bona fide employer, under a 
managed care contract, or under a personal service arrangement is 
deemed not to take into account the volume or value of referrals, even 
if the physician's compensation is 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 (66 FR 878). We 
determined that we would not consider a physician's compensation to 
take into account the volume or value of his or her referrals, as long 
as the directed 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 (66 FR 878). 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.
    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. 
In the proposed rule, we expressed concern that, given our proposed 
interpretation of the volume or value standard, Sec.  411.354(d)(4) may 
apply in fewer instances, if at all, to serve these important goals. To 
reiterate how critical these protections are, we proposed 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). To that end, we proposed 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 conditions of the revised special rule at Sec.  411.354(d)(4). 
In making this proposal, we relied 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 solicited comment as 
to whether, given the nature of academic medical centers, the 
conditions of revised Sec.  411.354(d)(4) are necessary. We are 
finalizing our proposal to include an affirmative requirement that the 
compensation arrangement meet the conditions of the special rule at 
Sec.  411.354(d)(4) in all of the exceptions identified in the proposed 
rule. As explained in section II.E.1. of this final rule, we are also 
finalizing this requirement in the new exception for limited 
remuneration to a physician at Sec.  411.357(z). Although the 
requirement is not included in the new exceptions for value-based 
arrangements at final Sec.  411.357(aa), as discussed in section 
II.A.2. of this final rule, we have incorporated into these exceptions 
specific requirements related to remuneration paid to a physician that 
is conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier.
    In the 1998 proposed rule, highlighting stakeholder inquiries

[[Page 77548]]

regarding whether an arrangement fails to meet the volume or value 
standard only in situations in which a physician's payments from an 
entity fluctuate in a manner that reflects referrals, we expressed our 
view that an arrangement can also fail to meet this standard in some 
cases when a physician's payments from an entity are stable, but 
predicated, either expressly or otherwise, on the physician making 
referrals to a particular provider. We gave the example of a hospital 
that includes as a condition of a physician's employment the 
requirement that the physician refer only within the hospital's own 
network of ancillary service providers, such as to the hospital's own 
home health agency. We stated that, in these situations, a physician's 
compensation reflects the volume or value of his or her referrals in 
the sense that the physician will receive no future compensation if he 
or she fails to refer as required. We continue to believe that 
conditioning a physician's future compensation on his or her referrals 
could improperly influence the physician's medical decision making, 
potentially impacting patient choice or the utilization of services. 
However, upon further examination of the policy goals behind our 
statements in the 1998 proposed rule (63 FR 1700), the special rule 
finalized in Phase I (66 FR 878), and the comments on the proposed 
rule, we no longer believe that compensation predicated, either 
expressly or otherwise, on the physician making referrals of designated 
health services to a particular provider, practitioner, or supplier 
should be evaluated for compliance with the volume or value standard.
    As described in the proposed rule (84 FR 55789) and in section 
II.B.3. of this final rule, after reviewing the statute and our 
regulations in a fresh light, we now believe that the volume or value 
standard is most appropriately interpreted as relating to how 
compensation is calculated; that is, what formula is used to determine 
the amount of the physician's compensation. We are finalizing special 
rules at Sec.  411.354(d)(5)(i) and (6)(i) that set forth mathematical 
formulas that identify compensation that takes into account the volume 
or value of a physician's referrals. However, a review of the 
mathematical formula that determines the amount of the physician's 
compensation would not be sufficient to identify a referral requirement 
that could lead to program or patient abuse. Rather, payment 
conditioned on the physician's referrals of designated health services 
to a given entity, such as an employer or an affiliated entity, should 
be evaluated for compliance with the special rule at Sec.  
411.354(d)(4), which is mandatory under the policies finalized in this 
final rule.
    As we explained in the proposed rule (84 FR 55794) and our response 
to comments in section II.B.3. of this final rule, there is a risk of 
program or patient abuse when a physician will receive no future 
compensation if he or she fails to refer as required. The same is true 
if the amount of the physician's compensation is tied to the 
physician's referral to a particular provider, practitioner, or 
supplier. To address this risk, we are revising Sec.  411.354(d)(4) to 
include a condition at Sec.  411.354(d)(4)(vi) that neither the 
existence of the compensation arrangement nor the amount of the 
compensation is contingent on the number or value of the physician's 
referrals to the particular provider, practitioner, or supplier. This 
condition must be met regardless of whether the physician's 
compensation takes into account the volume or value of his or her 
referrals to the entity with which the physician has the compensation 
arrangement. As applied, under final Sec.  411.354(d)(4)(vi), where an 
entity requires a physician to refer patients for designated health 
services to a particular provider, practitioner, or supplier and the 
applicable exception requires compliance with Sec.  411.354(d)(4), in 
addition to meeting the other conditions of Sec.  411.354(d)(4), 
neither the existence of the compensation arrangement nor the amount of 
the compensation may be contingent on the number or value of the 
physician's referrals to the particular provider, practitioner, or 
supplier. The requirement to make referrals to a particular provider, 
practitioner, or supplier may require that the physician refer an 
established percentage or ratio of the physician's referrals to a 
particular provider, practitioner, or supplier.
    In the proposed rule, we described this type of contingency as a 
direct ``if X, then Y'' correlation (84 FR 55794). The proposed special 
rule built upon the concerns described above, which we originally 
described in the 1998 proposed rule as relating to a nexus between 
fixed-rate compensation and the volume or value of a physician's 
compensation. We believe that the condition at final Sec.  
411.354(d)(4)(vi) provides a clearer standard for stakeholders and 
better addresses our concerns than the proposed special rule that would 
have considered fixed-rate compensation to take into account the volume 
or value of referrals if 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.
    We provide the following example to illustrate the application of 
our final regulation at Sec.  411.354(d)(4)(vi). Assume that a hospital 
directly employs a cardiologist to treat patients in the hospital's 
outpatient cardiology department. The physician is paid a 
predetermined, unvarying annual salary. Under the employment 
arrangement, the hospital requires the physician to refer patients to 
the hospital or other providers and suppliers wholly owned by the 
hospital, unless 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. When 
negotiating an extension of the employment arrangement and revised 
compensation terms, the hospital reviews the past performance of the 
physician, including the physician's referrals for diagnostic testing. 
At final Sec.  411.357(c)(5), the exception for bona fide employment 
relationships requires compliance with the conditions of the special 
rule for directed referrals at Sec.  411.354(d)(4). (The exceptions for 
personal service arrangements and fair market value compensation have 
identical requirements at Sec.  411.357(d)(1)(viii) and (l)(7), 
respectively.) Under Sec.  411.354(d)(4)(vi), the amount of the 
physician's compensation may not be contingent on the number or value 
of the physician's referrals under the directed referral requirement. 
Thus, if, for example, the hospital increases the physician's 
compensation in the renewal term only if the physician made a targeted 
number of referrals for diagnostic testing to the hospital or the 
designated wholly-owned providers and suppliers in the current term, 
the compensation would not meet the condition at Sec.  
411.354(d)(4)(vi). Similarly, if, for example, the hospital refuses to 
renew the employment arrangement (or terminates it in the current term) 
unless the value of the physician's diagnostic testing referrals 
generates sufficient profit to the hospital (or its wholly-owned 
providers and suppliers), the existence of the compensation arrangement 
would be contingent on the value of the physician's referrals in 
violation of Sec.  411.354(d)(4)(vi).

[[Page 77549]]

    We also proposed 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. The 
proposed revisions were intended to clarify 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). (See section II.D.5. of this 
final rule for a detailed discussion of the ``set in advance'' deeming 
provision at Sec.  411.354(d)(1).) We proposed to clarify that the 
physician's compensation must be consistent with the fair market value 
of the services performed. In addition, we proposed 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 in response to the comment in section II.B.1. of this final rule, 
these are separate standards, and compliance with one is not contingent 
on compliance with the other. We also proposed nonsubstantive revisions 
for clarity. We noted that, although 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 
regulation, we would leave the regulation in Sec.  411.354(d), which 
sets forth special rules on compensation, rather than include it in 
Sec.  411.354(e), which sets forth special rules for compensation 
arrangements. We are finalizing the proposed restructuring of and 
nonsubstantive revisions to Sec.  411.354(d)(4).
    We received the following comments and our responses follow.
    Comment: Many commenters recognized that directed referral 
requirements would be permitted without limitation if we finalized our 
proposed interpretation of the volume or value standard at Sec.  
411.354(d)(5). Commenters agreed that compliance with the conditions of 
the special rule at Sec.  411.354(d)(4) provides important protections 
for patients and the independence of a physician's medical decision 
making. Several commenters supported our proposal to continue this 
protection by including 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 an affirmative requirement for compliance 
with Sec.  411.354(d)(4) when a physician's compensation is conditioned 
on his or her referrals to a particular provider, practitioner, or 
supplier.
    Response: We agree with the commenters that patient choice, 
independent medical decision making, and avoiding interference with 
managed care contracts should be protected. We are finalizing our 
proposals and, as discussed in section II.E.1. of this final rule, are 
including the requirement in the new exception for limited remuneration 
to a physician at Sec.  411.357(z). As the previous commenter 
described, directed referral requirements can take the form of 
conditioning the existence of the arrangement itself on the physician's 
referrals to a particular provider, practitioner, or supplier, or they 
may condition the amount of the physician's compensation on his or her 
referrals to a particular provider, practitioner, or supplier. Because 
both types of conditioning represent threats to patient choice and the 
independence of a physician's medical decision making, in order to 
reflect both of these conditioning requirements, we are revising the 
language of Sec.  411.354(d)(4), with which the compensation 
arrangement must comply under the exceptions at Sec. Sec.  411.355(e) 
and 411.357(c), (d)(1), (d)(2), (h), (l), (p), and (z). In each of the 
exceptions noted, if the physician referrals are directed to a 
particular provider, practitioner, or supplier, the arrangement must 
satisfy the conditions of Sec.  411.354(d)(4).
    Comment: A few commenters stated that they did not oppose the 
policy stated in the proposed rule (84 FR 55796) that Sec.  
411.354(d)(4) applies to both the situation where the compensation 
arrangement is contingent on the physician's required referrals and the 
situation where the compensation amount is contingent on the 
physician's required referrals, but requested guidance on the precise 
function of the special rule at Sec.  411.354(d)(4) in light of our 
proposed interpretation of the volume or value standard. One of these 
commenters focused on the contractual terms between the parties to the 
compensation arrangement, and asked whether the volume or value 
standard would be violated if the breach of a directed referral 
requirement resulted only in termination of the arrangement, rather 
than an impact on the amount of the physician's compensation from the 
entity. This commenter provided a second example of a directed referral 
requirement that it stated would affect the amount of a physician's 
compensation. Under that example, a physician is paid different 
stipulated percentages of a bonus pool depending on the percentage of 
the physician's referrals that are ``in network'' (that is, to a 
particular provider, practitioner, or supplier). The commenter 
requested clarification of the applicability of the special rule at 
Sec.  411.354(d)(4) and whether provisions such as those described 
would violate the volume or value standard as proposed. A different 
commenter described a compensation arrangement under which a physician 
is paid an amount that does not result from a mathematical model tied 
to individual referrals of designated health services, but rather a 
``model'' under which the entity knows it will generate revenue by 
requiring physician referrals to a particular provider, practitioner, 
or supplier. The commenter stated that, under the scenario presented, 
the entity is not rewarding (paying) the physician for referrals but 
would terminate the physician's employment if he or she does not 
actively participate in the mandated referrals. The commenter asked 
whether CMS views this type of compensation model as taking into 
account the volume or value of the physician's referrals.
    Response: In light of this specific comment and other similar 
comments, we revisited the history of Sec.  411.354(d)(4) and our 
previously-stated concerns regarding directed referral requirements 
that ultimately led to the establishment of the special rule. As we 
stated in Phase I, we understand that directed referral requirements 
are a common and integral part of employment relationships, personal 
service arrangements, and managed care contracts (66 FR 878). Even so, 
we continue to believe that payments tied to referral requirements can 
be abused, and appropriate safeguards should be in place to protect 
against the risk of program or patient abuse when an entity directs a 
physician where to make referrals of designated health services. After 
review of the regulatory history of our interpretation of the volume or 
value standard and the establishment of the special rule at Sec.  
411.354(d)(4), we now believe that the best approach to addressing the 
risks of directed referral requirements is to affirmatively require 
compliance with the conditions of

[[Page 77550]]

Sec.  411.354(d)(4) whenever an entity conditions the compensation of a 
physician with whom it has an employment relationship, personal service 
arrangement, or managed care contract on the physician's referrals for 
designated health services to a particular provider, practitioner, or 
supplier. Compensation conditioned, either expressly or otherwise, on 
the physician making referrals of designated health services to a 
particular provider, practitioner, or supplier should not be evaluated 
for compliance with the volume or value standard. Because we are 
finalizing requirements in certain exceptions for affirmative 
compliance with the conditions of Sec.  411.354(d)(4), and directed 
referral requirements will no longer be considered in the context of 
compliance with the volume or value standards, we are applying the 
condition at final Sec.  411.354(d)(4)(vi), rather than the final 
regulation at Sec.  411.354(d)(5)(i), in our response to the 
commenters.
    The condition at Sec.  411.354(d)(vi) applies to a directed 
referral requirement which, if not achieved, would result in the 
termination of a physician's compensation arrangement, even if it would 
not impact the amount of the physician's compensation from the entity. 
The condition at Sec.  411.354(d)(4)(vi) prohibits making the existence 
of a compensation arrangement contingent on the number or value of the 
physician's referrals to a particular provider, practitioner, or 
supplier. If the compensation arrangement would be terminated if the 
physician failed to refer a sufficient number of patients for 
designated health services, or if the value of the physician's 
referrals of designated health services failed to achieve the target 
established under the directed referral requirement, the directed 
referral requirement would be impermissible and the compensation 
arrangement would not satisfy the applicable exception's requirement of 
compliance with Sec.  411.354(d)(4). We emphasize that Sec.  
411.354(d)(4)(vi) does not prohibit directed referral requirements 
based on an established percentage--rather than the number or value--of 
a physician's referrals. Therefore, if the directed referral 
requirement in the commenter's example provided for termination of the 
compensation arrangement if the physician failed to refer 90 percent, 
for example, of his or her patients to a particular provider, 
practitioner, or supplier, it would not run afoul of the special rule 
at Sec.  411.354(d)(4) or jeopardize compliance with the requirement of 
the applicable exception.
    With respect to the commenter's second example that ties the amount 
of the physician's compensation to achievement of a directed referral 
requirement, the condition at Sec.  411.354(d)(4)(vi) would apply in 
the same manner. A directed referral requirement under which a 
physician is paid different stipulated percentages of a bonus pool 
depending on the percentage of the physician's referrals that are ``in 
network'' (that is, to a particular provider, practitioner, or 
supplier) would not be categorically prohibited under Sec.  
411.354(d)(4)(vi); however, we caution that the composition of the 
bonus pool must be analyzed to ensure that the formula for the 
compensation ultimately paid to the physician does not include 
referrals of designated health services or other business generated by 
the physician as a variable. Also, if the directed referral requirement 
was tied to the number or value of the physician's referrals, it would 
run afoul of the special rule at Sec.  411.354(d)(4) and and the 
compensation arrangement would not satisfy the applicable exception's 
requirement of compliance with Sec.  411.354(d)(4).
    Comment: One commenter expressed support for the affirmative 
requirement for compliance with the conditions of Sec.  411.354(d)(4) 
where a physician is directed to refer patients to a particular 
provider, practitioner, or supplier under the physician's compensation 
arrangement with the entity directing the referrals. The commenter 
recommended that we finalize our proposal to make the compliance 
requirement mandatory, and that we apply the rule where the referral 
requirement is not only express, but where it occurs as the practical 
result of processes that steer a physician's referrals for designated 
health service to a provider, practitioner, or supplier selected by the 
entity.
    Response: The affirmative obligation finalized in the exceptions at 
Sec. Sec.  411.355(e) and 411.357(c), (d)(1), (d)(2), (h), (l), (p), 
and (z) is not limited to express or written requirements to refer 
patients to particular provider, practitioner, or supplier selected by 
the entity paying the compensation. Rather, the condition at Sec.  
411.354(d)(4)(vi), as finalized, prohibits making the existence of the 
compensation arrangement or any compensation paid to the referring 
physician contingent on the physician's referrals to a particular 
provider, practitioner, or supplier.
    Comment: One commenter expressed general agreement with the 
proposals to include compliance with the conditions of Sec.  
411.354(d)(4) as an affirmative requirement in exceptions applicable to 
compensation for physician services in those instances where the 
physician's compensation is conditioned on the physician's referrals to 
a particular provider, practitioner, or supplier. The commenter also 
supported leaving the regulation in Sec.  411.354(d)(4), rather than 
include it with other special rules related to compensation 
arrangements at Sec.  411.354(e).
    Response: We are finalizing our proposals with the modifications 
explained in the responses to other comments. We agree with the 
commenter that the regulation should remain at Sec.  411.354(d)(4). We 
believe this will avoid disruption with stakeholder compliance efforts 
and our enforcement efforts.
    Comment: One commenter urged CMS not to adopt an affirmative 
requirement to comply with the conditions of Sec.  411.354(d)(4) when a 
physician's compensation is conditioned on the physician's referrals to 
a particular provider, practitioner, or supplier. Despite its stated 
support for patient preference in referrals, the commenter asserted 
that the requirement would place additional burden on physicians and 
other providers.
    Response: Where such referral requirements have existed, they have 
historically implicated the volume or value standard under our historic 
interpretation of that standard. Thus, parties would have had to comply 
with the conditions of Sec.  411.354(d)(4) in order to be assured not 
to run afoul of the volume or value standard, or offer some other proof 
of compliance with the volume or value standard. This is not a new 
requirement.
    Comment: A few commenters discussed what they termed ``employee 
workplace requirements'' that require an employed physician to treat 
the employer's patients in a specified workplace, typically the 
location of a medical practice or clinic and the address of an 
affiliated hospital. The commenters questioned whether such 
requirements were of concern to CMS. The commenters requested that CMS 
provide guidance on employee workplace requirements, suggesting that 
several approaches might be appropriate. The commenters offered that 
CMS could take the position that employee workplace requirements are 
not directed referral requirements that trigger the need for compliance 
with the volume or value standard because the employed physician is 
merely restricted by his or her employment from working

[[Page 77551]]

elsewhere and is not expressly required to refer patients to the 
employer. In the alternative, the commenters offered that CMS could 
take the position that such workplace requirements are directed 
referral requirements because the employer is effectively requiring the 
physician to refer his or her patients to the employer and, for 
example, an affiliated hospital for designated health services. If so, 
the commenters requested that CMS confirm that Sec.  411.354(d)(4) 
requires only that the employer permits the physician to refer the 
patient to another physician who can provide the services (such as a 
surgery or other procedure) at a different location based on patient 
preference, payor requirements, or the best medical interest of the 
patient. The commenters requested specific confirmation that Sec.  
411.354(d)(4) does not require the employer to permit the employed 
physician to personally treat the patient in a location other than that 
specified in the physician's employment contract.
    Response: Under the policies finalized in this final rule, a 
directed referral requirement will not trigger analysis for compliance 
with the volume or value standard at final Sec.  411.354(d)(5). 
However, a compensation arrangement will have to satisfy the conditions 
of Sec.  411.354(d)(4) if any of the physician's compensation is 
conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier and the parties intend to rely on the 
exception at Sec.  411.355(e) or Sec.  411.357(c), (d)(1), (d)(2), (h), 
(l), (p), or (z). The commenter is correct that the requirement to 
comply with Sec.  411.354(d)(4) is not intended to interfere with 
employer's rights or operations or infringe on the employer-employee 
relationship. The condition at Sec.  411.354(d)(4)(iv)(B) requires only 
that 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. Requiring that the employed physician refer the 
patient to another physician for treatment is permissible, provided 
that the referral is appropriate. We wish to make clear that the 
permissibility of the referral to another physician for purposes of the 
physician self-referral law has no bearing on whether the employed 
physician complies with any State law and common law requirements, such 
as laws regarding patient abandonment.
    Comment: Many commenters noted that the term ``referrals'' is used 
throughout our physician self-referral regulations. Commenters stated 
that, although the term is defined at Sec.  411.351, they were 
uncertain whether the term ``referrals'' has the meaning ascribed to it 
at Sec.  411.351 in all instances in which it appears in the 
regulations. Several commenters asked if the term ``referrals'' in 
Sec.  411.354(d)(4) is intended to encompass more than the defined term 
``referrals'' at Sec.  411.351. One commenter stated that, if the 
meaning of ``referrals,'' as used at Sec.  411.354(d)(4), is not 
limited to the definition at Sec.  411.351, the proposed inclusion of a 
requirement for compliance with the conditions of Sec.  411.354(d)(4) 
as an element of the exceptions for bona fide employment relationships, 
personal service arrangements, and others has the effect of introducing 
an all-payor volume or value standard into these exceptions. The 
commenters requested that CMS expressly clarify in commentary that, 
unless otherwise noted, when ``referrals'' appears in the physician 
self-referral regulations, it has the meaning set forth at Sec.  
411.351.
    Response: The introductory language to Sec.  411.351 states clearly 
that, unless the context indicates otherwise, the term ``referral'' has 
the meaning set forth in Sec.  411.351. The term ``referral,'' as used 
at Sec.  411.354(d)(4) and the new requirement in certain exceptions 
that, if remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the conditions of Sec.  
411.354(d)(4) have the meaning set forth in the definition of 
``referral'' at Sec.  411.351. In Phase I, we discussed the scope of 
the term ``referral'' with reference to a requirement that a physician 
refer designated health services to a given entity (66 FR 878). As we 
stated above in section II.B.2. of this final rule, unless the context 
indicates otherwise, the term ``referral'' has the meaning set forth in 
Sec.  411.351 throughout the physician self-referral regulations, 
including in the special rules on compensation at Sec.  411.354(d).
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 the 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

[[Page 77552]]

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 that 
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 our then-interpretation of the fair market value standard 
in light of our Phase I interpretation of the requirement that 
compensation not take into account other business generated, we stated 
that--

[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 (69 FR 16107). We made no substantive changes 
to the definition of ``fair market value'' in Phase III or in any of 
our subsequent rulemaking.
    As a preliminary matter and as described previously in section 
II.B.1. of this final 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 final 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 or by the physician). For these 
reasons and as described further below, we are finalizing our proposal 
to eliminate the connection to the volume or value standard in the 
definitions of ``fair market value'' and ``general market value.''
    Our proposals to revise the definition of ``fair market value'' at 
Sec.  411.351 were premised on our goal to give meaning to the 
statutory language at section 1877(h)(3) of the Act. As described 
previously in this section II.B.5., 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 proposed 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

[[Page 77553]]

applicable to the rental of office space. (We proposed 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 
are finalizing our proposals to restructure the regulation in this way. 
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. Under the final regulation at Sec.  411.351, generally, fair 
market value means the value in an arm's-length transaction, consistent 
with the general market value of the subject transaction. With respect 
to the rental of equipment, fair market value means the value in an 
arm's-length transaction 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, fair market value means the value in an 
arm's length transaction 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 
are not finalizing the proposed references to ``like parties and under 
like circumstances.'' We note that the structure of the final 
regulation merely reorganizes for clarity, but does not significantly 
differ from, the statutory language at section 1877(h)(3) of the Act.
    We also proposed changes to the definition of ``general market 
value,'' which, until now, was included within the definition of fair 
market value at Sec.  411.351. As we explained in the proposed rule, 
the definition of ``fair market value'' finalized in Phase II states 
the following, some of which relates to fair market value and some of 
which relates to the included term, ``general market value'' (84 FR 
55797). Numerical references are added here for ease but did not appear 
in the regulation at Sec.  411.351:
    (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 stated in the proposed rule that we no longer see 
the benefit of connecting 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 (not general market value) 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,'' \8\ not general market value. Therefore, we 
considered whether current Sec.  411.351 includes an appropriate 
definition for ``general market value.''
---------------------------------------------------------------------------

    \8\ 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 stated in the proposed rule that 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. We discussed in detail the 
basis for our proposals to revise the definition of ``general market 
value'' in accordance with our belief that the Congress used the term 
``general market value'' to ensure that the fair market value of the 
remuneration is generally consistent with the valuation that would 
result using accepted valuation principles (84 FR 55798). However, 
after reviewing the comments, to which our detailed responses are 
provided below, we believe that our proposals, if finalized, could have 
had an unintended limiting effect on the regulated community, as well 
as the valuation community. Our use of the term ``market value'' in our 
preamble discussion, although not carried into the proposed definition 
of ``general market value,'' may have been inaccurate. Therefore, we 
are retracting our statements equating ``general market value,'' as 
that term appears in the statute and our regulations, with ``market 
value,'' the term we identified as uniformly used in the valuation 
industry (84 FR 55798).

[[Page 77554]]

    We continue to believe that the general market value of a 
transaction 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, for example, when 
parties to a potential medical director arrangement determine the value 
of the physician's administrative services, they must not consider that 
the physician could also refer patients to the entity when not acting 
as its medical director. After reviewing the comments on our proposed 
definition of ``general market value'' and the existing regulation at 
Sec.  411.351, we determined that the best way to state this policy is 
to remove the language regarding the volume or value standard (item 
three above) and restructure the definition to emphasize our policy 
that the valuation of the remuneration terms of a transaction should 
not include any consideration of other business the actual parties to 
the transaction may have with one another. Also, for clarity and as 
supported by commenters, we are finalizing definitions of ``general 
market value'' specific to each of the types of transactions 
contemplated in the exceptions to the physician self-referral law--
asset acquisition, compensation for services, and rental of equipment 
or office space. Under our final regulation at Sec.  411.351, ``general 
market value'' means, with respect to the purchase of an asset, the 
price that an asset would bring on the date of acquisition of the asset 
as the result of bona fide bargaining between a well-informed buyer and 
seller that are not otherwise in a position to generate business for 
each other. With respect to compensation for services, ``general market 
value'' means the compensation that would be paid at the time the 
parties enter into the service arrangement as the result of bona fide 
bargaining between well-informed parties that are not otherwise in a 
position to generate business for each other. And, with respect to the 
rental of equipment or the rental of office space, ``general market 
value'' means the price that rental property would bring at the time 
the parties enter into the rental arrangement as the result of bona 
fide bargaining between a well-informed lessor and lessee that are not 
otherwise in a position to generate business for each other.
    In the proposed rule, we stated that 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, 
typical transactions for like assets or services, with like buyers and 
sellers, and under like circumstances), while general 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. We 
provided examples of compensation arrangements under which compensation 
outside the parameters of salary survey data could be appropriate (84 
FR 55798 through 55799). Although we are not finalizing the proposed 
analytical framework related to ``hypothetical'' versus ``actual'' 
transactions, we continue to believe that the fair market value of a 
transaction--and particularly, compensation for physician services--may 
not always align with published valuation data compilations, such as 
salary surveys. In other words, the rate of compensation set forth in a 
salary survey may not always be identical to the worth of a particular 
physician's services. For this reason, we are affirming the examples 
provided in the proposed rule and restate them here, with modifications 
to eliminate terminology not included in our final analytical framework 
and regulations. As we stated in the proposed rule, extenuating 
circumstances may dictate that parties to an arm's length transaction 
veer from values identified in salary surveys and other valuation data 
compilations that are not specific to the actual parties to the subject 
transaction (84 FR 55799). 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. In this example, compensation substantially above 
$450,000 per year may be fair market value. On the other hand, 
hypothetical data may result in hospitals and other entities paying 
more than they believe appropriate for physician services. 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, and, due to 
declining reimbursement rates and a somewhat poor payor mix, the 
hospital's economic position is tenuous. Although the physician may 
request the $250,000 that the salary survey indicates would be 
appropriate for a hypothetical (unidentified) physician to earn, and 
the hospital may believe that it is compelled to pay the physician this 
amount, the fair market value of the physician's compensation may be 
less than $250,000 per year (84 FR 55799).
    We also proposed to remove from the regulation text at Sec.  
411.351 the 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 (84 FR 55798). 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. This regulation text appears to have caused confusion among 
stakeholders. Although it remains our policy, to avoid further 
confusion and provide certainty in the final definitions of ``fair 
market value'' and ``general market value,'' we are finalizing our 
proposal to remove this language from the definition of ``fair market 
value'' at Sec.  411.351.
    Lastly, we noted in the proposed rule that many CMS RFI commenters 
requested that we simply return to the statutory language defining fair 
market value (84 FR 55798). Some commenters on the proposed rule made 
similar requests. We continue to disagree that this would be the best 
approach. We believe that it is important to provide guidance with 
respect to the requirement that compensation is fair market value in 
order not to stymy our

[[Page 77555]]

enforcement efforts (or those of our law enforcement partners). This 
guidance is also crucial to support the compliance efforts of the 
regulated industry.
    We received the following comments and our responses follow.
    Comment: Some commenters supported our proposal to remove the 
language regarding bargaining between well-informed buyers and sellers 
who are not otherwise in a position to generate business for the other 
party, suggesting that this language essentially links the volume or 
value standard with the definition of ``fair market value.'' The 
commenters noted that CMS clearly stated in the proposed rule that the 
volume or value standard and other business generated standard are 
distinct and separate requirements of many exceptions to the physician 
self-referral law (84 FR 55797). These commenters also referenced court 
opinions in which they believe the standards were blended or conflated 
by the court, causing confusion, additional litigation, and what they 
termed a ``torrent of unnecessary effort to reexamine arrangements 
long-believed to comply with the law.'' The commenters contended that 
parties should not have to search for market data that isolates 
transactions with physicians who are not in a position to refer to the 
entities with which they have compensation arrangements. In contrast, 
one commenter strongly opposed our proposal to remove the language 
regarding well-informed buyers and sellers that are not otherwise in a 
position to generate business for each other from the definition of 
``general market value.'' A few other commenters asserted that, by 
defining general market value as the value determined by the parties to 
the subject transaction, the standard would simply be a subjective test 
of how parties to the transaction value the services, which could 
include additional payment for referrals or the generation of business. 
These commenters asserted that delinking the definition of ``general 
market value'' from the ability to generate business could result in 
the parties comparing the subject transaction to other transactions 
under which compensation is inflated by the value of referrals. One 
commenter suggested that we include in regulation text our preamble 
statement that [general] 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 
(84 FR 55798). The commenter asserted that this would address the 
legitimate concern about valuations for purposes of the physician self-
referral law being distorted by considerations of referrals. The 
commenter suggested that we include this statement at the end of the 
proposed definition of ``general market value'' for clarity.
    Response: Although we disagree with the characterization of our 
proposal to define general market value merely as the value determined 
by the parties to the subject transaction, we find the program 
integrity concerns highlighted by the latter commenters compelling. It 
was not our intention to define ``general market value'' in a way that 
permits the inappropriate consideration of the value of a physician's 
referrals or the other business that a physician could generate for an 
entity in a determination of the fair market value of compensation. In 
Phase I, based on our then-interpretation that the ``volume or value 
restriction'' in the exceptions to the physician self-referral law 
established a limitation on the fair market value of compensation 
rather than represent a separate and distinct requirement of the 
exceptions, we stated that, depending on the circumstances, the 
``volume or value'' restriction will preclude reliance on comparables 
that involve entities and physicians in a position to refer or generate 
business for each other (66 FR 944). In Phase II, we stated that, if 
parties are using comparables to establish fair market value, they 
should take reasonable steps to ensure that the comparables are not 
distorted (69 FR 16107). Although we have renounced the interpretation 
of the volume or value and other business generated standards as merely 
limiting or modifying the fair market value requirement (84 FR 55797), 
we continue to believe that precluding reliance on comparables that 
involve entities and physicians in a position to refer or generate 
business for each other in the determination of fair market value and 
general market value is an important program integrity safeguard. We 
are finalizing a definition of ``general market value'' that retains 
this language from the current regulation defining general market 
value. We believe this will be less disruptive to the regulated 
industry and valuation professionals that have developed compliance 
protocols and valuation standards that have incorporated this 
requirement for the past two decades, while still achieving our goal of 
disentangling the volume or value and other business generated 
standards from the requirement that compensation is fair market value. 
We are not including in the definition of ``general market value'' a 
statement that general 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. 
Although we continue to believe that the determination of general 
market value should be 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, we do not believe 
that it is necessary to include this statement because the final 
definition of ``general market value'' retains the essentially 
equivalent requirement for bona fide bargaining between well-informed 
parties that are not otherwise in a position to generate business for 
each other.
    Compensation to or from a physician should not be inflated or 
reduced simply because the entity paying or receiving the compensation 
values the referrals or other business that the physician may generate 
more than a different potential buyer of the items or services. This 
means that a hospital may not value a physician's services at a higher 
rate than a private equity investor or another physician practice 
simply because the hospital could bill for designated health services 
referred by the physician under the OPPS, whereas a physician practice 
owned by the private equity investor or other physicians would have to 
bill under the PFS, which may have lower payment rates. Put another 
way, the value of a physician's services should be the same regardless 
of the identity of the purchaser of those services. We recognize that 
reliance on similar transactions in the marketplace could simplify the 
process of determining fair market value for purposes of the physician 
self-referral law, but adopting such a standard would allow parties to 
consider the additional (or investment) value to certain types of 
entities, skewing the buyer-neutral fair market value.
    Comment: One commenter asserted that the definition of ``fair 
market value'' should include a statement that organizations 
compensating individuals at an ongoing loss may create risk that the 
compensation is not representative of fair market value. The commenter 
explained its concern in an example involving a hospital compensating a 
physician at an amount greater than the collections for the physician's 
services, asserting that the hospital is able to do so because it 
controls referrals within its network and increased facility revenues 
offset the physician practice losses. In the commenter's view, this 
creates a situation in which hospitals are taking

[[Page 77556]]

into account the value of referrals when setting physician 
compensation. The commenter noted that, from a fair market value and 
[general] market value perspective, two hypothetical parties (that 
cannot consider the fact that one party can generate business for the 
other) would never enter into a situation in which the physician's 
compensation and benefits exceeded direct revenue. A different 
commenter asserted that a payment to a physician above what the entity 
collects for the physician's services is inherently not fair market 
value.
    Response: We agree that, in some circumstances, an entity's 
compensation of a physician at an ongoing loss may present program 
integrity concerns, but see no need to include the language requested 
by the commenter in regulation. As we stated earlier, we are retaining 
the language ``not in a position to generate business'' in the 
definition of ``general market value.'' We believe this addresses the 
commenter's concern, at least in part, as it requires that the nature 
or identity of the purchaser of the items or services (in the 
commenter's example, the hospital) is irrelevant to a determination of 
``general market value'' and, thus, ``fair market value.'' In the 
commenter's example, the value of the physician's services is the value 
to any willing buyer, and the fact that the hospital could make up 
losses for the physician's compensation through designated health 
services reimbursed at facility rates under OPPS rather than PFS, may 
not be considered. Also, we disagree that parties would never enter 
into such an arrangement. As we stated above in section II.B.2 (with 
respect to the definition of ``commercially reasonable''), there are 
many valid reasons and legitimate business purposes for entering into 
an arrangement that will not result in profit for one or more of the 
parties to the arrangement.
    Comment: A few commenters raised the point that, with respect to 
our statements in the proposed rule connecting the statutory term 
``general market value'' to the valuation principle of ``market value'' 
(84 FR 55798), ``general market value'' does not equate to the ``market 
value'' of a transaction, as that term is used in the valuation 
industry. One of these commenters suggested that what CMS described as 
``market value'' actually corresponds to ``investment value'' as 
defined by the four commercial valuation disciplines: Business 
valuation, compensation valuation, machinery and equipment valuation, 
and real estate valuation. Commenters expressed concern that this focus 
would narrow the universe of appropriate valuation methodologies for 
purposes of the physician self-referral law solely to the ``market 
value'' approach. One commenter asserted that stakeholders should not 
be restricted to exclusive use of the market approach to value a 
physician's personal services or promote exclusive use by valuators of 
physician compensation survey data. Other commenters requested that 
hospitals should be permitted to use existing written offers to a 
physician from other similarly situated providers to support a 
valuation. One of these commenters requested guidance on how fair 
market value should be determined and documented for timeshare 
arrangements, citing the ``cost plus'' guidance from Phase I regarding 
equipment leases as potentially appropriate (66 FR 876 through 877). 
Another of the commenters asked for additional guidance on recruiting 
and paying physicians in rural areas, including the use of supply, 
demand, access, and community need to support the fair market value of 
a physician's compensation. Another commenter requested that CMS 
provide additional guidance or examples on what data, facts, and 
circumstances should be applied to evaluate fair market value. The 
commenter requested specific guidance on the relevance of payor mix, 
market supply and demand data, cost of living, physician skills, and 
experience. A different commenter noted costs of care, costs for 
medical liability insurance, costs of equipment and staffing, 
certificate of need laws, and provider and related taxes on health care 
services and centers as relevant factors when determining the fair 
market value of compensation.
    Response: As discussed above, we are retracting our statements in 
the proposed rule equating ``general market value'' with the valuation 
principle of ``market value'' (84 FR 55798). We did not intend to limit 
the valuation of assets, compensation, or rental property to the market 
approach or prescribe any other particular method for determining the 
fair market value and general market value of compensation. As we have 
stated consistently in prior rulemakings, to establish the fair market 
value (and general market value) of a transaction that involves 
compensation paid for assets or services, we intend to accept any 
method that is commercially reasonable and provides us with evidence 
that the compensation is comparable to what is ordinarily paid for an 
item or service in the location at issue, by parties in arm's-length 
transactions that are not in a position to refer to one another (66 FR 
944). We emphasize that our use of the language ``commercially 
reasonable'' in Phase I (and again in Phase III (72 FR 51015 through 
51016)) was also not intended to limit the valuation of assets, 
compensation, or rental property to a specific valuation approach or 
prescribe any other particular method for determining the fair market 
value and general market value of compensation. Rather, as stated in 
Phase II and reiterated in Phase III, we will consider a range of 
methods of determining fair market value and that the appropriate 
method will depend on the nature of the transaction, its location, and 
other factors (69 FR 16107 and 72 FR 51015 through 51016). We decline 
to affirm the specific valuation suggestions of the commenters because 
the amount or type of documentation that will be sufficient to confirm 
fair market value (and general market value) will vary depending on the 
circumstances in any given case (66 FR 944), but refer readers to the 
Phase I rulemaking for an extensive discussion on potentially 
acceptable valuation methods (66 FR 944 through 945).
    Comment: Several commenters expressed appreciation for the examples 
in the proposed rule regarding when an arrangement may involve 
compensation above or below what national market data (salary surveys) 
suggests would be appropriate. The commenters stated that the ability 
to factor in unique circumstances, such as whether a physician is 
particularly remarkable in his or her field, will allow entities to 
design compensation packages that more fully account for the broader 
circumstances of an arrangement. One commenter emphasized that the 
analysis of fair market value is always predicated on an analysis of 
the actual terms of a transaction and the actual facts and 
circumstances, while another commenter agreed specifically that 
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. 
The commenter urged CMS to include this language (or similar language) 
in regulation text to provide further assurances to stakeholders of 
CMS' policy. Another commenter requested that we acknowledge that there 
are other factors that may justify higher levels of compensation rates 
for physician services in markets that may have relatively low cost of 
living standards due to market supply and demand. A different commenter 
discussed the difficulty of establishing fair market value in rural 
areas and

[[Page 77557]]

other challenging markets. This commenter noted that, in some 
instances, a hospital might need to compensate a physician above what 
is indicated in some published salary schedules in order to convince 
the physician to relocate to the market area and fill a dire patient 
need. The commenter was concerned that the example in the proposed rule 
regarding lower cost of living in certain markets could be read to 
prohibit compensation above what is found in salary schedules. Some 
commenters requested additional examples of circumstances that could 
justify deviating from salary survey data. A few other commenters 
objected to the examples and disagreed that extenuating circumstances 
could require a downward deviation from salary surveys.
    Response: It appears from the comments that stakeholders may have 
been under the impression that it is CMS policy that reliance on salary 
surveys will result, in all cases, in a determination of fair market 
value for a physician's professional services. It is not CMS policy 
that salary surveys necessarily provide an accurate determination of 
fair market value in all cases. However, we decline to include in 
regulation text, as requested by one of the commenters, a statement 
that extenuating circumstances may dictate that parties to an arm's-
length transaction should veer from values identified in salary surveys 
and other hypothetical valuation data that is not specific to the 
actual parties to the transaction when determining the fair market 
value of the compensation under their transaction. We believe such a 
statement is unnecessary in light of our policy discussion in the 
proposed rule and this final rule and our concern that it could reduce 
the clarity in the definitions of ``fair market value'' and ``general 
market value'' that we and stakeholders seek.
    Consulting salary schedules or other hypothetical data is an 
appropriate starting point in the determination of fair market value, 
and in many cases, it may be all that is required. However, we agree 
with the commenter that asserted that a hospital may find it necessary 
to pay a physician above what is in the salary schedule, especially 
where there is a compelling need for the physician's services. For 
example, in an area that has two interventional cardiologists but no 
cardiothoracic surgeon who could perform surgery in the event of an 
emergency during a catheterization, a hospital may need to pay above 
the amount indicated at a particular percentile in a salary schedule to 
attract and employ a cardiothoracic surgeon. We also agree with the 
commenter that emphasized the need for an analysis of the actual terms 
of a transaction and the actual facts and circumstances of the parties. 
In our view, each compensation arrangement is different and must be 
evaluated based on its unique factors. That is not to say that common 
arrangements, where the services required are identical regardless of 
the identity of the physician providing them, do not lend themselves 
well to the use of salary surveys for determining compensation that is 
fair market value.
    Our examples in the proposed rule were intended to show that a 
variety of factors could affect whether the amount shown in a salary 
schedule is too high or too low to be fair market value for the 
services of the subject transaction. In some instances, it is exactly 
right. Parties do not necessarily fail to satisfy the fair market value 
requirement simply because the compensation exceeds a particular 
percentile in a salary schedule; nor are parties required to pay a 
physician what is shown in a salary schedule if the specific 
circumstances do not warrant that level of compensation. With respect 
to the commenters that took issue with the statements in the proposed 
rule that the fair market value of a particular physician's services 
may be below what is indicated in a salary schedule, we believe that 
salary schedules should not be used by a physician to demand 
compensation that is above what well-informed parties that are not in a 
position to generate business for each other would agree is the fair 
market value of the physician's services. We wish to be perfectly clear 
that nothing in our commentary was intended to imply that an 
independent valuation is required for all compensation arrangements.
    Comment: Two commenters, in identical statements, expressed concern 
with the proposed definition of ``general market value.'' The 
commenters contended that, despite the statutory language that fair 
market value means the value in an arm's-length transaction, consistent 
with the general market value, there is no reason to believe that the 
reference to ``general market value'' modifies ``fair market value'' 
such that fair market value means anything other than what it means to 
the business valuation profession, and suggested that CMS leave the 
determination of fair market value to the business valuation 
profession. These commenters shared a definition of ``fair market 
value'' found in the International Glossary of Business Valuation 
Terms, with slight modification to recognize the valuation of services 
and resources as well as property and goods; specifically, the price, 
expressed in terms of cash equivalents, at which property, services, 
and resources would change hands between a hypothetical willing and 
able buyer and a hypothetical willing and able seller, acting at arm's-
length in an open and unrestricted market, when neither is under 
compulsion to buy or sell and when both have reasonable knowledge of 
the relevant facts. The commenters asserted that this definition would 
not require valuators to limit themselves to the market approach or 
depart from time-honored valuation principles of their profession, 
including consideration of more than just physician compensation survey 
data. Ultimately, the commenters requested that CMS not adopt a new 
definition of ``fair market value'' (with or without a definition of 
``general market value'') to take advantage of the consensus reached 
within the valuation profession.
    Response: We decline to retain the current definition of ``fair 
market value'' (with or without a definition of ``general market 
value'') as requested by the commenters. First, the term ``general 
market value'' is included in the statutory definition of ``fair market 
value'' and we cannot ignore it for purposes of the statutory 
exceptions or remove it from our regulations. Second, we expect that 
our retraction of certain statements from the proposed rule and the 
clarification of previous commentary on valuation methods will assuage 
the commenters' concerns. As described above, we are finalizing only 
slight modifications to the existing definitions of ``fair market 
value'' and ``general market value'' to clearly indicate the statute's 
specific requirements for determining the fair market value of rental 
property and to disentangle the volume or value and other business 
generated standards of the exceptions to the physician self-referral 
law from the definition of ``general market value.''
    Comment: Most commenters supported the reorganization of the 
definitions, noting that the proposed structure provides better 
clarity. Some commenters urged CMS to adopt the definitions of ``fair 
market value'' and ``general market value'' as proposed. The commenters 
expressed appreciation for the restructuring of the existing definition 
of ``fair market value'' to extract the separate term ``general market 
value'' and the link to the volume or value standard. One of the 
commenters stated that the proposed definition of ``fair market value'' 
better aligns with the definition set forth in the statute.

[[Page 77558]]

    Response: We agree that the final structure of the definitions of 
``fair market value'' and ``general market value'' is clearer than our 
existing regulations. As we discussed above and in response to earlier 
comments, we are finalizing slight modifications to the proposed 
definitions. We are finalizing our proposal to remove the link to the 
volume or value standard in the definition of ``general market value'' 
as requested by the commenters. We believe that structuring 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 
facilitate parties' compliance with the fair market value requirement 
in the exceptions to the physician self-referral law that apply to the 
specific type of compensation arrangement between them. Similarly, we 
believe that definitions of ``general market value'' specific to each 
of the types of transactions contemplated in the exceptions to the 
physician self-referral law--asset acquisition, compensation for 
services, and rental of equipment or office space--will facilitate 
stakeholders' understanding of the requirements for fair market value 
compensation that is consistent with the general market value and ease 
overall compliance efforts.
    Comment: A large number of commenters requested that we establish 
rebuttable presumptions that compensation is fair market value or 
``safe harbors'' that would deem compensation to be fair market value 
if certain conditions are met. The commenters variously suggested that 
the following should be deemed to be fair market value: Compensation 
set within a range of percentiles identified in independent salary 
surveys (with a wider band of permissible compensation for physicians 
who practice in medically underserved areas, health professional 
shortage areas, or rural areas), compensation set within the parameters 
of an independent third-party valuation, and compensation set in 
accordance with a valuation process that meets certain conditions 
patterned after those set forth in IRS regulations at 26 CFR 53.4958-6 
(related to excess benefit transactions). Some of the commenters 
asserted that a ``safe harbor'' based on a range of values in salary 
surveys would be consistent with what they stated was established CMS 
policy that compensation set at or below the 75th percentile in a 
salary schedule is appropriate and compensation set above the 75th 
percentile is suspect, if not presumed inappropriate.
    Response: For the reasons explained in Phase I (66 FR 944 through 
945), Phase II (69 FR 16092), and Phase III (72 FR 51015), we decline 
to establish the rebuttable presumptions and ``safe harbors'' requested 
by the commenters. We are uncertain why the commenters believe that it 
is CMS policy that compensation set at or below the 75th percentile in 
a salary schedule is always appropriate, and that compensation set 
above the 75th percentile is suspect, if not presumed inappropriate. 
The commenters are incorrect that this is CMS policy.

C. Group Practices (Sec.  411.352)

    In the proposed rule, we proposed certain revisions to the group 
practice rules at Sec.  411.352 that relate to corresponding proposals 
regarding the 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 (84 FR 55799 through 
55802). We also proposed a revision to the rules regarding the 
distribution of overall profits intended to support our policies 
related to the transition from a volume-based to a value-based health 
care system (84 FR 55800 through 55801). We discuss these proposals and 
our final regulations in section II.C.2. of this final rule.
1. Interpretation of the ``Volume or Value Standard'' for Purposes of 
the Group Practice Regulations (Sec.  411.352(g))
    As we discussed in the proposed rule, in conjunction with our 
proposals related to the volume or value standards, we reviewed the 
physician self-referral regulations to ensure that the standards 
related to the volume or value of a physician's referrals (the volume 
or value standard) and the other business generated by the physician 
(the other business generated standard) are expressed using 
standardized terminology (84 FR 55799). We identified several 
occurrences of inconsistent expression of the standards. Although 
section 1877 of the Act uses more than one phrase to describe the 
volume or value and other business generated standards, 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 a physician's referrals or 
the other business generated by a physician for the entity providing 
the remuneration. Therefore, as discussed in section II.B.3. of this 
final rule, we proposed and are finalizing conforming changes 
throughout our regulations to delineate these standards as a 
prohibition on compensation that takes into account the volume or value 
of a physician's referrals or other business generated by the physician 
for the entity providing the remuneration. However, because the 
language in Sec.  411.352(g) and (i) mirrors the statutory language at 
section 1877(h)(4)(iv) of the Act, we did not propose changes to the 
``volume or value'' regulation text in either of those paragraphs. The 
terms ``based on'' and ``related to'' remain in the regulation text at 
Sec.  411.352(g) and (i). We are affirming here that we interpret the 
requirements of Sec.  411.352(g) and (i) to incorporate the volume or 
value standard as it relates to a physician's referrals; that is, 
compensation to a physician who is a member of a group practice may not 
be determined in any manner that takes 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).
    Prior to the revisions we are finalizing in this final rule, the 
regulation at Sec.  411.352(g) stated 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, where 
we used the terms ``based on,'' ``related to,'' and ``takes into 
account'' interchangeably when describing the final group practice 
regulations (66 FR 908 through 910).
    Prior to the revisions we are finalizing in this final rule, the 
regulation at Sec.  411.352(i) stated 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

[[Page 77559]]

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).
    Despite the varying language of the regulations, as detailed in the 
proposed rule (84 FR 55800), we consider the regulations at Sec.  
411.352(g) and (i) to prohibit compensation to physicians in a group 
practice that is determined in any manner that takes into account the 
volume or value of the physician's referrals to the group practice. The 
new special rule at Sec.  411.354(d)(5) establishes the universe of 
compensation that we consider to be determined in a manner that takes 
into account the volume or value of a physician's referrals to the 
entity paying the compensation. As described in section II.B.3. of this 
final rule, this special rule applies in all instances where our 
regulations include the volume or value standard, except as specified 
in Sec.  411.354(d)(5)(iv). Therefore, with respect to both Sec.  
411.352(g) and (i), when determining whether the physician's 
compensation, share of overall profits, or productivity bonus is based 
on, is directly or indirectly related to, or takes into account the 
volume or value of the physician's referrals to the group practice, the 
special rule at final Sec.  411.354(d)(5) applies.
    We received the following general comment and our response follows.
    Comment: Some commenters argued that we should not finalize our 
proposals because group practices need the utmost flexibility to 
participate and succeed in value-based health care delivery and payment 
systems.
    Response: Nothing in our final regulations prohibits a group 
practice (or any physician practice) that furnishes designated health 
services and the physicians who are owners, employees, or independent 
contractors of the practice from qualifying as a value-based 
enterprise. The new exceptions at Sec.  411.357(aa)(3) may be available 
to such an enterprise, assuming it meets all the requirements of the 
definitions and exceptions. Those exceptions do not include fair market 
value or volume or value requirements. The regulations at Sec.  411.352 
apply to group practices that operate in a FFS payment environment. We 
do not agree that our final regulations at Sec.  411.352 will prohibit 
a group practice from participating and succeeding in a value-based 
health care delivery and payment system.
2. Special Rules for Profit Shares and Productivity Bonuses (Sec.  
411.352(i))
a. Distribution of Profits Related to Participation in a Value-Based 
Enterprise
    We proposed a new Sec.  411.352(i)(3) to address downstream 
compensation that derives from payments made to a group practice, 
rather than payments made 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, profit shares or productivity bonuses paid to 
a physician in a group practice that are determined in any manner that 
directly takes 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.
    The 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 as a value-based enterprise 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 may not be 
allocated directly to the two physicians. We explained in the proposed 
rule that commenters on the CMS RFI 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. We also described 
the assertion of another commenter on the CMS RFI 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 stated 
that we share the commenters' concerns regarding physician 
participation in value-based health care delivery and payment models 
and are also concerned that our regulations could undermine the success 
of the Regulatory Sprint or the larger transition to a value-based 
health care system. Therefore, we proposed changes to Sec.  411.352(i) 
with respect to the payment of profit shares to eliminate this 
potential barrier to robust physician participation in value-based care 
delivery (84 FR 55800). We are finalizing our proposal with 
modifications to the regulation text as proposed. As explained in our 
responses to comments below, the policy will be codified at revised 
Sec.  411.352(i)(3) and effective on January 1, 2022.
    For the reasons described elsewhere in this final rule, in the 
exceptions for value-based arrangements at new Sec.  411.357(aa), we 
did not propose to prohibit remuneration that takes into account the 
volume or value of a physician's referrals. The revisions finalized at 
Sec.  411.352(i)(3) are an extension of this policy. Specifically, we 
are finalizing a 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 final 
policy at Sec.  411.352(i)(3), such profits may be distributed to the 
participating physician and will not be considered to directly relate 
to (or take into account) the volume or value of the physician's 
referrals. In other words, a group practice may distribute directly to 
a physician in the group the profits from designated health services 
furnished by the group that are derived from the

[[Page 77560]]

physician's participation in a value-based enterprise, including 
profits from designated health services referred by the physician, and 
such remuneration will be deemed not to be based on (or take into 
account) the volume or value of the physician's referrals. The 
regulation finalized at Sec.  411.352(i)(3) 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 value-based enterprise directly to 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 value-based enterprise 
(and its corresponding 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 value-based enterprise (and its corresponding participation in 
the model). Neither distribution would jeopardize the group's ability 
to qualify as a ``group practice'' under Sec.  411.352. In the proposed 
rule, we sought comment regarding whether we should permit the 
distribution of ``revenue'' from designated health services, as opposed 
to ``profits'' from designated health services in order to effectuate 
the goals described elsewhere in the proposed rule (84 FR 55801) and 
this final rule. As explained in our responses to comments below, we 
are finalizing our proposal to apply the rule at final Sec.  
411.352(i)(3) to ``profits'' from designated health services, which 
will be effective on January 1, 2022.
    We received the following comments and our responses follow.
    Comment: Commenters widely supported our proposal to address the 
distribution of profits from designated health services that are 
derived from the participation in a value-based enterprise by a 
physician in a group practice. Commenters urged us to finalize our 
proposal to permit the distribution of profits from designated health 
services that are directly attributable to a physician's participation 
in a value-based enterprise without having to aggregate the profits 
with the overall profits of the group practice or a component of five 
physicians within the group practice. Commenters asserted that this 
flexibility will encourage physicians to incorporate value-based 
elements into their practices, as well as physician participation in 
value-based enterprises on an individual basis and in circumstances 
where the entire group practice's participation may not be warranted or 
desirable.
    Response: We agree with the commenters regarding the potential 
impact of the permitted distributions; namely, that individual 
physicians in a group practice may be encouraged to participate in a 
value-based enterprise with providers and suppliers outside of the 
physician's own group practice even when the group practice does not 
participate as a whole in the value-based enterprise. We believe that 
the protection afforded by the safeguards in the new definitions and 
exceptions related to value-based care delivery and payment will ensure 
that distribution of profits to an individual physician (or subset of 
physicians) within a group practice should not increase the risk of 
inappropriate utilization of designated health services or program or 
patient abuse.
    Comment: One commenter noted that proposed Sec.  411.352(i)(3) was 
not structured in the same way as the ``special rules'' for 
distribution of overall profits and payment of productivity bonuses. 
The commenter expressed concern that the proposed regulation text would 
not create the deeming provision we intended. The commenter requested 
that we revise the regulation to expressly state that, where a group 
practice's profits from designated health services are directly 
attributable to a physician's participation in a value-based enterprise 
and those profits are distributed to the physician, the compensation to 
the physician is deemed not to take into account the volume or value of 
the physician's referrals under Sec.  411.352(g). The commenter 
asserted that making these revisions would eliminate any inference that 
Sec.  411.352(i)(3) is not an exception to Sec.  411.352(g).
    Response: The commenter is correct about the structure of the three 
provisions in Sec.  411.352(i) that describe methodologies for the 
distribution of profits from designated health services and the payment 
of productivity bonuses. We agree that standard language and further 
clarification of the provision at Sec.  411.352(i)(3) is warranted to 
ensure the provision operates as a deeming provision as we intend. We 
have revised the final regulation accordingly. Specifically, final 
Sec.  411.352(i)(3) provides that notwithstanding paragraph (g) of 
Sec.  411.352, profits from designated health services that are 
directly attributable to a physician's participation in a value-based 
enterprise, as defined at Sec.  411.351, may be distributed to the 
participating physician.
    Comment: With respect to our proposal to permit the distribution of 
profits from designated health services that are directly attributable 
to a physician's participation in a value-based enterprise, we sought 
comment regarding whether we should permit the distribution of 
``revenue'' from designated health services, as opposed to ``profits'' 
from designated health services in order to effectuate the goals 
described elsewhere in the proposed rule and this final rule. One 
commenter stated that the furnishing of certain designated health 
services does not always result in profit for the group practice and 
suggested that permitting the distribution of revenue from designated 
health services would provide needed flexibility to encourage 
physicians to participate in value-based care delivery. Another 
commenter suggested that we permit the distribution of revenue from 
designated health services to simplify the regulation because revenues 
are easier to calculate than profits.
    Response: We have no reason to doubt the commenter's assertion that 
a group practice does not realize a profit on every designated health 
service that it furnishes. Thus, it is possible that a group practice 
could have no profits to distribute to a physician in the group who 
makes a referral of designated health services for a patient in the 
target patient population while undertaking value-based activities as a 
VBE participant in a value-based enterprise. Although it may be true 
that it is easier to calculate revenues than to calculate profits, in 
general, we believe that a group practice's distribution of revenues to 
a referring physician rather than profits, which are calculated by 
deducting the expenses incurred in furnishing the designated health 
service, could serve as an inducement to make additional and 
potentially inappropriate referrals to the group practice. This is 
consistent with our statement in the 1998 proposed rule that rewarding 
a physician each time he or she self-refers for a designated health 
service can constitute an incentive to overutilize services (63 FR 
1691). We are unclear how the sharing of a group practice's revenues 
with a physician would encourage the physician's participation in 
value-based care delivery or how the physician's participation in his 
or her individual capacity in a value-based enterprise would mitigate 
our concerns regarding the inducement to refer any of the physician's 
patients outside the target patient population for designated health 
services furnished by the group practice. We are not adopting the

[[Page 77561]]

commenters' recommendation to permit the distribution of revenues from 
designated health services that are directly attributable to a 
physician's participation in a value-based enterprise.
b. Clarifying Revisions
(1) Restructuring of the Regulation at Sec.  411.352(i)
    We proposed to restructure and renumber Sec.  411.352(i) as well as 
clarify several provisions of the regulation. As we stated in the 
proposed rule, we believe that the revisions will 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 (84 FR 55801). Except as noted above with respect 
to the uniformity of the structure of the provisions in Sec.  
411.352(i), we received no comments on the general restructuring of the 
regulations, and are finalizing our proposal to restructure and 
renumber the regulations at Sec.  411.352(i) without modification to 
the proposed numbering and headers of the regulation. 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 does not directly take 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, the special rules for profit 
shares and productivity bonuses, as finalized, 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). As stated in the 
proposed rule, our addition of introductory language at Sec.  
411.352(i) and revised language at Sec.  411.352(i)(1) and 
411.352(i)(2) do not constitute a substantive change to the noted 
provisions (84 FR 55801).
(2) Overall Profits
    We proposed revisions to clarify our interpretation of the overall 
profits of a group that can be distributed to physicians in the group. 
Until now, the term ``overall profits'' was 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. As stated in the proposed rule, stakeholders 
informed us that they were confused about the definition. For example, 
stakeholders informally inquired whether the profits of a group 
practice that has only two, three, or four physicians may be 
distributed at all. We proposed to revise the definition of ``overall 
profits'' to mean 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 proposed 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 stated that we believe 
that this more precisely states the policy articulated in Phase I (66 
FR 909 through 910). For the reasons explained in our responses to 
comments, we are finalizing the definition of ``overall profits'' at 
Sec.  411.352(i)(1)(ii) as proposed.
    We highlight that the final regulation at Sec.  411.352(i)(1)(ii) 
includes the words ``all the'' before ``designated health services.'' 
As we stated in the proposed rule, stakeholders' informal inquiries 
regarding the permissible methods of distributing profits from 
designated health services indicated that the regulation text may not 
have precisely evidenced our intent (84 FR 55801). Such inquiries 
included 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, and whether a group 
practice may 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. As discussed, 
we are finalizing at Sec.  411.352(i)(1)(ii) that overall profits means 
``the profits derived from all the designated health services.'' Thus, 
the profits 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) must be aggregated before distribution. 
Under this final rule, a physician practice that wishes to qualify as a 
group practice may 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 centralized building (as defined at Sec.  411.351) or 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 and distribute the profits from diagnostic imaging to a 
different subset of its physicians.
    We are cognizant that, under the requirement at Sec.  411.352(e), 
to qualify as a ``group practice,'' the overhead expenses of, and 
income from, a practice must be distributed according to methods that 
are determined before the receipt of payment for the services giving 
rise to the overhead expense or producing the income. Essentially, a 
group practice's compensation methodology must be established 
prospectively. Based on the comments, it is our understanding that 
group practice physician compensation methodologies are often 
established prior to the beginning of a calendar year. We are concerned 
that the regulations we are finalizing in this final rule may require 
group practices that relied on their interpretation of Sec.  411.352(i) 
(as it existed prior to this final rule) to adjust their compensation 
methodologies and, if so, they may not have sufficient time prior to 
the end of the current calendar year to make necessary adjustments to 
their compensation methodologies. As explained in our responses to 
comments below, we are delaying the effective date of revised Sec.  
411.352(i)(1) until January 1, 2022. Through December 31, 2021, the 
definition of ``overall profits'' will be as set forth at existing 
Sec.  411.352(i)(2).
    We also proposed to remove the reference to Medicaid from the 
definition of ``overall profits.'' We believe that the inclusion of 
this reference unnecessarily complicates the regulation. In the 
proposed rule, we noted that it is possible that the reference to 
designated health services payable by Medicaid is related to the 
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 may not compensate its members 
based on the volume or value

[[Page 77562]]

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 the 1998 proposed policies were 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 congruently omitted when finalized. We explained further in the 
proposed rule that, under the definition of ``designated health 
services'' at Sec.  411.351, ``designated health services 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 existing 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 profits 
derived from designated health services payable by Medicare or 
Medicaid. For consistency with the definitions and regulations we 
proposed (and are finalizing here), we proposed to eliminate the 
references to Medicaid in the definition of ``overall profits.'' We are 
finalizing our proposal. However, as explained in our responses to 
comments below, we are delaying the effective date of these updates 
until January 1, 2022 to coincide with the effective date of the other 
revisions to the definition of ``overall profits.''
    Our group practice regulations also articulate 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. In this final 
rule, we are finalizing our proposal to move the prefatory language of 
this requirement from existing Sec.  411.352(i)(2) to revised Sec.  
411.352(i)(1)(iii) without substantive change. We are also finalizing 
our proposal to replace the varying language in the methods deemed not 
to relate directly to the volume or value of referrals (the deeming 
provisions). One of the current deeming provisions references ``the 
group's profits'' and another references ``revenues'' where both should 
reference ``overall profits.'' We are finalizing the revision to use 
the term ``overall profits'' in both of these deeming provisions in 
order to articulate more clearly that the deeming provisions relate to 
methods for distributing a share of overall profits, not ``profits'' or 
``revenues.'' To avoid complications associated with the restructuring 
of Sec.  411.352(i), as explained in our responses to comments below, 
we are delaying the effective date of these updates until January 1, 
2022 to coincide with the effective date of the revised definition of 
``overall profits.''
    We also proposed to revise the language related to one of the 
deemed permissible methods for distributing shares of overall profits 
by replacing ``are not [designated health services] payable by any 
Federal health care program or private [payor]'' with ``and would not 
be considered designated health services if they were payable by 
Medicare.'' This change is reflected in revised Sec.  
411.352(i)(1)(iii)(B). Current regulations provide 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 explained in the proposed rule, the definition of 
``designated health services'' includes only those specified services 
that are payable by Medicare (84 FR 55802). Thus, we believe a better 
way to reflect 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'' is to deem the payment of a share of overall profits 
not to directly take into account the volume or value of a physician's 
referrals if overall profits 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 proposed 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 are finalizing this proposal. As noted, to 
avoid complications associated with the restructuring of Sec.  
411.352(i), as explained in our responses to comments below, we are 
delaying the effective date of these updates until January 1, 2022 to 
coincide with the effective date of the revised definition of ``overall 
profits.''
    Lastly, we did not propose to revise the third deeming provision to 
replace the term ``revenues'' with ``overall profits.'' The third 
deeming provision states that a share of overall profits will be deemed 
not to relate directly to the volume or value of referrals if revenues 
derived from designated health services constitute less than 5 percent 
of the group practice's total revenues, and the allocated portion of 
those revenues to each physician in the group practice constitutes 5 
percent or less of his or her total compensation from the group. We 
did, however, propose nonsubstantive updates to the language used in 
this deeming provision and we are finalizing those nonsubstantive 
changes. Final Sec.  411.352(i)(1)(iii)(C) deems as a permissible 
methodology for distributing overall profits a methodology under which 
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. Again, 
to avoid complications associated with the restructuring of Sec.  
411.352(i), as explained in our responses to comments below, we are 
delaying the effective date of these updates until January 1, 2022 to 
coincide with the effective date of the revised definition of ``overall 
profits.''
    We received the following comments and our responses follow.
    Comment: One commenter characterized our policy clarifications as 
an attempt to micromanage the organization, governance, and operation 
of group practices. The commenter opposed any revisions to the group 
practice regulations (except for the addition of new Sec.  
411.352(i)(3), which the commenter found beneficial for group 
practices). The commenter asserted that we should not finalize the 
revisions to Sec.  411.352(i)(1) because the statute is not 
prescriptive with respect to what methodologies are permissible for 
distributing overall profits to physicians. Another commenter asserted 
that we gave no rationale to support our interpretation of the 
statutory term ``overall profits'' as meaning profits from all the 
designated health services of a group practice or a component of at 
least five physicians in the group practice (which may include all 
physicians in the group practice).
    Response: The commenter is correct that section 1877(h)(4)(B) of 
the Act does not prescribe the methodology that a group practice may 
use to pay shares of its overall profits, provided that the share is 
not determined in any manner that is directly related to the volume or 
value of referrals by the physician to whom the share is paid. The 
commenter appears to confuse our proposal to clarify our interpretation 
of the term ``overall profits'' as used in section 1877(h)(4)(B) of the 
Act with a proposal

[[Page 77563]]

to limit payment methodologies, although our final regulations may 
indeed result in some group practices modifying their physician 
compensation with respect to payment of shares of overall profits from 
designated health services.
    We have long interpreted the term ``overall profits'' as the 
profits from the group practice's overall pooled revenues from 
designated health services (63 FR 1691). In the 1998 proposed rule, we 
stated that we regard ``overall profits of the group'' to mean all of 
the profits a group can distribute in any form to physicians in the 
group, even if the group is located in two different states or has many 
different locations within one state, and that we would not interpret 
``overall profits'' as the profits that belong only to a particular 
specialty or subspecialty group (63 FR 1691). When finalizing our 
proposals related to the payment of shares of overall profits in Phase 
I, we stated that the Congress recognized that, in the case of group 
practices, revenues derived from designated health services must be 
distributed to the group practice physicians in some fashion, even 
though the physicians generate the revenue (66 FR 876). However, 
because the Congress wished to minimize the economic incentives to 
generate unnecessary referrals for designated health services, section 
1877(h)(4)(B) of the Act permits a physician in the group practice to 
receive a share of the 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 described our 
proposals in the 1998 proposed rule as requiring that profits must be 
aggregated at the group level and not at a component level (66 FR 908). 
In Phase I, we defined ``share of overall profits'' to mean a share of 
the entire profits of the entire group (or any component of the group 
that consists of at least five physicians) derived from designated 
health services (66 FR 908) (emphasis added). We stated that overall 
profit shares must be derived from aggregations of the entire practice 
or a component of the practice consisting of at least five physicians 
(66 FR 907). The regulation text defining ``overall profits'' finalized 
in Phase I stated that overall profits means the group's entire profits 
derived from ``DHS'' payable by Medicare or Medicaid or the profits 
derived from ``DHS'' payable by Medicare or Medicaid of any component 
of the group practice that consists of at least five physicians. The 
regulation text does not accord precisely with our preamble guidance 
that states that overall profits means the entire profits of the entire 
group. It has not been revised until now.
    We note that, in Sec.  411.351, the regulation text provides a 
definition for ``designated health services (DHS).'' The definition 
states that DHS means any of the following services (other than those 
provided as emergency physician services furnished outside of the 
U.S.), as they are defined in Sec.  411.351, and lists the various 
individual categories of services that are considered designated health 
services. Stakeholders may have evaluated this portion of the 
definition of ``designated health services'' within the context of the 
definition of ``overall profits'' and interpreted ``overall profits'' 
to mean the group's entire profits from any one of the individual 
categories of designated health services identified in the definition 
at Sec.  411.351. This was not our intention when using the acronym 
``DHS'' in the definition of ``overall profits'' in the regulation text 
at Sec.  411.352(i).
    We are finalizing our proposal to clarify our longstanding 
interpretation of the term ``overall profits'' as used in section 
1877(h)(4)(B) of the Act at final Sec.  411.352(i)(1)(ii). However, 
because the regulation text at Sec.  411.352(i) has not fully and 
exactly depicted the policy set forth in our Phase I preamble guidance, 
we are making the revisions prospective. In addition, for the reasons 
set forth in the response to comments below, we are delaying the 
effective date of the revisions to Sec.  411.352(i) until January 1, 
2022.
    Comment: Some commenters opposed our proposal to define ``overall 
profits'' to mean 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, asserting 
that group practices should be able to distribute profits of some types 
of designated health services, but not others. Other commenters asked 
for clarification regarding whether a group practice could retain its 
profits (from designated health services or otherwise), or whether our 
revisions would require a group practice to distribute all of its 
profits to physicians in the group in order to qualify as a group 
practice.
    Response: Nothing in final Sec.  411.352(i)(1)(ii) (or any other 
physician self-referral regulation) requires the distribution of a 
group practice's profits from designated health services. However, if a 
group practice wishes to pay shares of overall profits to any of its 
physicians, it must first aggregate: (1) The entire profits from the 
entire group; or (2) the entire profits from any component of the group 
that consists of at least five physicians. Once aggregated, the group 
practice may choose to retain some of the profits or distribute all of 
the profits through shares of overall profits paid to its physicians. A 
group practice need not treat all components of at least five 
physicians the same with respect to the distribution of shares of 
overall profits from designated health services. That is, the group 
practice may choose to distribute all of the overall profits from 
designated health services of one of its components of five physicians 
to the physicians in that component, and choose to retain some or all 
of the overall profits from designated health services of another of 
its components of five physicians. Moreover, we are aware that group 
practices may utilize eligibility standards to determine whether a 
physician is eligible for a profit share, such as length of time with 
the group practice, whether the physician is an owner, employee, or 
independent contractor of the group practice, or the amount of time 
that the physician practices (for example, full-time or part-time). 
Nothing in our regulations prohibits the use of eligibility standards, 
provided that they do not result in the payment of a profit share that 
is determined in a manner that is directly related to the volume or 
value of a physician's referrals. In sum, a group practice may 
determine for itself how much of the aggregate overall profits it 
chooses to share with its physicians and which physicians are entitled 
to a share of the group practice's overall profits; however, all 
payments of shares of overall profits must comply with the requirements 
of Sec.  411.352(g) and (i).
    Comment: A number of commenters opposed our proposal to define 
``overall profits'' from designated health services to mean the profits 
from all the designated health services of the group practice (or a 
component of the group that consists of at least five physicians), 
asserting that group practices should be permitted to distribute the 
profits from designated health services on a service-by-service basis, 
which some of the commenters referred to as ``split pooling.'' These 
commenters variously stated that service-by-service profit shares would 
allow physicians to receive profits shares more closely related to the 
services they referred, their specialty, the services they provide, or 
the expenses they have personally incurred. One of the commenters 
explained that, for large or multispecialty group practices, in 
particular, different practice locations or specialties commonly use 
ancillary

[[Page 77564]]

designated health services to varying degrees in connection with the 
delivery of care in their location or specialty, and another stated 
that the proposed ``limits'' may inadvertently penalize the 
``practices'' within a group that are more profitable due to efficiency 
and reward those that are less efficient. Another of the commenters 
asserted that a service-by-service allocation methodology aligns 
compensation with the physicians who are furnishing professional 
services in conjunction with designated health services and incurring 
the related expenses. The commenter complained that not allowing what 
it referred to as ``pooling by designated health service,'' physicians 
who have no treatment involvement in the designated health services are 
nonetheless rewarded financially. A different commenter gave the 
example of a subset of physicians within a group practice that agree to 
assume all of the costs of expensive diagnostic testing equipment when 
there is a dispute within the group as to whether to purchase the 
equipment. The commenter asserted that service-by-service distribution 
of profits is appropriate so that the physicians who bear the cost of 
the equipment also receive the profits arising from the use of the 
equipment. One commenter stated that distributing profits from 
designated health services on a service-by-service basis is not an 
issue, but offered no reason why this is the case. In contrast, several 
commenters commended CMS for proposing the clarifying language at Sec.  
411.352(i)(1)(ii) and supported finalizing the regulatory revisions.
    Response: Section 1877(h)(4)(B) of the Act permits a group practice 
to pay a physician in the group practice a share of overall profits of 
the group. In Phase I, we shared our interpretation that the term 
``overall profits'' means the entire profits of the entire group (or 
any component of the group that consists of at least five physicians) 
derived from designated health services (66 FR 908) (emphasis added). 
The proposed revisions at Sec.  411.352(i)(1)(ii), which we are 
finalizing in this final rule, incorporate this long-held 
interpretation. Commenters provided no justification for their 
preferred interpretation of the statutory term ``overall profits''--
which makes no reference to designated health services as the services 
that generated the profits--as meaning the profits from any one type of 
designated health service.
    We remind readers that, in order to qualify as a group practice, a 
physician practice must meet all the requirements set forth in Sec.  
411.352. These include that the practice is a unified business with 
centralized decision making by a body representative of the practice 
that maintains effective control over the practice's assets and 
liabilities (including, but not limited to, budgets, compensation, and 
salaries) and consolidated billing, accounting, and financial 
reporting. In addition, revenues from patient care services must be 
treated as receipts of the practice. Certain of the justifications for 
the commenters' assertions that we should permit a group practice to 
share the profits from designated health services on a service-by-
service basis call into question whether a physician practice that 
operates as described in the comments could satisfy the unified 
business test at Sec.  411.352(f) or, potentially, whether the revenues 
from patient care services are treated as receipts of the practice, as 
required at Sec.  411.352(d)(1).
    As we stated in Phase I, the Congress intended to confer group 
practice status on bona fide group practices and not on loose 
confederations of physicians who come together substantially in order 
to capture the profits from referrals of designated health services 
protected under the exception for in-office ancillary services (66 FR 
875). For that reason, we established the unified business test at 
Sec.  411.352(f). To meet the unified business test, a group practice 
must be organized and operated on a bona fide basis as a single 
integrated business enterprise with legal and organizational 
integration (66 FR 906). We designed the group practice rules at Sec.  
411.352 to preclude group practice status for loose confederations of 
physicians that are group practices in name, but not operation. In 
Phase I, in response to a comment on our 1998 proposed rule, we stated 
that we generally agree that a group practice should consist of a 
single medical business whose equity holders operate as a single 
business by sharing such things as contracts, liability, facilities, 
equipment, support personnel, management, and a pension plan, and that 
this aspect of a group practice is addressed by the unified business 
test at Sec.  411.352(f) (66 FR 898). The essential elements of a 
unified business are: (1) Centralized decision making by a body 
representative of the practice that maintains effective control over 
the group's assets and liabilities (including budgets, compensation, 
and salaries); and (2) consolidated billing, accounting, and financial 
reporting. As we stated in Phase I, group practices may distribute the 
revenues from services that are not designated health services in any 
manner they wish. The unified business test permits group practices to 
use cost- and location-based accounting with respect to services that 
are not designated health services, and, in some cases, with respect to 
services that are designated health services if the compensation method 
is not directly related to the volume or value of the physician's 
referrals and other conditions are satisfied (66 FR 895). However, if a 
physician practice's payment methods do not indicate a unified business 
(or indicate a business that is unified solely with respect to the 
provision of designated health services), the physician practice may 
not qualify as a group practice under section 1877(h)(4) of the Act and 
Sec.  411.352 (66 FR 907).
    With respect to the specific comments regarding the need for the 
payment of profit shares on a service-by-service basis, we assume the 
reference to ``practices'' within a group practice pertains to 
specialties or locations of the group practice. We remind parties that, 
if a ``practice'' within a group practice is comprised of five or more 
physicians, the group practice may aggregate the profits from all the 
designated health services of the component and pay shares of the 
overall profits to the physicians in the component, provided that the 
group practice satisfies all the requirements of Sec.  411.352, 
including Sec.  411.352(g) and (i). If a ``practice'' within a group 
practice is not comprised of at least five physicians, the group 
practice would have to include additional physicians in the component 
and aggregate the profits from all the designated health services of 
the component.
    Comment: One commenter stated that disparate state certificate of 
need and self-referral laws result in a patchwork of permitted and 
prohibited designated health services within different segments or 
practice locations of the same group practice. The commenter suggested 
that requiring group practices that operate in multiple states to 
aggregate all their profits from designated health services will be 
challenging, but did not elaborate on what those challenges are.
    Response: Group practices may use the ``component of five'' rule to 
aggregate and distribute profit shares. We think that most large group 
practices, including those that operate in more than one state, will be 
able to use the component of five rule to establish workable profit 
distribution methodologies to address issues related to the 
distribution of profits from designated health services for which all 
physicians in the group do not make

[[Page 77565]]

referrals and discrepancies in the types of designated health services 
furnished among practice locations due to state certificate of need and 
self-referral laws.
    Comment: Some of the commenters that objected to the proposed 
revisions to the group practice rules regarding the distribution of 
shares of overall profits noted that our proposals, if finalized, would 
require changes to the internal compensation practices in many medical 
groups. Some of these commenters requested that, if we finalize the 
proposed changes to the regulation text, we provide a sufficient 
timeframe of at least one year for all group practices to revise their 
compensation methodologies. Another commenter was generally supportive 
of the revisions to Sec.  411.352(i), but expressed concern about the 
time and effort involved in revising compensation arrangements for 
group practices that have separated profits by service type until now.
    Response: We agree with the commenters that parties may need time 
to revise compensation methodologies and arrangements for group 
practice physicians. For that reason, we are delaying the effective 
date of final Sec.  411.352(i)(1) until January 1, 2022. We believe 
this will provide group practices sufficient time to evaluate their 
current compensation methodologies for compliance with final Sec.  
411.352(i)(1) and make necessary revisions. Through December 31, 2021, 
the definition of ``overall profits'' will be as set forth at existing 
Sec.  411.352(i)(2). We note that the delayed effective date applies to 
all revisions at final Sec.  411.352(i)(1), including the removal of 
the reference to ``Medicaid.'' Also, to avoid complications associated 
with the restructuring of Sec.  411.352(i), we are also delaying the 
effective date of final Sec.  411.352(i)(2) and (4) to coincide with 
the effective date of the revised definition of ``overall profits.''
    Comment: One commenter was concerned that new Sec.  411.352(i)(3) 
would negatively impact physicians who are employees or independent 
contractors of a group practice, noting that only group practice owners 
are able to share in the group's profits.
    Response: The commenter is mistaken. Nothing in section 1877 of the 
Act or our physician self-referral regulations limits the payment of a 
share of overall profits to owners of a group practice. Under section 
1877(h)(4)(B) of the Act and our regulations, any physician in the 
group may be paid a share of overall profits of the group practice.
    Comment: One commenter requested confirmation that a group practice 
may designate more than one component of at least five physicians for 
the allocation of overall profits from designated health services as 
long as the profits from all the designated health services referred by 
the physicians in a component are aggregated and the profits shared 
with the physicians in that component. The commenter also sought 
confirmation that the various components could be established by 
grouping together physicians of the same specialty or by any other 
pooling mechanism, as long as each component consists of at least five 
physicians.
    Response: A group practice may designate more than one component of 
at least five physicians for the allocation of overall profits from 
designated health services as long as the profits from all the 
designated health services referred by the physicians in a component 
are aggregated and the profits shared with the physicians in that 
component. Provided that the share of overall profits received by a 
physician is not determined in any manner that is directly related to 
the volume or value of the physician's referrals, a group may establish 
components of at least five physicians by including physicians with 
similar practice patterns, who practice in the same location, with 
similar years of experience, with similar tenure with the group 
practice, or who meet other criteria determined by the group practice. 
We continue to believe, as we stated in Phase I, that a threshold of at 
least five physicians is likely to be broad enough to attenuate the 
ties between compensation and referrals of designated health services 
(66 FR 909).
    Comment: Some commenters asked whether a group practice must use a 
single methodology for distributing the shares of overall profits 
attributable to each of its designated components of five physicians. 
In other words, if a group practice has three designated ``pools'' of 
at least five physicians (components A, B, and C), must the group 
practice use the same methodology for distributing the profits for 
components A, B, and C? The commenters referenced the example in the 
proposed rule where we stated that a group practice 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 physicians (or the 
same subset of its physicians but using a different methodology) (84 FR 
55801).
    Response: The example provided in the proposed rule was intended to 
illustrate the application of the policy that does not permit service-
by-service distribution of profits from designated health services 
(which one of the commenters referred to as ``split pooling''). 
However, as noted by the commenters, the statement could appear to 
prohibit the use of different distribution methodologies for different 
components of five physicians in a group practice. To the extent that 
parties understood this to be our policy and an indication of how we 
would interpret the regulations, we are clarifying that a group 
practice may utilize different distribution methodologies to distribute 
shares of the overall profits from all the designated health services 
of each of its components of at least five physicians, provided that 
the distribution to any physician is not directly related to the volume 
or value of the physician's referrals. To illustrate, assume a group 
practice comprised of 15 physicians furnishes clinical laboratory 
services, diagnostic imaging services, and radiation oncology services. 
Assume further that the group practice has divided its physicians into 
three components of five physicians (component A, component B, and 
component C) for purposes of distributing the overall profits from the 
designated services of the group practice. Under the final regulations, 
for each component, the group practice must aggregate the profits from 
all the designated health services furnished by the group and referred 
by any of the five physicians in the component. The group practice may 
distribute the overall profits from all the designated health services 
of component A using one methodology (for example, a per-capita 
distribution methodology), distribute the overall profits from all the 
designated health services of component B using a different methodology 
(for example, a personal productivity methodology in compliance with 
Sec.  411.352(i)(1)(iii)(B)), and distribute the overall profits from 
all the designated health services of component C using a third 
methodology that does not directly relate to the volume or value of the 
component physicians' referrals (or the methodology used for component 
A or B). However, a group practice must utilize the same methodology 
for distributing overall profits for every physician in the component. 
That is, using the illustration above, the group practice must use the 
per-capita distribution methodology for each physician in component A, 
the personal productivity methodology for each physician in component 
B, and the same methodology (whichever it utilizes) for each physician 
in component C. As described in our responses to other comments in this

[[Page 77566]]

section II.C.2.b., the group practice could not use different 
methodologies to distribute the profits of the different types of 
designated health services within a component.
    Comment: Most commenters that commented on our proposals to revise 
the group practice regulations supported the removal of the reference 
to Medicaid from the definition of ``overall profits'' and the 
clarifying discussion in the proposed rule.
    Response: As stated above, we are finalizing our proposal to revise 
Sec.  411.352(i). However, we are delaying the effective date of these 
updates until January 1, 2022 to coincide with the effective date of 
the other revisions to the definition of ``overall profits.''
(3) Productivity Bonuses
    For consistency with the regulations related to the payment of a 
share of overall profits, we proposed 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. We also 
proposed 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 proposed minor changes to the deeming 
provisions themselves. In addition, we proposed to update the language 
of existing Sec.  411.352(i)(1) (relocated to 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.'' We stated that 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 does not directly take 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).
    To correct a misstatement about the nature of Sec.  414.22 of this 
chapter included in existing Sec.  411.352(i)(3)(i), we proposed 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 relate directly to 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 personally performed by the 
physician. We sought comment in the proposed rule 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. 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 
that at final Sec.  411.352(i)(1)(iii)(B). Therefore, we proposed 
corresponding revisions at Sec.  411.352(i)(2)(ii)(B) (to be renumbered 
from current Sec.  411.352(i)(3)(ii)) that would deem the payment of a 
productivity bonus not to directly relate to (or, as explained in this 
section II.C.2.b(1), 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 proposed to replace the term ``allocated'' 
with ``distributed'' at (redesignated) Sec.  411.352(i)(1)(iii)(C) as 
the latter term reflects the actual payment of the profit share (84 FR 
55802). We are finalizing all of our proposals related to the payment 
of productivity bonuses by a group practice. However, to avoid 
complications associated with the restructuring of Sec.  411.352(i), as 
explained in our responses to comments below, we are delaying the 
effective date of these updates at final Sec.  411.352(i)(2) until 
January 1, 2022 to coincide with the effective date of the revised 
definition of ``overall profits.''
    We received the following comments and our responses follow.
    Comment: One commenter requested that we permit a physician to 
receive a productivity bonus based on services that the physician or 
the physician's ``care team'' has personally performed, provided that 
the productivity bonus is not determined in any manner that is directly 
related to the volume or value of the physician's referrals of 
designated health services.
    Response: Whether or not a productivity bonus paid to a physician 
in a group practice would violate the prohibition on compensation that 
takes into account the volume or value of the physician's referrals at 
Sec.  411.352(g) depends on the basis for the productivity bonus. To 
the extent that a productivity bonus (or the portion of a productivity 
bonus) paid by a group practice to a physician in the group is solely 
based on services personally performed by the physician (which are not 
referrals, even if they are designated health services), the 
productivity bonus (or the portion of the productivity bonus) would not 
violate Sec.  411.352(g). To the extent that a productivity bonus (or 
the portion of a productivity bonus) paid by a group practice to a 
physician in the group is solely based on services performed by a 
member of the physician's care team that are not designated health 
services, the productivity bonus (or the portion of the productivity 
bonus) would not violate Sec.  411.352(g). To the extent that a 
productivity bonus (or the portion of a productivity bonus) paid by a 
group practice to a physician in the group is solely based on 
designated health services ordered by the physician and furnished by 
members of the physician's care team ``incident to'' the physician's 
services and billed to Medicare as such, the productivity bonus (or the 
portion of the productivity bonus) would not violate Sec.  411.352(g). 
To the extent that a productivity bonus (or the portion of a 
productivity bonus) paid by a group practice to a physician in the 
group is solely based on designated health services ordered by the 
physician and furnished by members of the physician's care team, but 
not furnished ``incident to'' the physician's services, the 
productivity bonus (or the portion of the productivity bonus) may only 
indirectly relate to the volume or value of the physician's referrals 
for the designated health services furnished by the members of the 
physician's care team.
    Comment: Most commenters that commented on our solicitation 
regarding whether the deeming provision related to the relative value 
units personally performed by a physician did not support a limitation 
of this deeming methodology to only the physician's relative value 
units as defined at Sec.  414.22. Commenters urged us to finalize our 
proposal to include as a deemed permissible productivity bonus 
methodology one that is based on the physician's total patient 
encounters. One commenter urged us not to make any revision to this 
regulation, stating that it works as currently structured and revising 
it would create additional regulatory burden.
    Response: We are finalizing Sec.  411.352(i)(2)(ii)(A) as proposed. 
Under our longstanding regulations, as well as those proposed, a 
physician in the group practice may be paid a productivity bonus based 
on services that he or she has personally performed or services 
``incident to'' such

[[Page 77567]]

personally performed services (or both). The productivity bonus may not 
be determined in any manner that is directly related to the volume or 
value of referrals by the physician, except that the productivity 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. The regulation at Sec.  
414.22(a) relates to the establishment of physician work RVUs. The 
regulation at Sec.  414.22(b) relates to the computation of practice 
expense RVUs. The regulation at Sec.  414.22(c) relates to the 
computation of malpractice expense RVUs. We believe the reference to 
Sec.  414.22 generally to describe a ``physician's RVUs'' is misplaced 
in our current regulations. Our clarification is intended only to marry 
the general requirement for productivity bonuses based on services that 
are personally performed by a physician with the deeming provision that 
allows productivity bonuses based on total patient encounters or RVUs. 
It is not intended to, nor do we believe it will, limit the payment of 
productivity bonuses currently permissible under our regulations. 
Therefore, we see no reason why the revisions finalized at Sec.  
411.352(i)(2)(ii)(A) would create additional regulatory burden for 
group practices.

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 final 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, comments to the CMS RFI and to our 
proposed rule, and our experience working with our law enforcement 
partners. In the proposed rule, we proposed revisions to, including 
deletions of, certain requirements in our regulatory exceptions. In 
this section II.D. of the final rule, we explain which of our proposals 
to recalibrate the scope and application of the physician self-referral 
regulations that we are finalizing and any modifications resulting from 
our consideration of the comments on 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 establish regulatory exceptions for other financial 
relationships that do not pose a risk of program or patient abuse. The 
majority of the exceptions issued using the Secretary's authority under 
section 1877(b)(4) of the Act (which we often refer to as 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 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. 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 using 
the Secretary's authority under 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. CMS RFI 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. These 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. The 
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 and claim for designated health services 
does not violate the physician self-referral law. CMS RFI 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. As discussed below, commenters on the 
proposed rule have many of these same concerns.
    As we stated in the proposed rule, 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, 
when a compensation arrangement violates the intent-based criminal 
anti-kickback statute, it will likely also fail to meet one or more of 
the key requirements of an exception to the physician self-referral law 
(84 FR 55803). 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. As noted in the proposed rule, since the 
Phase I regulation was issued, we are unaware of any instances of 
noncompliance with the physician self-referral law that turned solely 
on an underlying violation of the anti-kickback statute (or any other 
Federal or

[[Page 77568]]

State law governing billing or claims submission). We also emphasized 
in the proposed rule and reiterate here that, although we were 
considering removing the requirement that the arrangement does not 
violate the anti-kickback statute from some or all of the regulatory 
exceptions, we believe that the Secretary has the authority under the 
statute to impose a requirement that the financial relationship not 
violate the anti-kickback statute 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 also stated that we intend to monitor excepted 
financial relationships, and that we may propose in a future rulemaking 
to reinstate the requirements 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 (84 FR 55802 through 55803).
    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 stated in the proposed rule that 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 noted 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 proposed 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 or regulation governing billing or 
claims submission wherever such requirements appear. Specifically, we 
proposed 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 proposed 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 proposed to remove the definition of ``does 
not violate the anti-kickback statute'' in Sec.  411.351. We noted 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 safe 
harbors to the anti-kickback statute, and stated that our proposal did 
not apply to or affect these provisions.
    After reviewing comments on our proposed rule, we no longer believe 
that it is appropriate to remove the requirement that the arrangement 
does not violate the anti-kickback statute from the exception for fair 
market value compensation at Sec.  411.357(l), and we are not 
finalizing our proposal to remove that requirement at Sec.  
411.357(l)(5). We are finalizing our proposal to remove the requirement 
that the arrangement does not violate the anti-kickback statute from 
all other regulatory exceptions, and to remove requirements pertaining 
to Federal or State laws or regulations governing billing or claims 
submissions from all the regulatory exceptions, including Sec.  
411.357(l)(5). In the proposed rule, we noted 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 physician self-referral law's referral 
and billing prohibitions (84 FR 55803). However, the regulatory 
exception for fair market value compensation at Sec.  411.357(l) 
applies to many arrangements that also could be protected by a 
statutory exception. In particular, as explained in section II.D.10 of 
this final rule, we are finalizing our proposal to permit arrangements 
for the lease of office space to be excepted under Sec.  411.357(l). 
The statutory exception for the rental of office space at section 
1877(e)(1) of the Act and Sec.  411.357(a) of our regulations requires, 
among other things, that the space rented or leased does not exceed 
that which is reasonable or necessary for the legitimate purposes of 
the lease and is used exclusively by the lessee when being used by the 
lessee. There are similar requirements in the statutory exception for 
the rental of equipment at Sec.  411.357(b)(2). The regulatory 
exception for fair market value compensation, on the other hand, does 
not include such requirements. To the extent that the exception for 
fair market value compensation does not contain substitute requirements 
or safeguards, there is a possibility that certain potentially abusive 
arrangements that would not be permitted under a statutory exception 
could be protected by this regulatory exception.
    We believe that requiring that the arrangement does not violate the 
anti-kickback statute in the exception for fair market value 
compensation at Sec.  411.357(l) serves as a substitute safeguard, in 
lieu of certain safeguards that are included in the statutory 
exceptions but omitted from Sec.  411.357(l). The exclusive use 
requirement in the statutory exceptions for the rental of office space 
and equipment, for example, prevents sham or ``paper'' leases, where a 
lessor receives payment from a lessee for space that the lessor 
continues to use (63 FR 1714 and 69 FR 16086). We believe that sham or 
paper lease arrangements would likely violate the anti-kickback 
statute. Therefore, the requirement at Sec.  411.357(l)(5) that the 
arrangement not violate the anti-kickback statute provides a substitute 
safeguard for the statutory exclusive use requirement and serves to 
prevent program or patient abuse. Without the requirement that the 
arrangement not violate the anti-kickback statute, sham lease 
arrangements or other abusive arrangements could potentially be 
excepted under Sec.  411.357(l), and the exception for fair market 
value compensation would not satisfy the requirement at section 
1877(b)(4) of the Act that financial relationships protected by the 
exception do not pose a risk of program or patient abuse. On the other 
hand, we are no longer convinced that the requirement at Sec.  
411.357(l)(5) that an arrangement must not violate Federal or State 
laws or regulations governing billing or claims submission is needed as 
a substitute safeguard to prevent program or patient abuse, and we are 
therefore finalizing the proposal to remove that requirement from Sec.  
411.357(l)(5). In sum, the exception for fair market value compensation 
offers greater flexibility than certain overlapping statutory 
exceptions insofar as it omits some statutory requirements, but the 
greater flexibility could, in certain instances, increase the risk of 
program or patient abuse. Therefore, the requirement that the 
arrangement does not violate the anti-kickback statute should not be 
deleted from Sec.  411.357(l)(5).
    We emphasized in the proposed rule and reiterate here that our 
final rule in no way affects parties' liability under the anti-kickback 
statute. Indeed, the Congress clarified when enacting section 1877 of 
the Act that ``any

[[Page 77569]]

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 satisfies the requirements of an applicable 
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 a financial relationship is governed by other laws or 
regulations, our 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.
    After reviewing the comments on the proposed rule, we are 
finalizing our proposal to remove the requirement that an arrangement 
not violate the anti-kickback statute from all the regulatory 
exceptions except the exception for fair market value compensation at 
Sec.  411.357(l). Because this requirement will remain in Sec.  
411.357(l), we are not finalizing our proposal to delete the definition 
of ``does not violate the anti-kickback statute'' at Sec.  411.351. We 
are finalizing without modification our proposal to remove from all the 
applicable regulatory exceptions the requirement that an arrangement 
not violate any Federal or State law or regulation governing billing 
and claims submissions.
    We received the following comments and our responses follow.
    Comment: Nearly all the commenters that addressed the proposal 
favored removing provisions requiring that the arrangement does not 
violate the anti-kickback statute or Federal and State laws or 
regulations governing billing and claims submissions from the 
regulatory exceptions. The commenters stated that the requirements are 
unnecessary because parties must comply with these laws independently 
of the physician self-referral law. One of these commenters stated that 
removing the requirement that an arrangement that satisfies an 
exception to the physician self-referral law must also fit within a 
safe harbor under the anti-kickback is a welcome streamlining of the 
regulations. Some commenters stressed that the incorporation of the 
intent-based Federal anti-kickback statute into the strict-liability 
framework of the physician self-referral law causes confusion and 
compliance risk without affording any additional protection of the 
Medicare program. Commenters in favor of removing the requirement that 
the arrangement does not violate the anti-kickback statute also 
requested that CMS delete the definition of ``does not violate the 
anti-kickback statute'' in Sec.  411.351. One of these commenters 
maintained that the definition is circular, because it includes the 
phrase ``does not violate the anti-kickback provision in section 
1128B(b) of the Act.'' Lastly, one commenter generally opposed removing 
the requirement that the arrangement does not violate the anti-kickback 
statute from the regulatory exceptions, stating that finalizing the 
proposal would lead to program or patient abuse.
    Response: We agree with the majority of the commenters that the 
requirement that an arrangement not violate any Federal or State law or 
regulation governing billing or claims submission should be removed 
from all the regulatory exceptions. Parties have an independent 
obligation to follow such laws, and we no longer believe that the 
Secretary must require compliance with such laws and regulations to 
ensure that financial relationships excepted under a regulatory 
exception do not pose a risk of program or patient abuse.
    With respect to the anti-kickback statute, we continue to believe 
that, as a general matter, the requirement that the arrangement does 
not violate the anti-kickback statute in most regulatory exceptions 
would not further protect against program or patient abuse because the 
parties to the compensation arrangement are already required to comply 
with all Federal laws, including the anti-kickback statute. We 
understand the concerns raised by commenters that inclusion of the 
intent-based anti-kickback statute in the strict liability framework of 
the physician self-referral law may increase the burden of compliance 
with the physician self-referral law, and we are finalizing our 
proposal to remove this requirement from all regulatory exceptions 
except the exception at Sec.  411.357(l) for fair market value 
compensation. As previously noted in this final rule, the requirement 
that the arrangement does not violate the anti-kickback statute in 
Sec.  411.357(l)(5) is an important substitute requirement for certain 
statutory requirements that would otherwise apply to arrangements to 
which the regulatory exception at Sec.  411.357(l) is applicable, such 
as the exclusive use requirement for leases of office space and 
equipment. Given the current requirements in the exception for fair 
market value compensation, we are not convinced that it is appropriate 
to protect leases of office space and certain other arrangements under 
Sec.  411.357(l) without the requirement that the arrangement does not 
violate the anti-kickback statute. Thus, we are not finalizing our 
proposal to remove this requirement from Sec.  411.357(l)(5).
    Because we are not finalizing our proposal to remove the 
requirement that the arrangement does not violate the anti-kickback 
statute from the exception for fair market value compensation, we are 
not deleting the definition of ``does not violate the anti-kickback 
statute'' at Sec.  411.351. We note that the requirement that the 
arrangement does not violate the anti-kickback statute at Sec.  
411.357(l)(5) does not and never has required that an arrangement fit 
into a safe harbor under the anti-kickback statute; rather the 
requirement remains that the arrangement does not violate the anti-
kickback statute. As the term is defined at Sec.  411.351, an 
arrangement ``does not violate the anti-kickback statute'' if it meets 
a safe harbor under the anti-kickback statute, has been specifically 
approved by OIG in a favorable advisory opinion issued to a party to 
the particular arrangement with respect to the particular arrangement 
(and not a similar arrangement), or does not violate the anti-kickback 
provisions in section 1128B(b) of the Act. We did not propose and are 
not finalizing any specific substantive modifications of this 
definition.
    Lastly, we are taking this opportunity to reiterate that the 
Secretary retains the authority to impose, in future rulemaking, 
requirements pertaining to the anti-kickback statute and Federal or 
State laws or regulations governing billing or claims submissions in 
some or all of the regulatory exceptions issued under section 
1877(b)(4) of the Act, if the Secretary determines that such 
requirements are necessary to prevent program or patient abuse. We 
intend to monitor excepted financial relationships, and we may propose 
in a future rulemaking to include the requirements in some or all of 
the exceptions issued pursuant to the Secretary's 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, unless the 
requirements of an applicable exception are satisfied, if a physician 
(or an immediate family member of a physician) has a financial

[[Page 77570]]

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 (that is, 
Medicare). The referral prohibition is codified in our regulations at 
Sec.  411.353(a). In the 1998 proposed rule, 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 (for example, the individual may not have met his 
or her deductible)'' (63 FR 1694). Our 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, 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, 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 (60 FR 41980). We 
explained that the application of a composite rate payment 
``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 excepted 
services furnished under other payment rates that that the Secretary 
determines provide no financial incentive for under- or overutilization 
or any other risk of program or patient abuse (63 FR 1666). However, in 
Phase I, instead of expanding the exception at Sec.  411.355(d) to 
include services furnished under other payment rates, we narrowed the 
definition of ``designated health services'' to exclude certain 
services that are paid as part of a composite rate, and solicited 
comments on whether the exception at Sec.  411.355(d) was still 
necessary in light of the narrowed definition of ``designated health 
services'' (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 
by Medicare under the Part A composite rate (that is, the Skilled 
Nursing Facility Prospective Payment System (SNF PPS)), 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.\9\ In contrast, although home 
health and inpatient and outpatient hospital services are paid under 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 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 SNF PPS would have been considered designated 
health services under the 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 under a composite rate such as home health services, it did so 
by explicitly listing the services at section 1877(h)(6) of the Act. We 
agreed 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.
---------------------------------------------------------------------------

    \9\ ESRD services are also reimbursed on a composite rate, and 
thus are not considered to be designated health services. In this 
context, we refer readers to 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.
---------------------------------------------------------------------------

    As we stated in the proposed rule, in light of our experience with 
the SRDP and our review of the comments to the 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 (84 FR 
55805). We proposed 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 Medicare Severity Diagnosis Related Group 
(MS-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 payment under the IPPS has already been 
established by the MS-DRG (diagnostic

[[Page 77571]]

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 MS-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 
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 applicable 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. In the proposed rule, we 
stated that we are aware that not all hospitals are paid under the IPPS 
(84 FR 55805). We solicited 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. We also stated that, although hospital outpatient 
services are also paid under a composite rate, we believe that there is 
typically only one ordering physician for outpatient services, and it 
would be rare for a physician other than the ordering physician to 
refer an outpatient for additional hospital outpatient services that 
are compensated within the same ambulatory payment classification (APC) 
under the Hospital Outpatient Prospective Payment System (OPPS). For 
this reason, we did not propose to apply the modified definition of 
``designated health services'' at Sec.  411.351 to outpatient hospital 
services paid under the OPPS.
    In this final rule, we are extending the proposed policy to apply 
to hospital services furnished to inpatients that are paid under 
additional prospective payment systems. Specifically, we are revising 
the definition of ``designated health services'' to state that, 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 increase the amount of 
Medicare's payment to the hospital under any of the following 
prospective payment systems (PPS): (i) Acute Care Hospital Inpatient 
(IPPS); (ii) Inpatient Rehabilitation Facility (IRF PPS); (iii) 
Inpatient Psychiatric Facility (IPF PPS); or (iv) Long-Term Care 
Hospital (LTCH PPS). For the reasons explained in our response to 
comments below, we are not extending the proposed policy to apply to 
hospital services furnished to outpatients. We are also making 
nonsubstantive revisions to the definition of ``designated health 
services'' for consistency regarding the terms ``paid'' and ``payable'' 
and making a minor grammatical change.
    We received the following comments and our responses follow.
    Comment: The vast majority of commenters that commented on this 
proposal supported our proposal to exclude from the definition of 
``designated health service payable, in whole or in part, by Medicare'' 
those services furnished by a hospital to an inpatient that do not 
affect the amount of Medicare's payment to the hospital under the IPPS. 
Commenters indicated that the revision would bring clarity to hospitals 
when assessing compliance with the physician self-referral law and 
calculating potential overpayments for violations of the law. Some 
commenters highlighted the onerous compliance burdens associated with 
quantifying a potential overpayment when the financial relationship 
that does not satisfy the requirements of an applicable exception is 
with a physician other than the physician who referred the patient for 
the inpatient admission. Nearly all of the commenters that supported 
our proposal requested that we expand the policy to other composite 
rate payment systems under which hospitals are paid. Some commenters 
suggested limiting the expansion to payments for services to inpatients 
under the IRF PPS, IPF PPS, and LTCH PPS. Other commenters suggested 
that we expand the policy to any composite rate payment system under 
which a hospital is paid for either inpatient or outpatient services, 
including OPPS. The commenters suggesting expansion to OPPS stated (in 
identical language) that they are aware of circumstances where 
physicians other than the ordering physician refer outpatients for 
additional outpatient services that would not be compensated separately 
under the OPPS; however, none of these commenters provided a specific 
example or identified a specific APC.
    Response: We believe that expanding our policy to other payment 
systems applicable to the furnishing of services to inpatients would 
not pose a risk of program or patient abuse. The IRF PPS, IPF PPS, and 
LTCH PPS operate similarly to IPPS. No additional payment is available 
where additional hospital services are ordered after a patient's 
admission by a physician who was not responsible for the patient's 
admission, except in limited circumstances. We are not persuaded to 
expand the policy to the OPPS. As we stated in the proposed rule, we 
believe that there is typically only one ordering physician for 
outpatient services, and it would be rare that a physician other than 
the ordering physician would refer an outpatient for additional 
outpatient services that would not be paid separately under the OPPS 
(84 FR 55805). The commenters that asserted the existence of 
circumstances where physicians other than the ordering physician refer 
outpatients for additional outpatient services that would not be paid 
separately under the OPPS provided no evidence or examples of such 
circumstances for us to confirm. Finally, we believe that extending the 
rule to designated health services paid under the OPPS would be 
burdensome and challenging for stakeholders, CMS, and our law 
enforcement partners to implement and enforce. We decline to extend the 
policy to the OPPS.
    Comment: One commenter questioned whether a service would be 
considered a designated health service if the hospital's furnishing of 
the service to an inpatient decreased the IPPS payment to the hospital. 
Another commenter requested clarification of the meaning of ``affects'' 
the amount of Medicare payment. A few commenters requested additional 
examples of hospital services that would or would not ``affect'' an 
IPPS payment under the revised definition of ``designated health 
services,'' if finalized.
    Response: Although we do not believe it is likely that the ordering 
of additional services for an inpatient would decrease the amount of 
Medicare's payment for the admission, we are replacing the word 
``affect'' with ``increase'' to express our policy with more precision. 
As noted, under the definition of ``designated health

[[Page 77572]]

services'' finalized at Sec.  411.351, 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 increase the amount of Medicare's payment to the 
hospital under any of the following prospective payment systems (PPS): 
(i) Acute Care Hospital Inpatient (IPPS); (ii) Inpatient Rehabilitation 
Facility (IRF PPS); (iii) Inpatient Psychiatric Facility (IPF PPS); or 
(iv) Long-Term Care Hospital (LTCH PPS).
    Comment: One commenter in opposition to our proposal described a 
summary of the proposed rule prepared by an independent law firm that 
identified what the law firm assumed the rationale behind our proposal 
to be: Physicians have no financial incentive to overprescribe services 
that do not affect the rate of payment. The commenter disagreed with 
that rationale as support for our proposal, and described a complicated 
situation that could present a risk of abuse based on hospital 
referrals to service lines within the hospital in which certain 
physicians, but not the referring physicians addressed in our proposal, 
could profit. The commenter expressed concern that the revised 
definition of ``designated health services'' would likely eliminate 
inpatient hospitalization from the reach of the physician self-referral 
law. The commenter also asserted that there exists no opposition to the 
current definition of ``designated health services'' and urged CMS not 
to finalize the proposal.
    Response: All inpatient and outpatient hospital services will 
remain designated health services except for services furnished to an 
inpatient after he or she becomes an inpatient and only where those 
additional services do not increase the amount of Medicare's payment to 
the hospital for the inpatient admission. For the reasons stated in the 
proposed rule and in this final rule, we are finalizing our proposal 
with the modification described above.
    Comment: A few commenters expressed uncertainty with respect to a 
hospital's ability to know whether services furnished to an inpatient 
pursuant to a prohibited referral from a physician other than the 
physician who made the referral for the inpatient admission result in 
outlier payments under the IPPS such that the ``caveat'' in the 
exclusion from the definition would apply. The commenters also stated 
that they lacked clarity regarding when a hospital could know that an 
outlier payment is triggered by a particular inpatient admission. The 
commenters asserted that this makes the revised definition of 
``designated health services'' unworkable.
    Response: We see no reason why a hospital would be unable to 
identify referrals made by physicians with whom the hospital has 
financial relationships that do not satisfy the requirements of an 
applicable exception. As we have stated repeatedly throughout our 
rulemaking history, the physician self-referral law's billing 
prohibition requires that the entity submitting a claim to Medicare for 
payment for designated health services has the burden of ensuring that 
the services were not furnished as a result of a prohibited referral. 
It is incumbent upon hospitals to implement effective compliance 
programs to identify financial relationships with physicians that do 
not satisfy the requirements of an applicable exception to the 
physician self-referral law and take action not to submit prohibited 
claims for payment. If a hospital did not identify the financial 
relationship with a referring physician until after a claim was 
submitted and paid, the hospital would need to identify admissions for 
which payments in excess of the expected MS-DRG payment (or other PPS 
payment) were received and identify any prohibited referrals for 
services furnished to the inpatients for whom the excess payments 
relate. We believe that our rules and regulations regarding outlier 
payments are clear and we are unaware of any reason that a hospital 
would be unable to utilize its medical record and billing systems to 
identify inpatient admissions that resulted in payments in addition to 
the expected MS-DRG payment (or other PPS payment) for the inpatient 
admission.
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, although the definition of ``physician'' 
at Sec.  411.351 cross-references section 1861(r) of the Act, the two 
definitions are not entirely harmonious. 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 
between Title XVIII of the Act and our regulations with regard to the 
definition of a ``physician,'' in the proposed rule, we proposed to 
amend the definition of ``physician'' at Sec.  411.351 (84 FR 55805 
through 55806). Under the proposed definition, the types of 
practitioners who qualify as ``physicians'' for purposes of the 
physician self-referral law would be defined by cross-reference to 
section 1861(r) of the Act. Therefore, the definition of ``physician'' 
at Sec.  411.351 would incorporate the statutory limitations imposed on 
the definition of ``physician'' by section 1861(r) of the Act. As 
proposed, 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. After 
reviewing the comments, we are finalizing the definition of 
``physician'' as proposed.
    We received the following comment and our response follows.
    Comment: Several commenters generally supported the regulatory 
change to cross-reference the definition of ``physician'' at Sec.  
411.351 to the definition in section 1861 of the Act. A few commenters 
maintained that the definition of ``physician'' should be limited to 
doctors who have a Doctor of Medicine, Doctor of Osteopathic Medicine, 
or a recognized equivalent physician degree. One commenter questioned 
the practical effect of incorporating into our definition of physician 
at Sec.  411.351 the statutory limitations imposed in the definition of 
``physician'' under section 1861(r) of the Act. Specifically, the 
commenter asked whether the policy excludes podiatrists, optometrists, 
and chiropractors from the definition of ``physician'' for purposes of 
the physician self-referral law, because, according to the commenter, 
the statutory limitations related to those three types of practitioners 
restrict when they are considered physicians under section 1861(r) of 
the Act to very limited circumstances, none of which reference the 
physician self-referral law.
    Response: We are finalizing the definition of ``physician'' as 
proposed.

[[Page 77573]]

The revised definition will align the regulatory definition of 
``physician'' at Sec.  411.351 with the statutory definition of 
``physician'' in section 1861(r) of the Act to ensure that there are no 
inconsistencies between our regulations and the statutory definition. 
Because the physician self-referral statute is in Title XVIII of the 
Act, in the absence of a definition of ``physician'' in section 1877 of 
the Act, definitions of general applicability, such as the definition 
of ``physician'' at section 1861(r) of the Act, are applicable to the 
physician self-referral law. Under section 1861(r) of the Act, a 
``physician'' includes a doctor of medicine or osteopathy, a doctor of 
dental surgery or dental medicine, a doctor of podiatric medicine, a 
doctor of optometry, and a chiropractor, but provides for limitations 
on when such doctors are considered ``physicians'' for purposes of 
Title XVIII of the Act. We do not believe that the definition of 
``physician'' in our regulations should be either more limited or more 
expansive than the statutory definition. Thus, to the extent that the 
statutory definition of ``physician'' includes doctors other than 
doctors of medicine and osteopathy, those practitioners fall within the 
ambit of the physician self-referral law. However, we do not believe 
that the referral prohibition at Sec.  411.353(a) should apply to any 
doctor during the period he or she is not considered to be a physician 
for purposes of Title XVIII of the Act. In those instances when a 
doctor of medicine or osteopathy, doctor of dental surgery or dental 
medicine, doctor of podiatric medicine, doctor of optometry, or 
chiropractor is considered a physician under section 1861(r) of the 
Act, the doctor or chiropractor will be considered a physician 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. In the 
proposed rule, we reaffirmed 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 exceptions proposed in the proposed rule 
would protect such payments. We proposed 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 (84 
FR 55806). After reviewing the comments, we are finalizing our 
modification of the definition of ``referral'' as proposed.
    We received the following comment and our response follows.
    Comment: Numerous commenters supported the proposed revision of the 
definition of ``referral.'' We also received comments on our proposed 
definition of ``referral'' that pertained to the volume or value 
standard and the payment of productivity bonuses.
    Response: We are finalizing the definition as proposed. Comments 
pertaining to the volume or value standard and the payment of 
productivity bonuses are addressed in section II.B.3. of this final 
rule.
d. Remuneration
    A compensation arrangement between a physician (or an immediate 
family member of such physician) and an entity (as defined at Sec.  
411.351) 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 that 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 or below fair market 
value prices, 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 or 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 71321). In two advisory opinions issued 
in 2013 we applied the definition of ``remuneration'' at Sec.  411.351 
to two proposed arrangements to provide

[[Page 77574]]

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.
    After further consideration of our interpretation of section 
1877(h)(1)(C)(ii) of the Act and the analysis set forth in the 2013 
advisory opinions, in the proposed rule, we proposed certain 
modifications to the definition of ``remuneration'' at Sec.  411.351 
(84 FR 55806 through 55807). Specifically, we proposed to remove the 
parenthetical in the current definition of ``remuneration,'' which 
stipulates that the carve-out to the definition of ``remuneration'' 
does not apply to surgical items, devices, or supplies. We stated that 
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, 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 \10\ 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.
---------------------------------------------------------------------------

    \10\ 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.''
---------------------------------------------------------------------------

    In the proposed rule, we also clarified the ``used solely'' 
requirement at Sec.  411.351. Although the furnished item, device, or 
supply may not 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 
proposed 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 again 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 1693 through 1694 and 66 FR 947 through 948, 
respectively).
    Although we proposed certain modifications to the definition of 
``remuneration,'' we did not propose to exclude from the definition of 
``remuneration'' 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 948). 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.
    After reviewing the comments, we are finalizing our revision of the 
definition of ``remuneration'' as proposed.
    We received the following comments and our responses follow.
    Comment: Numerous commenters supported our proposed revision of the 
definition of ``remuneration,'' including our proposal to remove the 
phrase ``not including surgical supplies, devices, or supplies'' and 
our proposal to clarify that items, devices, and supplies are not 
remuneration if they are, ``in fact,'' used exclusively for one or more 
of the permitted purposes. Several of the commenters that supported our 
proposed revision of the definition of ``remuneration'' also supported 
our statement that those items, devices, or supplies whose main 
function is to prevent contamination or infection are not carved out of 
the definition of ``remuneration.'' One commenter suggested that the 
proposed changes to the definition will reduce physician hesitancy 
regarding the acceptance of such items, devices, and supplies and will 
reduce administrative burden.

[[Page 77575]]

    Response: We agree that the revisions to the definition of 
``remuneration'' will provide additional clarification and reduce 
administrative burden, and are revising the definition of 
``remuneration'' as proposed.
    Comment: One commenter objected to the proposal to strike the 
parenthetical pertaining to surgical items, devices, or supplies from 
the definition of ``remuneration'' and urged CMS not to finalize the 
proposal. The commenter maintained that CMS did not explain the 
rationale for the policy change in the proposed rule, and that CMS did 
not provide any examples of surgical items, devices, or supplies that 
would not be considered remuneration. According to the commenter, it is 
relatively straightforward for a laboratory to determine if an item, 
device, or supply is classified as ``surgical,'' and thus is not 
excluded from the definition of remuneration. The commenter asserted 
that it would be more difficult, if not impossible, for a laboratory to 
determine whether a physician in fact uses a surgical item, device, or 
supply for one of the permitted purposes under the statute. The 
commenter noted that CMS acknowledged in the proposed rule the 
difficulty of monitoring the use of sterile gloves. The commenter 
concluded that, given the difficulty of monitoring actual use, the 
proposal, if finalized, would create a ``slippery slope'' that would 
permit unscrupulous actors to provide items, devices, or supplies that 
are routinely used as part of a surgical procedure as opposed to one of 
the permitted purposes under the statute. A different commenter raised 
similar objections to the proposal. This commenter acknowledged that 
the proposal to no longer categorically include surgical items, 
devices, or supplies in the definition of ``remuneration'' provides 
some additional flexibility under our regulations, but urged CMS to 
ensure that the items, devices, or supplies not considered to be 
remuneration continue to be single-use items, devices, or supplies with 
little, if any, independent value to the physicians who receive them. 
The commenter expressed concern that, under the proposal, valuable 
items, devices, or supplies, such as bone marrow kits, would no longer 
be considered remuneration, thus increasing the risk of program or 
patient abuse. The commenter also expressed concern that it would 
increase the burden on parties to monitor the use of items, devices, or 
services, to ensure that physicians are in fact using the items, 
devices, or services for one or more of the permitted purposes under 
the statute.
    Response: The purpose of the revision to the definition of 
``remuneration'' is to increase flexibility under our regulations and 
to clarify the ``used solely'' requirement. As noted in the proposed 
rule, we no longer believe that the mere fact that an item, device, or 
supply is classified as ``surgical'' means that the item, device, or 
supply is not used solely for one or more of the permitted purposes. 
Although the categorical inclusion of surgical items, devices, or 
supplies in the definition of ``remuneration'' may provide a bright 
line test for determining which items may be furnished to physicians at 
reduced or no cost, it also may include certain items, device, or 
supplies in the definition of ``remuneration'' that the Congress meant 
to exclude in section 1877(h)(1)(C)(ii) of the Act. Nothing in the 
regulation compels an entity to provide any item, device, or supply to 
a physician below fair market value or for free. Entities concerned 
about monitoring for ``sole use'' may elect not to give away surgical 
(or any other) item, device, or supply. Moreover, items, devices, and 
supplies that do not constitute remuneration for purposes of the 
physician self-referral law may nonetheless implicate the anti-kickback 
statute.
    Similarly, our clarification of the ``used solely'' requirement was 
not intended to loosen the requirement or to create a slippery slope 
that will lead to abusive arrangements. Prior to the proposed rule, we 
received inquiries from stakeholders questioning whether the mere fact 
that an item, device, or supply could be used for a purpose other than 
one or more of the permitted purposes means that the provision of such 
an item, device, or supply constitutes ``remuneration'' under our 
regulations. We are adding the phrase ``in fact'' to the definition to 
clarify that this is not the case and to provide certainty to parties 
regarding items, devices, or supplies with potential ancillary 
functions outside of one or more of the permitted purposes. At the same 
time, as indicated in our discussion of the provision of sterile 
gloves, we continue to believe that, for an item, device, or supply 
(including surgical tools) to satisfy the ``used solely'' requirement, 
the primary purpose of the item, device, or supply must be one or more 
of the uses permitted under the statute. Sterile gloves and other 
multi-use items, devices, or supplies whose primary purpose is not one 
of the permitted purposes are not excluded from the definition of 
``remuneration,'' even if a particular physician in fact only uses the 
item, device, or supply for one of the permitted purposes. We do not 
disagree that it may be difficult for an entity to monitor how a 
physician ``in fact'' uses a multi-use item, device, or supply whose 
primary purpose is not one or more of the permitted purposes to ensure 
that the physician in fact uses the item, device, or supply exclusively 
for one or more of the permitted purposes. However, because the 
provision of multi-use items, devices, or supplies whose primary 
purpose is not one or more of the permitted purposes will not be carved 
out of the definition of remuneration.
    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 that are primarily provided by 
laboratories to ensure proper collection of specimens. We note that, in 
the OBRA 1993 Conference Report, H.R. 103-213 pp. 818 through 819, the 
Congress characterized section 1877(h)(1)(C)(ii) of the Act as an 
``exception'' for ``certain minor remuneration.'' Although we are not 
finalizing a monetary limit for the carve-out, we continue to believe 
that the items carved out of the definition of ``remuneration'' must be 
low value. We also reaffirm that the items, devices, or supplies 
provided to a physician must have little or no independent value to the 
physician. In this context, it is important to note that both the 
statute and our regulations provide that the items, devices, or 
supplies provided must serve a purpose for the entity providing the 
items, devices, or supplies; for example, collecting specimens for the 
entity. We believe that the phrase ``for the entity'' underscores that 
the items, devices, or supplies must have little, if any, independent 
value for the physician. Lastly, we emphasize that, even if the 
provision of an item, device, or supply is carved out of the definition 
of ``remuneration'' under the physician self-referral law, the 
provision of such items, devices, and supplies implicates the anti-
kickback statute.
e. Transaction (and Isolated Financial 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 the fair market value of the transaction and is not 
determined in a manner that takes into account (directly or indirectly) 
the

[[Page 77576]]

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 the 1992 proposed rule, we proposed an exception (ultimately 
codified 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 8591). 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 that 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.
    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 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 that 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 some 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. We see no reason to unduly stretch 
the meaning and applicability of the exception for isolated 
transactions beyond what was intended by the Congress. As described 
elsewhere in this final rule, our final regulations should 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 final 
provisions will afford parties with sufficient flexibility to ensure 
that personal service and other compensation arrangements comply with 
the physician self-referral law.
    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, in service arrangements where multiple services are provided 
over an extended duration of time, the same services are provided on a 
repeated basis, even if there is only one payment for the multiple 
services provided. Also, 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.
    We remind parties that 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. Thus, the exception for isolated 
transactions is not available

[[Page 77577]]

to retroactively cure noncompliance with the physician self-referral 
law. Our position is buttressed by the fact 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.
    After reviewing the comments, we are finalizing the proposed 
independent definition of ``isolated financial transaction'' at Sec.  
411.351, which clarifies that an ``isolated financial transaction'' 
does not include a single payment for multiple services provided over 
an extended period, with the following modifications: First, the final 
definition of ``isolated financial transaction'' specifies that an 
isolated transaction is a one-time transaction. Second, subparagraph 
(2) of the definition of ``isolated financial transaction'' at Sec.  
411.351 and the introductory chapeau language in Sec.  411.357(f) 
provides as an additional example of an isolated financial transaction 
a single instance of forgiveness of an amount owed in settlement of a 
bona fide dispute. Third, we are clarifying at Sec.  411.357(f)(4) that 
an isolated financial transaction that is an instance of forgiveness of 
an amount owed in settlement of a bona fide dispute is not part of the 
compensation arrangement giving rise to the bona fide dispute. Fourth, 
although we did not propose further changes to the definition of 
``transaction'' at Sec.  411.351, we are modifying the definition in 
response to comments to remove the phrase ``or process,'' because the 
term ``process'' has led some stakeholders to conclude that the 
exception is available to protect a single payment for multiple 
services provided over an extended period of time. Lastly, we are 
finalizing corresponding revisions to the exception for isolated 
transactions at Sec.  411.357(f) to reference isolated financial 
transactions in order to align the exception text with the statutory 
provisions at section 1877(e)(6) of the Act. Even though the exception 
at Sec.  411.357(f) applies to isolated financial transactions, we did 
not propose and we are not finalizing a change in the title of the 
exception from ``isolated transactions'' to ``isolated financial 
transactions,'' as the title of the statutory exception is ``isolated 
transactions.''
    We received the following comments and our responses follow.
    Comment: Many commenters expressed concern that, given the proposed 
definition of ``isolated financial transaction,'' the exception at 
Sec.  411.357(f) would not apply to the settlement of a bona fide legal 
dispute, especially a dispute arising from an ongoing service 
arrangement, may not be excepted under Sec.  411.357(f). Commenters 
noted that parties to a service arrangement may have a legitimate 
dispute concerning the amount of compensation due under a service 
arrangement, for example, where the terms of a contract documenting the 
arrangement are ambiguous. In these circumstances, a physician may have 
reasonable belief that he or she is owed more money under the contract, 
while the entity may believe in good faith that the physician is 
entitled to less than what the physician claims. Under such 
circumstances, the parties may wish to settle the matter to avoid 
litigation. The commenters expressed concern that the settlement could 
be construed as a single payment for multiple services previously 
provided by the physician and, therefore, the exception at Sec.  
411.357(f) would be unavailable to protect the compensation arrangement 
arising from the settlement payment (or reduction in debt). Several 
commenters maintained that resolution of a bona fide dispute is 
altogether different from making a single payment for multiple services 
provided over an extended period of time. The commenters requested that 
CMS expressly include a settlement of a bona fide legal dispute, along 
with a one-time sale of a property or practice, in the definition of 
``isolated financial transaction,'' and strike language stating that an 
isolated financial transaction does not include a single payment for 
multiple services.
    Response: Our policy has always been that the exception for 
isolated transactions at Sec.  411.357(f) is applicable to a 
compensation arrangement arising from the settlement of a bona fide 
dispute, even if the dispute originates from a service arrangement 
where multiple services have been provided over an extended period of 
time. To clarify our longstanding policy, we are modifying the 
definition of ``isolated financial transaction'' at Sec.  411.351 to 
include in subparagraph (2) a single instance of forgiveness of an 
amount owed in settlement of a bona fide dispute, and we are including 
similar language in the introductory chapeau language at Sec.  
411.357(f). However, the exception is not applicable to the 
compensation arrangement that the parties dispute.
    We agree with the commenters that stated that settlement of a bona 
fide dispute arising from an arrangement is fundamentally different 
from making a payment, including a single payment, for items or 
services provided under the arrangement. Although the settlement of a 
bona fide dispute may include a one-time payment made by a party (or 
installment payments as permitted under the exception), the cornerstone 
of a settlement of a bona fide dispute, as opposed to a payment for 
items or services, is that one or more of the parties forgoes a good 
faith claim to be paid more under the arrangement than the party 
actually receives. Therefore, we are describing the settlement of a 
bona fide dispute in the definition of ``isolated financial 
transaction'' and in the exception at Sec.  411.357(f) as an instance 
of forgiveness of an amount owed. We are further clarifying at Sec.  
411.357(f)(4) that an isolated financial transaction that is an 
instance of forgiveness of an amount owed in settlement of a bona fide 
dispute is not part of the compensation arrangement giving rise to the 
bona fide dispute. Thus, a settlement of a bona fide legal dispute 
under Sec.  411.357(f) is a separate compensation arrangement from any 
compensation arrangement between the parties giving rise to the bona 
fide dispute, and settlement of a bona fide dispute under Sec.  
411.357(f) does not retroactively bring the compensation arrangement 
that gave rise to the dispute into compliance with the physician self-
referral law.
    For the reasons explained above, we decline to omit from 
subparagraph (2) the phrase ``but does not include a single payment for 
multiple or repeated services (such as payment for services previously 
provided but not yet compensated).'' Parties may rely on the exception 
at Sec.  411.357(f) to protect an isolated financial transaction that 
settles a bona fide dispute arising from an arrangement for multiple, 
repeated, or ongoing services, but the exception is not available to 
protect a single payment for multiple or repeated services. A single 
payment for multiple or repeated services is not an isolated financial 
transaction, but rather an ongoing, extended compensation arrangement 
that must satisfy the requirements of another applicable exception.
    Comment: Several commenters maintained that our proposal to exclude 
a single payment for multiple services from the definition of 
``isolated financial transaction'' is inconsistent with the

[[Page 77578]]

statutory exception for isolated transactions at section 1877(e)(6) of 
the Act. According to the commenters' interpretation of section 
1877(e)(6) of the Act, the statutory examples of isolated financial 
transactions, namely a one-time sale of property or a one-time sale of 
a practice, are illustrative only, and non-exhaustive. The commenters 
asserted that the exception may also be used for payments for services, 
noting that section 1877(e)(6) of the Act incorporates by reference 
certain requirements of the exception at section 1877(e)(2) of the Act 
for bona fide employment relationships, including the requirement that 
the remuneration is ``consistent with the fair market value of the 
services'' (emphasis added). Another commenter asserted that it is 
reasonable to see a single payment for items or services already 
furnished as an isolated transaction. The commenter provided as an 
example a hospital's single payment to a physician for fulfilling an 
unanticipated need for call coverage over a weekend or holiday, where 
the physician performs no others services for the hospital for the 
previous or subsequent 6-month periods.
    Response: We agree with the commenters that the examples of 
isolated transactions in section 1877(e)(6) of the Act are illustrative 
only, not exhaustive. Among other things, as noted above, we believe 
that a single transaction resolving a bona fide dispute is an example 
of an isolated transaction that may be protected under the exception, 
if all the requirements of the exception are met. What the statutory 
examples illustrate, however, are one-time transactions, where there is 
not only a single payment (or installment payments as permitted under 
the exception) but also a single exchange of value, typically occurring 
on a specific date, involving consideration that is usually not the 
subject of repeated or frequent exchange over an extended period of 
time. In a sale of property or a practice, for example, there is 
typically a closing date when value is exchanged, and the parties 
ordinarily do not repeatedly transact to buy and sell the same property 
or practice over an extended period. The Congress' inclusion of the 
term ``one-time'' underscores that the exception is not available for 
transactions that are repeated over an extended period of time. In 
contrast to a one-time sale of property or a practice, if a physician 
repeatedly provides services to an entity over the course of months or 
years, then the physician has repeatedly provided remuneration to the 
entity in the form of an in-kind benefit during that timeframe. Even if 
the entity only makes one payment for the services, this is not a one-
time transaction as contemplated by the statute, but rather an ongoing 
service arrangement. Because we interpret the exception for isolated 
transactions as protecting one-time transactions, as indicated at 
section 1877(e)(6) of the Act, we are modifying the definition of 
``isolated financial transaction'' to include the term ``one-time.''
    Under our interpretation of the statutory scheme, ongoing service 
arrangements, where a physician provides multiple services to an entity 
over an extended period of time, must satisfy all the requirements of 
another applicable exception, such as the exception for personal 
service arrangements at Sec.  411.357(d)(1) or the exception for fair 
market value compensation at Sec.  411.357(l). We do not believe that 
the Congress would have required ongoing service arrangements to meet 
all the requirements of section 1877(e)(3) of the Act, including 
writing, signature, 1-year term, and set in advance requirements, and 
then permit parties to sidestep these requirements by making a single, 
retrospective payment for multiple services relying on the exception 
for isolated transactions.
    We agree with the commenters that not all service arrangements are 
per se excluded from protection under the exception for isolated 
transactions. In the proposed rule, we noted that the same services can 
be provided by one party and purchased by another on a repeated basis, 
whereas a party cannot repeatedly offer and sell the same property or 
medical practice to another party (84 FR 55808). We believe that the 
commenters may have inferred from this statement that our policy 
categorically excludes services from the isolated transaction 
exception. This is not our policy. As noted above, the exception for 
isolated transactions protects one-time transactions. With respect to 
an arrangement for services, the exception is available to protect a 
single payment (or installment payments, as permitted by the exception) 
for a one-time service arrangement, as opposed to an arrangement where 
multiple or repeated services are provided over an extended period of 
time. Whether a one-time service arrangement constitutes an isolated 
financial transaction depends on the facts and circumstances of the 
arrangement, including whether the service (or bundle of integrally 
related services) is provided in its entirety during a discrete time-
period of short duration, such as a 24-hour or weekend shift. We note 
that, under Sec.  411.357(f)(3), if parties utilize the exception for 
isolated transactions for a one-time service arrangement that qualifies 
as an isolated financial transaction, the parties would not be barred 
from entering into an ongoing arrangement for the same or similar 
services during the 6 months after the isolated financial transaction, 
provided that the subsequent service arrangement satisfied all the 
requirements of a different exception applicable to the subsequent 
service arrangement. The parties would, however, be barred from using 
the exception for isolated transactions for 6 months after the one-time 
service arrangement, regardless of the subject matter or consideration 
of the transaction.
    Comment: Some commenters maintained that, under the plain language 
of the exception for isolated transactions and our previous guidance, 
the exception may be relied on to protect a single payment for multiple 
services. The commenters noted that ``transaction'' is currently 
defined to mean an ``instance or process'' of two or more persons or 
entities doing business, and stated that a ``process'' suggests an 
ongoing relationship such as an arrangement for repeated or multiple 
services provided over an extended period of time. The commenters 
further noted that the terms ``isolated financial transaction'' and 
``transaction'' are defined together in the current regulations, and 
that ``isolated financial transaction'' is defined as a transaction 
involving a single payment. Another commenter objected to CMS' 
statement that the proposal is a clarification of longstanding policy 
and stated that there is nothing in the plain language of the exception 
to put parties on notice that the exception cannot be used to protect a 
single payment for multiple services.
    Response: We first introduced the concept of a ``process'' of two 
or more persons doing business in the 1995 final rule (60 FR 41979). 
There is very little commentary in the 1995 final rule or subsequent 
rulemaking on the term ``process'' in the definition of 
``transaction,'' though we did note in Phase II, when declining to 
adopt a policy allowing a certain number of transactions per year, that 
the concept of an isolated transaction is incompatible with parties 
routinely engaging in multiple transactions each year or more than one 
transaction during a short period of time (69 FR 16098). Moreover, in 
the FY 2009 IPPS final rule, we explained that all the requirements of 
an exception must be met at the time that a physician makes a referral, 
and that parties may not turn back the clock to retroactively ``cure'' 
noncompliant

[[Page 77579]]

arrangements (73 FR 48703). Under the statute and our regulations, a 
compensation arrangement is formed when remuneration, including in-kind 
remuneration such as the provision of a service, is exchanged between a 
physician and an entity. Thus, once a physician begins providing 
services to an entity under an arrangement, a compensation arrangement 
is formed, and the compensation arrangement must satisfy all the 
requirements of an exception at that time if the physician makes 
referrals to the entity. The statute and our previous policy statements 
in Phase II and the FY 2009 IPPS final rule are the basis for the 
policy articulated in the proposed rule and this final rule, namely 
that parties may not rely on the exception for isolated transactions to 
protect or retroactively ``cure'' a service arrangement involving the 
provision of multiple or repeated services over an extended period of 
time.
    We recognize, however, that stakeholders may have been under the 
impression, given the use of the word ``process'' in the definition of 
``transaction,'' that the exception for isolated transactions was 
available to protect service arrangements involving multiple or 
repeated services provided over an extended period of time. We also 
acknowledge that, under the current regulations, the definition of 
``isolated financial transaction'' is subsumed under the definition of 
``transaction,'' and, although the definition of ``isolated financial 
transaction'' requires a single payment (or installment payments, if 
certain requirements are met), it does not explicitly state that a 
single payment cannot be made for repeated or multiple services. To 
clarify our policy, we are deleting the term ``process'' from the 
definition of ``transaction'' in Sec.  411.351 and we are explicitly 
stating in subparagraph (2) of the definition of ``isolated financial 
transaction'' at Sec.  411.351 that an isolated financial transaction 
does not include a single payment for multiple or repeated services. We 
stress that these revisions are effective as of the date set forth in 
this final rule and apply prospectively only.
    Comment: Many commenters maintained that our policy reduces 
flexibility and increases the burden of compliance with the physician 
self-referral law. The commenters noted that the exception for isolated 
transactions includes core safeguards of the physician self-referral 
law, such as requirements pertaining to fair market value, the volume 
or value of a physician's referrals and other business generated by the 
physician, and commercial reasonableness, and asserted that a single 
payment for multiple services that meets these requirements and the 
other requirements of Sec.  411.357(f) does not pose a risk of program 
or patient abuse. One commenter stated that parties often seek to rely 
on the isolated transaction exception to make a single payment for 
items or service previously furnished, where the arrangement has not 
been documented before payment is made, and the documentation 
deficiencies are not discovered until after the items or services have 
been furnished (which may be for a period of more than 90 days).
    Several commenters asserted that the proposal, if finalized, would 
have an especially acute impact on hospitals located in states that 
prohibit the corporate practice of medicine. According to the 
commenters, hospitals in states without such restrictions may rely on 
the exception for bona fide employment relationships for instances in 
which fair market value compensation has been paid to a physician for 
services provided, but the arrangement is not set out in writing and 
the compensation was not set in advance. The commenters noted that, in 
states where the employment of physicians is prohibited, the exception 
for bona fide employment relationships is not available, and the only 
available exception to protect the arrangement may be the exception for 
isolated transactions.
    A few commenters, using identical language, provided an example of 
an arrangement that the commenters claimed should be covered by the 
exception for isolated transactions. In the example, an arrangement 
with an anesthesiology group is expiring, and despite good faith 
efforts to agree to the terms of a renewal arrangement, the parties 
disagree over the amount of compensation to be paid under the renewal. 
The commenters explained that the compensation formula in such a case 
may be very complex and take significant time to negotiate. In the 
commenters' example, the anesthesiology group agrees to keep providing 
services to patients after the previous arrangement expires while the 
parties continue to negotiate the terms of the renewal. The commenters 
contended that there is no harm to the Medicare program if, after the 
parties agree on compensation for the renewal, the entity relies on the 
exception for isolated transactions to compensate the physicians for 
services already furnished in the renewal term. The commenters 
suggested that no other exception would be available in this context, 
because the compensation for the renewal term was not set in advance of 
the services already provided, and the compensation would likely exceed 
the $3,500 limit under the proposed exception for limited remuneration 
to a physician.
    Response: Our policy that the exception for isolated transactions 
is not available to protect a single payment for multiple or repeated 
services is grounded in our interpretation of the statute and the 
mandate under sections 1877(b)(4) and 1877(e)(6)(B) of the Act to 
protect only those financial relationships that do not pose a risk of 
program or patient abuse. We are not convinced that an ongoing service 
arrangement is an isolated financial transaction like a one-time sale 
of a property or a practice. Moreover, we do not believe that the 
Congress would have required an ongoing service arrangement to satisfy 
all the requirements of the exception for personal service arrangements 
at section 1877(e)(3) of the Act, including set in advance, writing, 
and 1-year term requirements, and allowed the same arrangement to be 
excepted under the exception for isolated transactions, which does not 
include these requirements. The commenters' example of the 
anesthesiology practice illustrates our concern with the use of the 
exception for isolated transactions to protect an ongoing service 
arrangement. As explained in section II.D.5 of this final rule, the 
``set in advance'' requirement is an important safeguard to prevent 
parties from adjusting, including retrospectively adjusting, the 
compensation under an arrangement in a manner that takes into account 
the volume or value of a physician's referrals. In the commenters' 
example, the parties would be permitted to rely on the exception for 
isolated transactions to compensate the physicians retroactively, thus 
sidestepping the ``set in advance'' requirement of other exceptions and 
opening the door to adjustments of compensation during the negotiation 
period that take into account the volume or value of the physicians' 
referrals or other business generated by the physicians.
    The special rule for writing and signature requirements at final 
Sec.  411.354(e)(4) and the exception for limited remuneration to a 
physician at final Sec.  411.357(z) provide significant flexibility 
under our regulations while providing sufficient safeguards, including 
an annual monetary limit of $5,000 (as adjusted for inflation) under 
Sec.  411.357(z), a 90-day period for obtaining required writings under

[[Page 77580]]

Sec.  411.354(e)(4), and the requirement under Sec.  411.354(e)(4) that 
the arrangement satisfy all the requirements of an applicable exception 
(other than the writing and signature requirement), including the ``set 
in advance'' requirement, for the first 90 days of the arrangement and 
thereafter. In contrast, the exception for isolated transactions does 
not limit the amount of compensation permissible under the arrangement, 
does not require the compensation arrangement to ever be in writing, 
and does not require compensation to be set in advance. Given the 
limited requirements of the exception for isolated financial 
transactions, we believe that excepting ongoing service arrangements 
under Sec.  411.357(f), which could last for years and be worth 
hundreds of thousands of dollars or more, would pose a risk of program 
or patient abuse.
    We note that, depending on the facts and circumstances, the parties 
in the commenters' example of an anesthesiology services arrangement 
could rely on the indefinite holdover provision at Sec.  
411.357(d)(1)(vii) to continue the arrangement on the same terms and 
conditions of the original arrangement while the parties negotiate the 
compensation terms for the renewal arrangement. Once the parties 
finalize the negotiations, compensation under the arrangement could be 
amended under new Sec.  411.354(d)(1)(ii) (as discussed in section 
II.D.5. of this final rule) or the parties could enter into a new 
arrangement that satisfies the requirements of Sec.  411.357(d)(1) or 
another applicable exception to the physician self-referral law. In 
either case, to meet the ``set in advance'' requirement, the newly 
negotiated compensation terms may only be applied prospectively.
    Comment: A few commenters requested that, if CMS finalizes its 
proposed definition of ``isolated financial transaction,'' it should 
also finalize a new exception for isolated payments. The exception 
suggested by the commenters would permit an isolated, one-time payment 
for services already furnished, if: (1) The payment 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 other 
business generated; and (2) the remuneration is provided under an 
arrangement that would be commercially reasonable even if the physician 
made no referrals to the entity. Similar to the current exception at 
Sec.  411.357(f) for isolated transactions, there could be no 
additional exchanges of remuneration between the parties for 6 months 
after the isolated payment, except for financial relationships that 
satisfy all the requirements of another exception in Sec.  411.355 
through Sec.  411.357. The commenters contended that their proposal 
incorporates the three central requirements of other compensation 
exceptions--fair market value compensation, commercial reasonableness 
of the arrangement, and compensation that 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--but would 
not require a writing or compensation set in advance.
    Response: The exception suggested by the commenters does not differ 
substantively from the exception for isolated financial transactions at 
Sec.  411.357(f). For the reasons explained in response to the 
immediately previous comment, adopting the commenters' suggestions 
would pose a risk of program or patient abuse and, therefore, we cannot 
issue the suggested exception under the authority at section 1877(b)(4) 
of the Act.
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 timeframe 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 the requirements of an 
applicable exception). We noted, however, that it is not always clear 
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 regulations at Sec.  
411.353(c)(1) pertaining to the period of disallowance (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 the requirements of an applicable exception. 
Correspondingly, where the noncompliance is related to the payment of 
excess or insufficient compensation, we proposed 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 requirements 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 
regulations 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 regulations regarding 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

[[Page 77581]]

emphasized again that the regulation only prescribed an outside date 
for the period of disallowance, and that parties could determine that 
the period of disallowance ended earlier than the outside date 
prescribed by the regulation 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 established at Sec.  
411.353(c)(1) was not intended to extend the period of disallowance 
beyond the end of a financial relationship. Rather, the regulation 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 provisions regarding excess and 
insufficient compensation at Sec.  411.353(c)(1)(ii) and (iii).
    In the proposed rule, noting our experience administering the SRDP 
and stakeholder feedback that we have received over the years, we 
proposed to delete in their entirety the provisions setting forth the 
period of disallowance at Sec.  411.353(c)(1) because we believe that, 
although the rules were initially intended merely to establish an 
outside, bright-line limit for the period of disallowance, in 
application, they appear to be overly prescriptive and impractical (84 
FR 55809). We are finalizing this proposal. We emphasize that our 
action in this final rule does not permit parties to a financial 
relationship to make referrals for designated health services or to 
bill Medicare for the services when their financial relationship does 
not satisfy all the 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 (or an immediate family member) 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 final rule affects the billing and referral prohibitions at Sec.  
411.353(a) and (b). We stress 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.
    We also emphasize that removing the period of disallowance 
regulations is in no way meant to undermine parties who relied on Sec.  
411.353(c)(1)(ii) or (iii) in the past to establish that the period of 
disallowance has ended. 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 the requirements of any applicable exception and 
end on the date that the financial relationship ends or satisfies all 
the requirements of an applicable exception remains true. And, we 
continue to believe that one way to establish that the period of 
disallowance has ended in such circumstances is to recover any excess 
compensation and bring the financial relationship back into compliance 
with the requirements of an applicable exception. However, we are aware 
that the payment of excess or insufficient compensation may complicate 
the question of when a financial relationship has ended or been brought 
back into compliance with the requirements of an applicable exception 
for purposes of the physician self-referral law, and believe that 
removing the period of disallowance regulations is the best way to 
ensure that what was intended as an elective ``safe harbor'' is not 
mistaken for a compulsory action required to ensure that the period of 
disallowance has ended.
    As we stated in the proposed rule, 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 due during the timeframes established under the 
terms of an arrangement, would necessarily result in noncompliance with 
the physician self-referral law (84 FR 55809). 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. As we stated in the proposed rule and affirm here, 
this was never our intent (84 FR 55809 through 55810). However, the 
failure to remedy such operational inconsistencies (that is, payment 
discrepancies) could result in a distinct basis for noncompliance with 
the physician self-referral law.
    In the proposed rule, endeavoring to clarify statements in the FY 
2009 IPPS final rule regarding whether parties can ``turn back the 
clock'' or retroactively ``cure'' noncompliance, we stated that parties 
that detect and correct administrative or operational errors or payment 
discrepancies during the course of the arrangement are not necessarily 
``turning back the clock'' to address past noncompliance (84 FR 55811). 
Rather, it is a normal business practice, and a key element of an 
effective compliance program, to actively monitor ongoing financial 
relationships, and to correct problems that such monitoring uncovers. 
An entity that detects a problem in an ongoing financial relationship 
and corrects the problem while the financial relationship is still 
ongoing 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, parties cannot retroactively ``cure'' the 
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, regular review of arrangements for 
compliance with the physician self-referral law. We provided an example 
to illustrate our policy regarding payment discrepancies in the 
operation of a compensation arrangement (84 FR 55810 through 55811), 
and believe that it is useful to repeat the example from the proposed 
rule here. We have modified some of the language of the example for 
clarity.
    Assume there is a 1-year arrangement between an entity and a 
physician beginning January 1 for the personal services of the 
physician; the arrangement is memorialized at the outset in a writing 
signed by the parties; the amount of compensation provided for in the 
writing does not exceed fair market value; and the arrangement 
otherwise fully complies with all 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 writing, and the parties discover the payment 
discrepancy early in month 7. For purposes of this illustration, assume 
that a hospital pays a physician $150 per hour for medical director 
services

[[Page 77582]]

when the writing evidencing the arrangement 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 payment 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 
administrative or operational errors and rectify them promptly. We 
provided this example in the proposed rule and include it in this final 
rule to assure parties that unintended payment discrepancies that are 
corrected in a timely manner do not cause a compensation arrangement to 
fail to satisfy the requirements of an exception to the physician self-
referral law during the timeframe of the erroneous operation of the 
arrangement. We did not state in the proposed rule, nor is it our view, 
that every error or mistake will cause a compensation arrangement to 
fail to satisfy the requirements of an exception or that every error or 
mistake must be corrected in order to maintain compliance with the 
physician self-referral law. However, if parties identify an error that 
would cause the compensation arrangement to fail to satisfy the 
requirements of an exception to the physician self-referral law, they 
cannot simply ``unring the bell'' by correcting it at some date after 
the termination of the arrangement. We discuss below the comments that 
we received regarding our statements in the proposed rule and this 
example.
    In the proposed rule, we continued our analysis of the example 
provided, stating that, if the operational error--that is, payments of 
$150 per hour instead of the agreed upon $140 per hour--was not timely 
discovered and rectified, we would analyze the actual compensation 
arrangement between the parties as we would any financial relationship 
under the physician self-referral law. For purposes of explaining our 
policies in this final rule, assume also that the payments to the 
physician did not revert back to the intended $140 per hour for months 
7 through 12, and the hospital did not recover any of the $10 per hour 
paid in excess of the intended $140 per hour. Therefore, the physician 
was, in fact, paid $150 per hour under the parties' arrangement for the 
provision of medical director services. In the proposed rule, we noted 
that the actual arrangement between parties does not always coincide 
with the terms described in the written documentation. To properly 
ascertain 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 ($150 
per hour) did not exceed fair market value and was not determined in 
any manner that took into account the volume or value of the 
physician's referrals or other business generated for the hospital, 
then the potential noncompliance would relate primarily to the failure 
to properly document the actual arrangement (medical director services 
compensated at $150 per hour) in writing, provided that the arrangement 
satisfied the remaining requirements of an applicable exception. We 
emphasize again in this final rule that various provisions in our 
regulations, including those finalized in this final rule, may offer 
parties a means of limiting the scope of potential noncompliance when 
the actions of the parties differ from their documented arrangement 
such that they create a separate compensation arrangement that must be 
analyzed for compliance with the physician self-referral law. To 
illustrate, assume the actual arrangement between the parties is for 
the provision of medical director services compensated at $150 per hour 
and all the requirements of an applicable exception are satisfied 
except for the requirements that the compensation is set in advance, in 
writing, and signed by the parties. The new exception finalized at 
Sec.  411.357(z) for limited remuneration to a physician may be 
available to protect the first $5,000 paid to the physician (if the 
exception has not yet been utilized during the current calendar year). 
In addition, the parties could rely on the special rule for writing and 
signature requirements finalized 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 consecutive calendar 
days of the commencement of the arrangement via a collection of 
documents, including documents evidencing the course of conduct between 
the parties. The 90-day clock would begin when the parties could no 
longer use (or were no longer using) the exception at Sec.  411.357(z). 
Thus, while the parties are relying on the exception at Sec.  
411.357(z) and for up to 90 consecutive calendar days after, they would 
likely be developing the documentation necessary to evidence their 
arrangement for medical director services under which the physician is 
paid $150 per hour. Depending on the facts and circumstances, the 
parties may be able to establish that the arrangement complied with the 
physician self-referral law for its entire duration.
    Finally, as we stated in the proposed rule, in certain instances, 
the failure to collect money that is legally owed under an arrangement 
may potentially give rise to a secondary (separate) financial 
relationship between the parties (84 FR 55810). In such circumstances, 
because forgiveness of an obligation or debt may constitute 
remuneration for purposes of the physician self-referral law, the 
parties may conclude that the only means to avoid noncompliance with 
the physician self-referral law is to recoup the amount owed under the 
arrangement. Turning back to the previous example, and assuming that 
the hospital corrected the error beginning in month 7 but did not 
collect the excess compensation from the physician, the relevant 
inquiry is whether the uncorrected payment errors during months 1 
through 6--that is, the additional $10 per hour paid to the physician--
gave rise to a secondary financial relationship (for example, an 
interest free loan or the complete forgiveness of debt) that must 
satisfy the requirements of an applicable exception.
    We received the following comments and our responses follow.
    Comment: Commenters generally supported the removal of the ``period 
of disallowance'' provisions from Sec.  411.353(c). One commenter 
stated that these provisions were cumbersome to apply and raised 
questions for parties deciding whether the period of disallowance 
ended. The commenter further stated that removal of the provisions will 
help parties to establish the end of the period of disallowance on a 
case-by-case basis without concern of having to defend why an 
arrangement is believed to have ended prior to the deeming provision in 
the regulations. One commenter agreed with our proposal, asserting that 
removing the period of disallowance regulations in their entirety would 
offer providers more flexibility to determine when a financial 
relationship has ended. In contrast, two commenters requested that we 
replace the period of disallowance regulation to provide for a date 
certain by which a compensation arrangement

[[Page 77583]]

would be deemed to end. Specifically, the commenters (in identical 
phrasing) suggested that the arrangement and, thus, the period of 
disallowance, should be deemed to end on the date that is 90 days after 
the physician (or immediate family member) last receives remuneration 
from the entity under the arrangement.
    Response: As we stated in the proposed rule, although the period of 
disallowance provisions were initially intended to establish an 
outside, bright-line limit for the period of disallowance, the rules, 
in application, were overly prescriptive and impractical (84 FR 55809). 
We are finalizing our proposal to delete the provisions from Sec.  
411.353(c) of our regulations. We are not persuaded to establish a rule 
under which the period of disallowance would end 90 days after the 
physician (or immediate family member) last receives remuneration from 
the entity under the specific arrangement. Such a rule would be 
inappropriate in the case of remuneration to a physician that was 
substantially in excess of fair market value or that was determined in 
a manner that took into account the volume or value of the physician's 
referrals to the entity. In addition, the rule suggested by the 
commenters could extend the period of disallowance in many cases, for 
instance, in a case where a lease arrangement has ended and the 
noncompliance was related to the parties' failure to properly document 
it as required by our regulations. We believe that the determination of 
when the period of disallowance ends is best made on a case-by-case 
basis taking into consideration the facts and circumstances of the 
specific compensation arrangement between the parties.
    Comment: Two commenters (in essentially identical comments) claimed 
that parties often have no way of knowing when certain types of 
compensation arrangements end. The commenters highlighted as 
particularly problematic one-time payments that are above or below fair 
market value and the provision of nonmonetary compensation in excess of 
the annual limit established in regulation. The commenter suggested 
that we adopt a rebuttable presumption that a compensation arrangement 
resulting from a one-time payment in excess or below fair market value 
or the payment of nonmonetary compensation above the annual limit in 
Sec.  411.357(k)(1) ends the earlier of 6 months after the payment and 
the date the value causing the one-time payment or excess nonmonetary 
compensation is corrected (paid or repaid) by the physician (or the 
physician organization in whose shoes the physician stands under Sec.  
411.354(c)).
    Response: One-time payments that are above or below fair market 
value may be an indication of a reward (that is, payment) for a 
physician's referrals. Referrals are not items or services (see section 
II.D.2.c. of this final rule); therefore, there is no exception 
available to protect the payment for referrals. A compensation 
arrangement that involves a one-time payment that is above or below 
fair market value does not lend itself to a one-size-fits-all approach. 
We decline to adopt the commenter's suggestion with respect to one-time 
payments that are above or below fair market value.
    With respect to the provision of nonmonetary compensation in excess 
of the annual limit established in regulation, we offer the following 
observations. In Phase II, when explaining that the exception for 
temporary noncompliance does not apply to arrangements that previously 
complied with the exception for nonmonetary compensation at Sec.  
411.357(k), we noted that, in the case of nonmonetary compensation, it 
is possible to be compliant in the next year, since the exception 
permits nonmonetary compensation up to $300 annually (69 FR 16057). In 
Phase III, we clarified that the aggregate limit in Sec.  411.357(k)(1) 
is to be calculated on a calendar year basis (72 FR 51058). Thus, on 
January 1 of the next calendar year, the parties would no longer be 
over the limit for the current calendar year. Put another way, the 
period of disallowance for nonmonetary compensation overages that are 
not repaid in accordance with Sec.  411.357(k)(1) in most cases will 
end on December 31st of the year in which the excess nonmonetary 
compensation is provided. However, in rare instances, the period of 
disallowance may continue if the nonmonetary compensation is so 
valuable that it cannot fairly be considered the type of token of 
appreciation anticipated by the exception (72 FR 51059). For example, 
if a hospital gifts a physician an expensive new car on December 30th 
of a calendar year, the compensation arrangement that results from the 
transfer of the remuneration would not appropriately be considered to 
end the next day. Rather, the remuneration should be viewed as a likely 
exchange for the physician's future referrals. Under our final 
regulation at Sec.  411.351, it is clear that referrals are not items 
or services for which an entity may provide remuneration. In essence, 
with respect to the provision of nonmonetary compensation that is not a 
fair market value exchange for items or services and the amount of 
which is over the annual limit at Sec.  411.357(k)(1), there is a 
rebuttable presumption that the period of disallowance ends no later 
than December 31st of the year in which the excess nonmonetary 
compensation is provided. There is no need to adopt the commenter's 
suggestion with respect to the period of disallowance for the payment 
of excess nonmonetary compensation.
    Comment: A large number of commenters expressed appreciation for 
our proposed rule guidance on remedying payment discrepancies that 
occur during the course of a compensation arrangement. Most of these 
commenters agreed that, if a party identifies an administrative or 
operational error or a payment discrepancy during the course of an 
arrangement, the parties do not fall out of compliance with the 
requirements of an applicable exception if the payment discrepancy is 
remedied prior to the end of the arrangement.
    Response: As described more fully above and in our responses to 
other comments, an effective compliance program should enable parties 
to identify administrative and operational errors that result in 
payment discrepancies under a compensation arrangement. When payment 
discrepancies are identified and rectified in a timely manner, we do 
not believe that the discrepancies cause a compensation arrangement to 
be out of compliance with the requirements of the applicable exception 
during the time that they existed. We are codifying in regulation at 
new Sec.  411.353(h) a special rule for reconciling compensation to 
confirm our policy view.
    Comment: One commenter noted that, ideally, the impact of an 
effective compliance program will be the identification of payment 
discrepancies within the term of an arrangement, providing the parties 
an opportunity to cure the error. According to this commenter, however, 
even an effective compliance program may not identify all errors within 
the term of an arrangement. The commenter requested that CMS provide a 
grace period for correcting unintentional errors that would begin upon 
termination or expiration of an arrangement, expressing concern, along 
with other commenters, with a policy that does not allow for the 
correction of errors that are discovered after the termination or 
expiration of an arrangement. Some of these commenters asserted that it 
is unfair that errors discovered after several years of an ongoing 
multi-year arrangement could be corrected to ``right

[[Page 77584]]

the ship,'' while errors discovered even 1 week after the expiration of 
a 1-year arrangement could not. One commenter suggested that, provided 
that the parties to an arrangement correct any payment discrepancies 
within 1 year of the termination or expiration of an arrangement, we 
should consider the arrangement to have satisfied the requirements of 
the applicable exception for its entire duration. Other commenters 
asserted that ``retroactive curing'' of an arrangement (or ``turning 
back the clock'') should be permitted at any time.
    Response: In Phase II, when we finalized the exception for 
temporary noncompliance at Sec.  411.353(f), we stated that it was 
applicable in those instances where an arrangement has fully satisfied 
the requirements of another exception for at least 180 consecutive 
calendar days, but has fallen out of compliance with that exception for 
reasons beyond the control of the entity. We also stated that parties 
must take steps to rectify their noncompliance or otherwise comply with 
the statute as expeditiously as possible under the circumstances (69 FR 
16057). In regulation, we provided that the period of time in which an 
entity must rectify the noncompliance must not exceed 90 consecutive 
calendar days. By the end of the 90-day exception period, parties must 
either comply with another exception or have terminated their otherwise 
prohibited financial relationship. We continue to believe in the 
importance of promptly rectifying noncompliance in those instances 
where the noncompliance occurs for reasons beyond the control of the 
entity. Our belief that parties should promptly reconcile known payment 
discrepancies that occur through their own administrative or 
operational errors in order to maintain compliance with the 
requirements of an exception is a logical extension of this policy. In 
Phase II, we also stated that the exception for temporary noncompliance 
is not intended to allow an entity to submit otherwise prohibited 
claims or bills when it purposefully takes or omits to take actions or 
engages in conduct that causes its financial relationship to be 
noncompliant with the requirements of an exception (69 FR 16057). It is 
our view that the knowing failure to comply with the terms of an 
arrangement negotiated by the parties is a purposeful or affirmative 
action or omission of the parties. It does not qualify as a reason 
beyond the control of the entity, and we are not persuaded by the 
commenters that we should allow a period of time for reconciliation of 
known payment discrepancies that exceeds the period for resolving 
temporary noncompliance occurring for reasons beyond the control of the 
entity. Specifically, permitting parties to reconcile payment 
discrepancies for a period of 1 year following the expiration or 
termination of their compensation arrangement or for an unlimited 
period of time would present a risk of program or patient abuse. 
Allowing a lengthy or unlimited period of time to correct payment 
discrepancies, especially in the case of significant payment 
discrepancies, would serve as a disincentive for parties to monitor 
arrangements for compliance with the physician self-referral law 
through an effective compliance program. Therefore, we decline to adopt 
the commenters' suggestions regarding the length of the reconciliation 
period. However, we are persuaded that a limited ``grace period'' to 
reconcile payment discrepancies following the expiration or termination 
of a compensation arrangement would not pose a risk of program or 
patient abuse. We believe that allowing the same period of time to 
reconcile payment discrepancies as the period to rectify noncompliance 
due to reasons beyond the control of the entity--but no longer--would 
not pose a risk of program or patient abuse. Therefore, we are 
finalizing at Sec.  411.353(h) a special rule that permits an entity to 
submit claims or bills for designated health services and permits 
payment to be made to the entity for such designated health services if 
all payment discrepancies under the parties' arrangement (or the 
arrangement between the entity and the immediate family member of the 
physician) are reconciled within 90 consecutive calendar days of 
expiration or termination of the compensation arrangement, and 
following the reconciliation, the entire amount of remuneration for 
items or services has been paid as required under the terms and 
conditions of the arrangement. To maintain consistency with other 
regulations that require remedial action within certain timeframes, the 
regulation specifies that the reconciliation must occur within the 
specified number of consecutive calendar days. Under the special rule 
for reconciling compensation at final Sec.  411.353(h), if the parties 
to a compensation arrangement reconcile all payment discrepancies in 
the arrangement within this timeframe, the entity may submit a claim or 
bill and payment may be made to the entity for designated health 
services referred by the physician, assuming their arrangement 
satisfied all the requirements of an applicable exception during the 
entire duration of the arrangement, after considering the 
reconciliation.
    Comment: One commenter asserted that a result of our policy that 
payment discrepancies reconciled during the course of an arrangement 
will prevent the arrangement from being considered out of compliance 
with the requirements of an exception to the physician self-referral 
law is that parties will continue arrangements they would otherwise 
wish to terminate in order to keep the arrangement ``live'' or ongoing 
so that identified payment discrepancies may be reconciled.
    Response: The flexibility provided under the final special rule for 
reconciling compensation at Sec.  411.353(h) should provide parties 
sufficient time to reconcile identified payment discrepancies without 
requiring the continuation of arrangements the parties no longer wish 
to have.
    Comment: A few commenters asserted that it is unfair that parties 
could discover an error in the first few months of a long-term 
arrangement but not have to correct it until the end of the 
arrangement, yet parties that discover an error after the termination 
or expiration of an arrangement would be unable to take even immediate 
action to cure it in order to maintain compliance with the physician 
self-referral law.
    Response: We believe the new special rule at Sec.  411.353(h) 
addresses the latter part of the commenter's concern. However, the 
commenter's assumption that parties could discover an error in the 
first few months of a long-term arrangement and suffer no consequences 
under the physician self-referral law if they wait until the end of the 
arrangement to reconcile the discrepancies is incorrect. Although the 
new special rule for reconciling compensation at Sec.  411.353(h) 
allows an entity to avoid violating the billing prohibition of the 
physician self-referral law if the parties reconcile all payment 
discrepancies under their arrangement within 90 consecutive calendar 
days following the expiration or termination of the arrangement, 
parties that fail to reconcile known payment discrepancies risk 
establishing a second financial relationship (for example, through the 
forgiveness of debt or the provision of an interest-free loan) that 
must satisfy the requirements of an applicable exception in order to 
avoid the prohibitions of the physician self-referral law. If the 
payment discrepancy or the failure to reconcile it (that is, recover 
excess compensation or collect

[[Page 77585]]

compensation owed) is significant enough to give rise to a separate 
financial relationship, that financial relationship must satisfy the 
requirements of an applicable exception once it exists. The 
commencement date of the second financial relationship depends on the 
facts and circumstances, such as the amount of excess compensation or 
unpaid compensation and how long the known overpayment or underpayment 
of the compensation has continued. For example, a large amount of 
excess compensation that is not recovered may give rise to a financial 
relationship in a shorter amount of time than a very small amount of 
unrecovered excess compensation or unpaid compensation. Thus, even if 
the entity is deemed not to have violated the physician self-referral 
law's billing prohibition once the original compensation arrangement is 
ultimately reconciled, the entity would be prohibited from submitting a 
claim or bill for a designated health service referred by the physician 
beginning at the point where the second financial relationship exists.
    Comment: One commenter suggested that we allow parties an 
established amount of time after the end of a financial relationship to 
cure noncompliance with one or more requirements of an applicable 
exception. The commenter did not expressly limit its suggestions to 
payment discrepancies due to clerical errors or other unintentional 
deviation from the terms of a compensation arrangement. The commenter 
asserted that this approach would acknowledge the realities of the 
rhythms of compliance programs and recognize that it can take some time 
to identify, quantify, and cure defects in a financial relationship 
with a referring physician. The commenter claimed that this approach 
would not absolve an entity of its responsibility to structure its 
financial relationships with physicians to comply with the requirements 
of an applicable exception or to monitor its administration of those 
relationships.
    Response: We are not adopting the commenter's suggestion to allow 
the correction of any aspect of a compensation arrangement that fails 
to satisfy the requirement of the exception upon which the parties 
rely. As we understand the commenter's suggested approach, parties 
would be able to retroactively restructure compensation arrangements 
that failed to satisfy the requirements of an applicable exception for 
any reason. This approach would allow parties to retroactively 
restructure compensation terms to comply with fair market value 
requirements or apply a different formula for the compensation so that 
it does not run afoul of the volume or value standard. To the extent 
the commenter was suggesting this approach only with respect to the 
types of errors we discussed in the proposed rule, we believe our final 
policy addresses the commenter's concerns.
    Comment: One commenter requested clarification whether a hospital 
that has paid a physician excess compensation due to a technical error 
could ``cure'' the error by offsetting the amount to be recouped 
against future compensation over multiple years to alleviate hardship 
and navigate complex state employment laws related to wage recoupment 
and penalties charged to employees.
    Response: The special rule for reconciling compensation at final 
Sec.  411.353(h) requires that the reconciliation of payment 
discrepancies occurs no later than 90 consecutive calendar days 
following the expiration or termination of a compensation arrangement. 
The commenter's inquiry relates to an ongoing compensation arrangement 
between the hospital and the physician. In such circumstances, the 
payment discrepancy could be recovered through an offset against future 
compensation. However, if the parties wish to ensure that their 
compensation arrangement is deemed to satisfy the requirements of an 
applicable exception throughout its entire duration, if their 
compensation arrangement expires or terminates before the entire amount 
of the payment discrepancy is recouped, the remaining amounts must be 
recouped within 90 consecutive calendar days following the expiration 
or termination of a compensation arrangement.
    Comment: One commenter expressed concern with what it interpreted 
as a mandate for a party to recover any excess payments it has made in 
order to achieve compliance with the physician self-referral law. The 
commenter discussed the difficulty entities face when trying to recover 
excess payments or collect unmade payments from physicians and 
physician practices. The commenter explained that disputes over whether 
excess payments have been made or are owed are common and contribute to 
the difficulty entities face recovering excess payments or 
underpayments in order to achieve compliance. The commenter suggested 
that requiring the party to which money is owed to make a ``reasonable 
effort'' to be made whole would be sufficient, with the determination 
of ``reasonable effort'' dependent on the facts and circumstances of 
the arrangement, such as the amount of money at issue. The commenter 
asserted that, if a large amount of money is at issue, a reasonable 
effort might very well require a hospital, for example, to sue a 
physician or physician practice, but a lawsuit might not be reasonable 
for a dispute over a small amount of money or where the costs of the 
action would dwarf the amount owed. The commenter also asserted that a 
compromise of the amount owed may be justified if the physician or 
physician practice has equitable or legal defenses.
    Response: As we explained in the proposed rule, the now-removed 
period of disallowance rules were never intended as anything more than 
deeming provisions so that parties could know the absolute latest date 
that the period of disallowance would end when the reason for the 
failure of their compensation arrangement to satisfy the requirements 
of an exception is the payment of excess compensation or the failure to 
pay all amounts due under the arrangement (84 FR 55809). The now-
removed period of disallowance provisions never stated that a party 
must recover any excess payments it has made or recover any 
underpayment owed to it in order to achieve compliance with the 
physician self-referral law, nor do we adopt such a policy here. 
However, we reiterate the following points.
    First, the new special rule for reconciling compensation 
arrangements permits the submission of a claim or bill and the payment 
of the claim or bill for a designated health service even if a 
compensation arrangement does not operate as intended with respect to 
its compensation terms, provided that: (1) No later than 90 consecutive 
calendar days following the expiration or termination of a compensation 
arrangement, the entity and the physician (or immediate family member 
of a physician) that are parties to the compensation arrangement 
reconcile all discrepancies in payments under the arrangement such 
that, following the reconciliation, all remuneration for items or 
services has been paid as required under the terms and conditions of 
the arrangement; and (2) except for the discrepancies in payments 
described in paragraph (h)(1), the compensation arrangement fully 
complies with an applicable exception. This regulation assures an 
entity that its claims were not prohibited under section 1877(a)(1) of 
the Act or our regulations at Sec.  411.353(b). However, it is a 
deeming provision only and does not require the entity to reconcile 
payment discrepancies.
    Second, if payment discrepancies are not reconciled within 90 
consecutive calendar days following the expiration

[[Page 77586]]

or termination of a compensation arrangement, the parties may not 
``unring the bell'' on any noncompliance resulting from the payment 
discrepancies. In the event that the compensation arrangement failed to 
satisfy the requirements of an applicable exception due to 
discrepancies in payment as required under the terms and conditions of 
the arrangement, the period of noncompliance would begin at the time 
the payment discrepancies caused the arrangement to fail to satisfy the 
requirements of the exception. As described in response to other 
comments below, not all payment discrepancies necessarily result in 
noncompliance with the physician self-referral law.
    Third, although recoupment of amounts due to payment discrepancies 
is not required to show that the period of disallowance has ended, 
referrals are prohibited and claims may not be submitted during the 
period that a financial relationship fails to satisfy the requirements 
of an applicable exception. If a physician was regularly paid more for 
services called for under an arrangement (due to an overpayment) or 
regularly paid less for items or services actually received (due to 
failure to pay all amounts owed), and the discrepancies were not 
reconciled during the course of the arrangement (or, under the policies 
finalized in this final rule, within 90 consecutive calendar days of 
the termination or expiration of the arrangement), from the point of 
the variance on, the arrangement would not satisfy the requirements of 
an applicable exception. Parties are free to demonstrate that a 
financial relationship has ended as they see fit. As always, in the 
absence of a financial relationship, the physician self-referral law is 
not implicated.
    Fourth, we do not believe that ``reasonable efforts'' to recover 
excess payments or collect amounts due are equivalent to the 
reconciliation of payment discrepancies. A policy requiring that the 
parties make ``reasonable efforts'' would present compliance and 
enforcement challenges, and would not provide for the certainty that 
reduces burden on stakeholders. Moreover, we do not believe that the 
mere undertaking of ``reasonable efforts'' to recover excess payments 
or collect amounts due is sufficient to warrant a deeming provision 
allowing the submission of claims or bills for designated health 
services and the payment for such services where parties make 
``reasonable efforts'' to recover excess payments or collect amounts 
due under their compensation arrangement.
    Finally, as discussed in section II.D.2.e. of this final rule, 
parties to a legitimate dispute regarding a compensation arrangement 
may utilize the exception for isolated transactions at Sec.  411.357(f) 
to protect the compensation arrangement that arises from the 
forgiveness of an obligation related to the settlement. However, the 
settlement of a dispute over payment discrepancies that confers 
remuneration on the party that is relieved of some or all of its 
obligation to refund excess payments or pay amounts due under the 
original arrangement does not retroactively return the original 
arrangement to compliance with the requirements of an exception.
    Comment: A few commenters questioned our analysis that the actual 
activities and remuneration between parties constitutes the arrangement 
that must be analyzed for compliance with the physician self-referral 
law. These commenters argued that the ``arrangement'' is what the 
parties intended (as referenced in a written agreement or otherwise). 
The commenters also stated a belief that this position is unsupported 
by the statute. Another commenter asserted that, once the parties have 
memorialized in writing an arrangement that would satisfy the 
requirements of an applicable exception, if the arrangement satisfied 
all the requirements of an applicable exception at its inception, the 
referral and billing prohibitions of the physician self-referral law 
will not and cannot attach during the course of the arrangement.
    Response: As we stated in Phase II and continue to believe, section 
1877 of the Act is clearly intended to make entities responsible for 
monitoring their compensation arrangements with physicians (69 FR 
16112). Unless a compensation arrangement between a physician (or 
immediate family member of a physician) and an entity satisfies the 
requirements of an applicable exception, section 1877 of the Act and 
Sec.  411.353(a) and (b) of our regulations prohibit a physician from 
making a referral for designated health services and prohibit an entity 
from submitting a claim to Medicare or bill any individual, third party 
payor, or other entity for the designated health services furnished 
pursuant to a prohibited referral. As set forth in section 1877(h)(1) 
of the Act, the term ``compensation arrangement'' means any arrangement 
involving remuneration between a physician (or an immediate family 
member of such physician) and an entity. The regulation at Sec.  
411.354(c) specifies that the arrangement involving remuneration may be 
direct or indirect, but otherwise essentially incorporates the 
statutory definition. Neither of these definitions limits a 
compensation arrangement to that described in written documentation. 
Although many of the exceptions to the physician self-referral law 
require that the arrangement between the parties is documented in 
writing in order to avoid the law's prohibitions, the actions of the 
parties, regardless of what they have documented an arrangement to be, 
constitute the compensation arrangement between them.
    The commenters assert that, once a compensation arrangement is 
documented in writing and satisfies the remaining requirements of an 
applicable exception, the referral and billing prohibitions of the 
physician self-referral law will not and cannot attach from that point 
forward and during the course of the arrangement, even if the parties 
deviate from the terms and conditions--including the payment terms and 
conditions--of the documented arrangement. If this were the case, 
parties would only need to document an arrangement that, on its face, 
would satisfy the requirements of an applicable exception. As noted, 
the physician self-referral law requires that, where a compensation 
arrangement exists between a physician (or an immediate family member 
of the physician) and the entity to which the physician makes referrals 
for designated health services, unless the compensation arrangement 
satisfies all the requirements of an applicable exception, the 
physician is prohibited from making referrals and the entity from 
submitting claims for designated health services. The physician self-
referral law does not permit the physician to make referrals and the 
entity to submit claims for designated health services merely because 
an arrangement they documented would comply with the requirements of an 
applicable exception. The actions of the parties, regardless of what 
they have documented an arrangement to be, constitute the compensation 
arrangement between them. The commenter's assertion that the actual 
arrangement that exists between parties need not satisfy the 
requirements of an exception and the law's prohibitions would not apply 
as long as they have documentation of some arrangement they state they 
intended, if true, would reduce the statute to a paper tiger.
    To be clear, for purposes of determining compliance with the 
physician self-referral law, the

[[Page 77587]]

arrangement under which the parties operate is analyzed to determine 
whether it satisfies all the requirements of an applicable exception. 
As discussed in the responses to other commenters, a slight deviation 
from the terms set forth in the written documentation of an arrangement 
may not result in a different actual arrangement between the parties.
    Comment: Some commenters expressed concern with a policy under 
which--they assumed--even a single mistake, for instance if a check for 
single rental payment during an arrangement was written for the wrong 
amount, would turn the original arrangement into a different actual 
arrangement. One of these commenters stated its disagreement that a 
mere mistaken payment of remuneration creates a financial relationship 
within the meaning of the physician self-referral law, but conceded 
that, if an entity discovers that it has overpaid a physician or has 
been underpaid by a physician and fails to make reasonable efforts to 
recover the excess compensation or recover the shortfall, a new 
financial relationship in the form of a gift (that is, the forgiveness 
of debt) may arise, for which there would be no applicable exception 
under the physician self-referral law.
    Response: We did not state in the proposed rule, nor is it our 
view, that every error or mistake will cause a compensation arrangement 
to fail to satisfy the requirements of an exception or that every error 
or mistake must be corrected in order to maintain compliance with the 
physician self-referral law. However, if parties identify an error that 
would cause the compensation arrangement to fail to satisfy the 
requirements of an exception to the physician self-referral law, they 
cannot simply ``unring the bell'' by correcting it at some date after 
the expiration or termination of the arrangement.
    Given the individual commenter's concession that the failure to 
make reasonable efforts to recover excess compensation or a shortfall 
in payment may establish a new financial relationship in the form of a 
gift (that is, forgiveness of debt) for which there would be no 
applicable exception under the physician self-referral law, we assume 
that commenter's assertion that a mere mistaken payment of remuneration 
under a compensation arrangement does not create a second, separate 
financial relationship within the meaning of the physician self-
referral law refers to the situation in which the parties never 
identify the mistaken payment (or underpayment) and are, therefore, 
unaware of the need to reconcile any payment discrepancies. We agree 
that not all transfers of remuneration create compensation 
arrangements. (See 66 FR 921 and 69 FR 16113.) In addition, theft 
generally does not create a compensation arrangement between the thief 
and the victim. For example, the theft of items, the use of office 
space that is not included in a lease, and the use of equipment during 
periods outside those included in a lease would not create a 
compensation arrangement between the party whose assets have been 
coopted and the party that took them or used them without permission or 
payment. Further, a slight deviation from the operation of the 
arrangement as anticipated and documented (where written documentation 
is required under the applicable exception) that results in the payment 
of too much or too little compensation under an arrangement--for 
example, in the case of a single rental payment over the course of an 
entire lease arrangement that was paid in the wrong amount--may not 
require reconciliation by the party receiving the overpayment or 
failing to make the full payment due, especially if the parties are not 
aware of the discrepancy. However, where a party is aware of the 
mistakes (or payment discrepancies) in the operation of its 
arrangements, as the commenter stated, the failure to correct the 
mistake may indeed establish a second financial relationship between 
the parties, depending on the facts and circumstances.
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 to the ``stand in the shoes'' provisions at Sec.  
411.354(c) (73 FR 48693 through 48699). Under the provisions 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 
physician owners, employees, and contractors of 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 provisions at Sec.  
411.354(c) which pertain to compensation arrangements. Because we were 
responding to a comment on 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. Separately, 
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.
    In the proposed rule, we proposed to extend the concept of titular 
ownership or investment interests to our rules governing ownership or 
investment interests at Sec.  411.354(b). We explained that, 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 are 
finalizing Sec.  411.354(b)(3)(vi) as proposed. The new regulation at 
Sec.  411.354(b)(3)(vi) should 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 our advisory opinion CMS-AO-2005-08-
01, namely that a physician with a titular ownership in an entity does 
not have a

[[Page 77588]]

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, 
our interpretation and revised definition of ``ownership or investment 
interest'' does not pose a risk of program or patient abuse. We are 
finalizing Sec.  411.354(b)(3)(vi) as proposed, without modification.
    We received the following comment and our response follows.
    Comment: Nearly all the commenters that addressed the proposal to 
revise Sec.  411.354(b)(3) supported excluding titular ownership from 
qualifying as an ownership or investment interest under Sec.  
411.354(b). One commenter emphasized that the proposal, if finalized, 
would afford physicians with greater flexibility, especially in States 
where the corporate practice of medicine is prohibited.
    Response: We have long recognized that an interest in an entity 
that excludes the ability or right to receive the financial benefits of 
ownership should not be considered to constitute an ownership or 
investment interest for purposes of the physician self-referral law. 
(See CMS advisory opinion CMS-AO-2005-08-01.) Our proposal at Sec.  
411.354(b)(3)(vi) codifies this policy. The policy we are explicitly 
articulating in regulatory text at Sec.  411.354(b)(3)(vi) will provide 
stakeholders greater certainty under our regulations. We caution that 
any compensation arrangement between a physician and an entity in which 
the physician or an immediate family member of the physician holds only 
a titular ownership or investment interest must nonetheless satisfy all 
the requirements of an applicable exception in Sec.  411.355 or Sec.  
411.357.
b. Employee Stock Ownership Program (Sec.  411.354(b)(3)(vii))
    We stated in 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 that we 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 
on 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 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 
constitute 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 
(73 FR 48737 through 48738).
    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 regulation at Sec.  411.354(b)(3)(i), the physician's interest 
in the holding company would not be considered an ownership or 
investment interest, 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 physician has an interest in the retirement plan that 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 excluded 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 (as defined at Sec.  411.351) 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

[[Page 77589]]

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 finalizing our proposal 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, 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 policy, 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 Sec.  411.354(b)(3)(vii), for purposes of the 
physician self-referral law, the physician's interest in the ESOP will 
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 exclusion at Sec.  
411.354(b)(3)(i), employer contributions to the ESOP on behalf of an 
employed physician will be considered part of the physician's overall 
compensation and will have to meet the requirements of an applicable 
exception for compensation arrangements at Sec.  411.357 or the 
physician's individual referrals must satisfy the requirements of an 
applicable exception in Sec.  411.355.
    In the proposed rule, we sought comments on whether the safeguards 
that are imposed by ERISA are sufficient for purposes of the physician 
self-referral law to ensure that an ownership or investment interest in 
an ESOP does 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 identified by the commenter on Phase II, we sought 
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. We sought comment on 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. Finally, we sought comment on whether the 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 
(84 FR 55812).
    We are finalizing Sec.  411.354(b)(3)(vii) as proposed, without 
modification.
    We received the following comment and our response follows.
    Comment: Nearly all the commenters that addressed the proposal at 
Sec.  411.354(b)(3)(vii) favored excluding an interest in an entity 
that arises by virtue of a physician's participation in an ESOP from 
the regulation regarding what constitutes an ownership or investment 
interests under Sec.  411.354(b). Commenters stated that no additional 
safeguards or requirements are necessary. Two commenters pointed to 
specific safeguards related to ESOPs that are imposed by ERISA, which 
they asserted are sufficient to protect against program or patient 
abuse. One of the commenters highlighted that ERISA requires a 
fiduciary to act with care, skill, prudence, and diligence under the 
circumstances of a prudent person acting in a similar capacity, and 
ESOPs are required to have an independent appraiser to establish value 
for all securities which are not readily tradable on a market. The 
other commenter emphasized that ESOPs are also regulated by the U.S. 
Department of Treasury. This commenter highlighted anti-abuse rules for 
ESOPs in section 409(p) of the Internal Revenue Code, which mandate 
broad-based employee ownership and establish strict repercussions for 
violations. According to this commenter, since their enactment, these 
rules have been highly effective in ensuring that ESOPs serve their 
intended purpose and are not subject to abuse.
    Response: We are convinced by the commenters that the legal and 
regulatory protections applicable to ESOPs are sufficient to prevent 
program or patient abuse, and we are finalizing Sec.  
411.354(b)(3)(vii) without any additional requirements. We remind 
parties that employer contributions to the ESOP are considered part of 
an employee's overall compensation arrangement with his or her employer 
(see 66 FR 870). Thus, when determining whether a compensation 
arrangement satisfies all the requirements of an applicable exception, 
including the requirements pertaining to fair market value and the 
volume or value of the physician's referrals, employer contributions to 
the ESOP must be considered as part of the employee's compensation 
under the arrangement.
5. Special Rules on Compensation Arrangements (Sec.  411.354(e))
    In the CY 2008 PFS proposed rule, we proposed an alternative method 
for satisfying certain requirements of some of the exceptions in 
Sec. Sec.  411.355 through 411.357 (72 FR 38184 through 38186). 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 any 
manner that takes into account the volume or value of a physician's 
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

[[Page 77590]]

in 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 consecutive calendar days if the failure to obtain the 
signatures was inadvertent, or within 30 consecutive calendar 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 consecutive calendar days to 
obtain the missing signatures (80 FR 71333). As discussed in further 
detail in this section of the final rule, following a revision to 
section 1877 of the Act, in the CY 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).\11\ In response to our proposals regarding satisfaction 
of the writing requirement, one 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 patients 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 that a ``grace period'' for satisfying the writing requirement 
could pose 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 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 (80 FR 71317).
---------------------------------------------------------------------------

    \11\ Our guidance on the writing requirement was subsequently 
codified in statute in section 1877(h)(1)(D) of the Act and 
incorporated into our regulations at Sec.  411.354(e). See 83 FR 
59715 through 59717.
---------------------------------------------------------------------------

    Section 50404 of the Bipartisan Budget Act of 2018 (Pub. L. 115-
123, enacted February 9, 2018) (BiBA) added provisions to section 
1877(h)(1) of the Act pertaining to the writing and signature 
requirements in certain exceptions applicable to compensation 
arrangements. As amended, section 1877(h)(1)(D) of the Act provides 
that the writing requirement in various exceptions applicable to 
compensation arrangements ``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 
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 already-existing Sec.  411.353(g).
    As stated in our proposed rule, we have reconsidered our policy on 
temporary noncompliance with the signature and writing requirements of 
various compensation arrangement exceptions (84 FR 55813 through 
55814). 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 compensation 
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 consecutive calendar days, we 
do not believe that the arrangement poses a risk of program or patient 
abuse. Therefore, it is appropriate to provide entities and physicians 
flexibility under our rules to satisfy the writing or signature 
requirement of an applicable exception within 90 consecutive 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,

[[Page 77591]]

which establishes a statutory rule for temporary noncompliance with 
signature requirements, we proposed to create a special rule for 
noncompliance with the writing or signature requirement of an 
applicable exception for compensation arrangements. Specifically, we 
proposed 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). In this final rule, the special rule on writing 
and signature requirements is designated as Sec.  411.354(e)(4) and a 
new rule on electronic signatures is included in our regulations at 
Sec.  411.354(e)(3).
    Under the special rule for writing and signature requirements at 
Sec.  411.354(e)(4), the writing requirement or the signature 
requirement is deemed to be satisfied if: (1) The compensation 
arrangement satisfies all the 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. A 
party may rely on Sec.  411.354(e)(4) if an arrangement is neither in 
writing nor signed at the outset, provided both the required writing 
and signature(s) are obtained within 90 consecutive calendar days and 
the arrangement otherwise satisfied all the requirements of an 
applicable exception. 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 in the exceptions to the physician self-referral law (80 FR 
71314 through 71317). Depending on the facts and circumstances, the 
writing requirement may be satisfied by a collection of documents, 
including contemporaneous documents evidencing the course of conduct 
between the parties. Thus, parties to an arrangement would have 90 
consecutive calendar days to compile the collection of documents if the 
parties determine to show compliance with the writing requirement in 
this manner. We note that, because parties must compile the documents 
that evidence their arrangement within 90 consecutive calendar days of 
the commencement of the arrangement, if an arrangement expires or is 
terminated before the compilation is complete or the end of the ``grace 
period,'' whichever comes first, the parties may not rely on the 
special rule at Sec.  411.354(e)(4) to establish compliance with the 
physician self-referral law for their arrangement. However, depending 
on the facts and circumstances, the new exception for limited 
remuneration to a physician at Sec.  411.357(z), which does not include 
a writing or signature requirement, might be available to protect a 
short-term arrangement.
    We stressed in the proposed rule and reiterate here that our 
proposal to permit parties up to 90 consecutive calendar 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 must be set in advance. 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, in order 
for parties to an arrangement to establish compliance with the 
physician self-referral law by relying on Sec.  411.354(e)(4). Section 
1877(h)(1)(D) of the Act provides the Secretary with the authority to 
determine the means by which the writing requirement may be satisfied, 
but it does not provide the Secretary similar authority with respect to 
the set in advance requirement. Moreover, we believe that the set in 
advance requirement is necessary to prevent parties from retroactively 
adjusting the amount of compensation paid under an arrangement in any 
manner that takes into account the volume or value of a physician's 
referrals or the other business generated by the physician over the 
course of the arrangement, including the first 90 days of the 
arrangement.
    In the proposed rule, we did not propose to amend the special rule 
on compensation that is considered to be set in advance at Sec.  
411.354(d)(1), though we did clarify that Sec.  411.354(d)(1) is a 
deeming provision, not a requirement (84 FR 55782). As explained in 
more detail below, in response to comments, we are finalizing certain 
modifications to the special rule at Sec.  411.354(d)(1), including 
codifying requirements at Sec.  411.354(d)(1)(ii) for modifying the 
compensation (or formula for determining the compensation) during the 
course of an arrangement. The new regulation related to modifying 
compensation terms during the course of an arrangement requires that 
the modified compensation (or formula for determining compensation) is 
set out in writing before the furnishing of items or services for which 
the modified compensation is to be paid, and it specifically provides 
that parties do not have 90 days under Sec.  411.354(e)(4) to reduce 
the modified compensation terms to writing. We emphasize that the 
requirements in new Sec.  411.354(d)(1)(ii), including the writing 
requirement, apply only when the parties modify the compensation (or 
formula for determining compensation) during the course of an 
arrangement.
    In this final rule, the current special rule at Sec.  411.354(d)(1) 
is redesignated as Sec.  411.354(d)(1)(i). To underscore that this rule 
is merely an optional ``deeming provision'' and not a requirement, we 
are replacing the phrase ``is considered `set in advance' '' with ``is 
deemed to be `set in advance'.'' We are also deleting the phrase ``and 
may not be changed or modified during the course of the arrangement in 
any manner that takes into account the volume or value of referrals or 
other business generated by the referring physician,'' because the 
requirements for modifying the compensation are codified in this final 
rule at Sec.  411.354(d)(1)(ii).
    Under Sec.  411.354(d)(1)(i), compensation is deemed to be set in 
advance 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)(i) are met. In the proposed rule, we stated that, because 
the special rule on the set in advance requirement at Sec.  
411.354(d)(1) is an optional deeming provision and not a requirement, 
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. Given the writing requirement in the new rule at Sec.  
411.354(d)(1)(ii) on modifying compensation during the course of an 
arrangement, we are qualifying this statement in this final rule. As 
finalized in this rule, compensation may be set in advance even if it 
is not set out in writing before the furnishing of items or services as 
long as the compensation is not modified at any time during the period 
the parties seek to show the compensation was set in advance. 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 Sec.  411.354(e)(4), during the 90-day period after the 
items or services are

[[Page 77592]]

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 was not modified 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. On the other hand, under Sec.  
411.354(d)(1)(ii), if the parties modify the compensation (or formula 
for determining the compensation) during the 90-day period (or 
thereafter), the modified compensation (or formula for determining the 
compensation) must be set out in writing before the furnishing of items 
or services for which the modified compensation is to be paid. To the 
extent that our preamble discussion in the CY 2016 PFS final rule 
suggested that the rate of compensation must always be set out in 
writing before the furnishing of items or services in order to meet the 
set in advance requirement of an applicable exception, we are 
retracting that statement (80 FR 71317).
    We noted in the proposed rule and reiterate here that there are 
many ways in which the amount of or a formula for calculating the 
compensation under an arrangement may be documented before the 
furnishing of items or services (84 FR 55815). 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 of the 
applicable exception; 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 of the applicable exception as 
interpreted 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 new exception for 
limited remuneration to a physician at Sec.  411.357(z). Under Sec.  
411.357(z), if an entity initially pays a physician for services 
utilizing the exception for limited remuneration to a physician and the 
parties subsequently decide to continue the arrangement utilizing an 
exception that requires the compensation to be set in advance, such as 
the exception for personal service 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 utilizing 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 subsequent personal service arrangement.
    In the proposed rule, we clarified 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 and sought comments on whether we should 
codify this policy in our regulations. We also noted that the 
collection of writings that parties may rely on under Sec.  
411.354(e)(2) to satisfy the writing requirement of our exceptions may 
include documents and records that are stored electronically (84 FR 
55815). In response to commenters, we are codifying a new special rule 
for electronic signatures at Sec.  411.354(e)(3); the special rule on 
writing and signature requirements, which was proposed at Sec.  
411.354(e)(3), will be designated as Sec.  411.354(e)(4). While we are 
not codifying our policy on electronic documents, we are reaffirming in 
this final rule our policy that the documents that may be used to 
satisfy the writing requirement under Sec.  411.354(e)(2) include 
electronically stored documents.
    After reviewing the comments, we are finalizing the special rule 
for writing and signature requirements without modification at Sec.  
411.354(e)(4). In addition, to clarify the set in advance requirement 
in various exceptions and to prevent program or patient abuse, we are 
finalizing requirements for modifying compensation (or the formula used 
to calculate compensation) during the course of an arrangement at Sec.  
411.354(d)(1)(ii); for modified compensation under an arrangement to be 
set in advance, it must satisfy these requirements. We are also 
finalizing a special rule for electronic signatures at Sec.  
411.354(e)(3), codifying our longstanding policy that an electronic 
signature that is valid under Federal or State law is sufficient to 
satisfy the signature requirement of various physician self-referral 
law exceptions.
    We received the following comments and our responses follow.
    Comment: We received nearly unanimous support for our proposal to 
allow parties up to 90 consecutive calendar days to satisfy the writing 
and signature requirements of various physician self-referral law 
exceptions. Commenters stated that the proposal, if finalized, would 
reduce administrative burden associated with the documentation 
requirements of the exceptions to the physician self-referral law, 
provide flexibility in situations where an arrangement begins before 
key terms and conditions are reduced to writing, and allow entities to 
avoid so-called technical noncompliance that may lead to disclosures of 
nonabusive arrangements to the SRDP.
    Response: We agree with the commenters that the policy as finalized 
affords greater flexibility and will reduce the administrative burden 
associated with the writing and signature requirements. We believe 
that, with the clarification of the set in advance requirement detailed 
below, the special rule on writing and signature requirements at Sec.  
411.354(e)(4) will not pose a risk of program or patient abuse, and we 
are finalizing it as proposed.
    Comment: Several commenters supported our proposal to allow parties 
additional time to obtain required writings and signatures, but 
encouraged us to adopt a 120- or 180-day period instead of the proposed 
90-day period for obtaining required writings and signatures. According 
to some commenters, if, as required under the proposed special rule, a 
compensation arrangement complies with all the requirements of an 
applicable exception except for the writing and signature requirements, 
a 180-day grace period for compliance with the writing and signature 
requirements poses a low risk of program or patient abuse. One 
commenter stated that a grace period of 120 days is necessary for a 
large health care system to obtain required writings and signatures, 
given the large number of contracts the system must review and the time 
it takes for staff to review the contracts. Another commenter stated 
that small practices may need up to 120 days to comply with the writing 
and signature requirements.

[[Page 77593]]

    Response: We decline to extend the special rule to allow parties up 
to 120 or 180 days to comply with the writing and signature 
requirements. With respect to the signature requirement, section 
1877(h)(1)(E) of the Act currently provides for a period of 90 
consecutive calendar days for parties to obtain missing signatures, and 
we are not persuaded that we could extend the period to 120 or 180 days 
under section 1877(b)(4) of the Act without posing a risk of program or 
patient abuse. Regarding the writing requirement, we believe that the 
requirement is important for ensuring transparency in potentially 
lucrative compensation arrangements, and we believe that extending the 
grace period to 120 or 180 days could pose a risk of program or patient 
abuse.
    We believe that allowing a period of 90 consecutive calendar days 
to satisfy the writing and signature requirements sufficiently 
addresses legitimate concerns regarding the administrative burden of 
the writing and signature requirements and inadvertent ``technical'' 
noncompliance, especially in light of the clarification of the writing 
requirement at Sec.  411.354(e)(2) and the new exception for limited 
remuneration to a physician at Sec.  411.357(z), which may be used to 
protect an arrangement at its inception while parties collect required 
documentation and signatures to satisfy the writing and signature 
requirements of other exceptions on a going-forward basis.
    Commenter: One commenter objected on both legal and policy grounds 
(the policy objections are discussed in the next comment and response) 
to the proposal to allow parties up to 90 consecutive calendar days to 
document arrangements in writing, especially for personal service 
arrangements excepted under Sec.  411.357(d). The commenter stated that 
CMS lacks the legal authority to permit parties up to 90 consecutive 
calendar days to document an arrangement in writing. The commenter 
maintained that the codification of the 90-day signature rule in the 
BiBA expressly provides that, except for the signature requirement, an 
arrangement must comply with all the other requirements of an 
exception, including the writing requirement. The commenter concluded 
that the Congress did not intend that the 90-day signature rule to be 
expanded to include the writing requirement.
    Response: Our proposal to allow parties up to 90 consecutive 
calendar days to document arrangements in writing does not waive the 
writing requirement in various statutory and regulatory exceptions, 
including the exception for personal service arrangements at Sec.  
411.357(d). Rather, our proposal was made pursuant to section 
1877(h)(1)(D) of the Act, which expressly grants the Secretary the 
authority to determine the means by which the writing requirement in 
various exceptions is satisfied. In this context, the special rule we 
are finalizing at Sec.  411.354(e)(4) functions as a deeming provision. 
As long as parties obtain the required writings and signatures within 
90 consecutive calendar days (and the other requirements of an 
applicable exception are met), the arrangement is deemed to have met 
the writing and signature requirement, including for the first 90 days 
of the arrangement. Thus, with respect to the statutory special rule 
for signature requirements at section 1877(h)(1)(E) of the Act, if the 
parties obtain the required writing within 90 consecutive calendar days 
and the arrangement satisfies all the other requirements of an 
applicable exception, then the arrangement ``otherwise complies with 
all criteria of the applicable exception'' for the initial 90-day 
period, including the writing requirement. While it is true that the 
Congress did not explicitly extend the 90-day period for signature 
requirements in section 1877(h)(1)(E) of the Act to the writing 
requirement in various exceptions, we do not believe that section 
1877(h)(1)(E) of the Act limits the grant of authority in section 
1877(h)(1)(D) of the Act to determine the means by which the writing 
requirement may be satisfied.
    We note that, in addition to the authority granted to the Secretary 
under section 1877(h)(1)(D) of the Act, the Secretary has authority 
under section 1877(b)(4) of the Act to issue regulations excepting 
financial relationships that do not pose a risk of program or patient 
abuse. In the FY 2009 IPPS final rule, we explained that, although the 
Secretary cannot grant immunity for violations or waive requirements of 
the physician self-referral law, the Secretary is authorized under 
section 1877(b)(4) of the Act to propose alternative methods for 
compliance with the physician self-referral law, including amendments 
to our regulations that keep within the exceptions certain financial 
relationships that would otherwise be out of compliance with the 
physician self-referral law (73 FR 48707 through 48709). Relying on 
this authority, in the FY 2009 IPPS final rule, we finalized the 
special rule for temporary noncompliance with signature requirements at 
Sec.  411.353(g) (73 FR 48702 through 48703), which the Congress in the 
BiBA codified in the substantively identical special rule for signature 
requirements at section 1877(h)(1)(E) of the Act. As with the special 
rule for temporary noncompliance with signature requirements finalized 
in the FY 2009 IPPS final rule, the Secretary has the authority under 
section 1877(b)(4) of the Act to propose alternative methods for 
compliance with the writing requirement of various physician self-
referral law exceptions, if the financial relationships ultimately 
protected under the exceptions do not pose a risk of program or patient 
abuse. Based on our administration of the SRDP and our experience 
working with our law enforcement partners, we conclude that an 
arrangement that satisfies all the requirements of an applicable 
exception for the duration of the arrangement, including the set in 
advance requirement as detailed below, but is not initially set out in 
writing or signed (or both) for a period of no longer than 90 
consecutive calendar days, does not pose a risk of program or patient 
abuse. Therefore, the Secretary also has authority under section 
1877(b)(4) of the Act to issue the new special rule for writing and 
signature requirements at Sec.  411.357(e)(4).
    Comment: In addition to the objection discussed above, one 
commenter objected strongly to the proposed policy to permit parties up 
to 90 consecutive calendar days to document personal service 
arrangements. According to the commenter, the proposal, if finalized, 
would allow parties to routinely, intentionally, and repeatedly enter 
into oral agreements worth thousands of dollars, without sufficient 
transparency to determine if the arrangements comply with all the other 
requirements of an exception. Specifically, the commenter expressed 
concern that parties would use the ``grace period'' to adjust 
compensation upward or downward based on a physician's referrals, and 
these adjustments would be virtually impossible to detect, because the 
original arrangement would not be documented. The commenter doubted 
whether parties that do not timely document arrangements at their 
inception would assiduously comply with all the other requirements of 
an exception.
    Response: We believe that the set in advance requirement, as 
clarified and codified in this final rule, addresses the commenter's 
concern that parties will adjust the compensation under an arrangement 
upward or downward during the first 90 days of the arrangement in a 
manner that takes into account the volume or value of referrals

[[Page 77594]]

or other business generated by the physician, and that these 
adjustments will be virtually impossible to detect. In the proposed 
rule, we emphasized that, other than the writing and signature 
requirements, the special rule on writing and signature requirements 
requires an arrangement to satisfy all the requirements of an 
applicable exception, including the set in advance requirement, for the 
entire term of the arrangement, including the first 90 days (84 FR 
55814). Under the current special rule for compensation that is 
considered set in advance at Sec.  411.354(d)(1) (that is, the special 
rule in effect prior to the effective date of this final rule), the 
formula for determining compensation cannot be changed or modified 
during the course of an arrangement in any manner that takes into 
account the volume or value of referrals or other business generated by 
the referring physician. Thus, to the extent that compensation is 
adjusted upwards or downwards during the first 90 days of an 
arrangement in a manner that takes into account the volume or value of 
referrals or other business generated, as described by the commenter, 
the compensation would not be considered to be set in advance under 
current Sec.  411.354(d)(1). However, as we explained in the proposed 
rule, the special rule at current Sec.  411.354(d)(1) is merely a 
deeming provision, not a requirement (84 FR 55814).
    We share the commenter's concern regarding inappropriate and 
potentially undetectable changes in compensation during the first 90 
days of an arrangement and thereafter. Although modifications of the 
compensation terms of an arrangement are permissible under the 
physician self-referral law (see 73 FR 48697), such modifications may 
pose a risk of program or patient abuse, because the modifications 
could be made--either retroactively or prospectively--in a manner that 
takes into account the volume or value of a physician's referrals or 
other business generated by the physician. We believe that, in order to 
prevent program or patient abuse, including abuse of the 90-day ``grace 
period'' for documenting an arrangement in writing under final Sec.  
411.354(e)(4), it is necessary to codify in our regulations certain 
requirements, including a writing requirement, for modified 
compensation to meet the set in advance requirement of various 
exceptions. Unlike the deeming provision in current Sec.  
411.354(d)(1), which will be redesignated as Sec.  411.354(d)(1)(i), 
compliance with the new set in advance rule at Sec.  411.354(d)(1)(ii) 
will be required for any modification of the compensation terms of an 
arrangement. The set in advance requirements at Sec.  411.354(d)(1)(ii) 
are based on preamble guidance in the FY 2009 IPPS final rule on the 
requirements for amending compensation arrangements (73 FR 48696 
through 48697).
    Under final Sec.  411.354(d)(1)(ii), compensation (or a formula for 
determining the compensation) that is modified at any time during the 
course of a compensation arrangement, including the first 90 days of 
the arrangement, satisfies the set in advance requirement of various 
exceptions only if all of the following conditions are met: (1) All 
requirements of an applicable exception in Sec. Sec.  411.355 through 
411.357 are met on the effective date of the modified compensation (or 
the formula for determining the modified compensation); (2) the 
modified compensation (or the formula for determining the modified 
compensation) is determined before the furnishing of the items, 
services, office space, or equipment for which the modified 
compensation is to be paid; and (3) before the furnishing of the items, 
services, office space, or equipment for which the modified 
compensation is to be paid, the formula for the modified compensation 
is set forth in writing in sufficient detail so that it can be 
objectively verified. Importantly, parties will not have 90 days under 
Sec.  411.354(d)(1)(ii) to reduce the modified compensation (or the 
formula for determining the modified compensation) to writing. Rather, 
the modified compensation (or the formula for determining the modified 
compensation) must be set forth in writing in sufficient detail so that 
it can be objectively verified before the furnishing of items, 
services, office space, or equipment for which the modified 
compensation is to be paid. Given our program integrity concerns, as 
well as the concerns identified by the commenter with modifications to 
the compensation terms of an arrangement, we believe that the 
transparency afforded by a writing requirement is necessary for 
modifying compensation, including modifying compensation during the 
first 90 days of an arrangement.
    Under Sec.  411.354(d)(1)(ii)(A), the amended arrangement, 
including the modified rate of compensation, must satisfy the 
requirements of an applicable exception anew. For example, suppose that 
an arrangement for call coverage at the rate of $500 per 24-hour shift 
of coverage satisfies all the requirements of the exception for 
personal service arrangements at Sec.  411.357(d)(1) on day 1. If, on 
day 70, the parties agree to modify the compensation to $600 per 24-
hour shift, the arrangement as amended must satisfy all the 
requirements of the exception for personal service arrangements; thus, 
the compensation under the amended arrangement (that is, $600 per 24-
hour shift) may not exceed fair market value for the call coverage and 
may not be determined in any manner that takes into account the volume 
or value of referrals or other business generated by the physician, and 
the other requirements of the exception for personal service 
arrangements must also be satisfied. In addition, as required by Sec.  
411.354(d)(1)(ii)(B), the amended compensation rate may not be 
retroactive (that is, the physician may not be paid at the rate of $600 
per 24-hour shift for services provided from day 1 to day 69). Lastly, 
under Sec.  411.354(d)(1)(ii)(C), the modified compensation (or formula 
for determining the compensation) must be set forth sufficiently in 
writing before the furnishing of the services for which the modified 
compensation is to be paid. Thus, if the physician provides the first 
shift of call coverage at the rate of $600 per 24-hour shift on day 75, 
the modified rate of compensation must be set forth in writing in 
sufficient detail so that it can be objectively verified before the 
services are furnished on day 75. Under Sec.  411.354(e)(4), the 
parties will still have through day 90 to reduce the entire arrangement 
to writing and to obtain required signatures, but in order for the 
modified compensation (or formula for determining the compensation) to 
satisfy the set in advance requirement, it must be in writing before 
the furnishing of services on day 75. If the parties again modify the 
compensation terms of the arrangement effective, for example, on day 
180, all the conditions for modifying the compensation under Sec.  
411.354(d)(1)(ii) must be met again, and the modified compensation must 
be sufficiently set forth in writing before the furnishing of services 
on day 180. (There is no signature requirement under Sec.  
411.354(d)(1)(ii), so the writing that documents the modified 
compensation need not be signed by the parties.)
    As noted in Phase III, in certain instances, modifications to an 
arrangement may be material to the compensation terms of the 
arrangement, without directly modifying the amount of compensation 
under an arrangement (72 FR 51044). Returning to the example above, 
assume the parties modified the arrangement on day 70 to reduce the

[[Page 77595]]

call coverage shift from 24 to 12 hours, but retained the compensation 
amount of $500 per shift. For purposes of the physician self-referral 
law, the modification is material to the compensation terms of the 
arrangement because it raises questions as to whether the compensation 
under the amended arrangement ($500 per 12-hour shift) satisfies 
requirements pertaining to fair market value and the volume or value of 
referrals or other business generated. It is our view that such an 
amendment is a modification of the formula for determining compensation 
($500 per 12-hour shift versus $500 per 24-hour shift), and this 
modification must meet all conditions of Sec.  411.354(d)(1)(ii) in 
order to avoid the physician self-referral law's referral and billing 
prohibitions. On the other hand, modifications that do not affect the 
compensation terms of the arrangement need not meet the conditions of 
Sec.  411.354(d)(1)(ii); for example, if the parties amend the schedule 
for the provision of call coverage from Tuesdays to Thursdays but there 
are no other changes to their arrangement, Sec.  411.354(d)(1)(ii) 
would not be triggered. Lastly, reflecting our current policy, Sec.  
411.354(d)(1)(ii) does not require that the modified compensation 
remain in place for at least 1 year from the date of amendment and 
there is no prohibition on the number of times the parties may modify 
the compensation, provided that the conditions of Sec.  
411.354(d)(1)(ii) are met each time the compensation is modified. We 
caution against a practice of frequently or repeatedly modifying the 
compensation terms over the course of an arrangement and remind readers 
that, under Sec.  411.354(d)(1)(ii), each time the compensation is 
modified, the parties must establish anew that the arrangement--as 
modified--satisfies all the requirements of an applicable exception.
    Given our clarification and codification at Sec.  411.354(d)(1)(ii) 
of the conditions that modified compensation must meet in order to be 
set in advance, we believe that our interpretation of writing and 
signature requirements as set forth at Sec.  411.354(e)(4) does not 
pose a risk of program or patient abuse. To reiterate, with the 
exception of the writing and signature requirements, a compensation 
arrangement must satisfy all the requirements of an applicable 
exception, including the set in advance requirement, during the initial 
90 days of the arrangement (and thereafter). Any modification of the 
compensation terms of an arrangement during the initial 90 days (or 
thereafter) must meet all the conditions of Sec.  411.354(d)(1)(ii) in 
order for the compensation to be set in advance. If parties modify the 
compensation terms of an arrangement during the first 90 days (or 
thereafter), the modified compensation arrangement will have to satisfy 
all the requirements of an applicable exception, including applicable 
requirements pertaining to fair market value and the volume or value of 
referrals or other business generated by the referring physician. In 
addition, under Sec.  411.354(d)(1)(ii)(C), the modified compensation 
(or formula for determining the compensation) must be sufficiently set 
forth in writing before the furnishing of items, services, office 
space, or equipment for which the modified compensation is to be paid, 
even if the modification occurs during the first 90 days of the 
arrangement. Thus, notwithstanding the 90-day period for obtaining 
required writings and signatures under Sec.  411.354(e)(4), parties 
will not be permitted to modify the compensation terms of an 
arrangement during the first 90 days without documenting the 
modification in writing, and modifications to the compensation (or 
formula for determining the compensation) may not be determined in any 
manner that takes into account the volume or value of referrals or 
other business generated by the physician.
    Lastly, the commenter doubted that parties that fail to document 
their arrangements during the first 90 days of the arrangement work 
diligently to ensure compliance with other requirements of applicable 
exceptions. Our experience administering the SRDP suggests otherwise. 
We have reviewed a large number of arrangements that satisfied all the 
requirements of an applicable exception except the writing and 
signature requirements. We have learned that parties neglect to 
document arrangements in writing and sign the writings for a variety of 
reasons, such as administrative oversight or personnel changes. At the 
same time, we continue to believe that the writing requirement 
functions as an important safeguard to provide transparency and prevent 
program or patient abuse, and we reiterate that the best practice is to 
document compensation arrangements in writing from the outset. We 
believe that Sec.  411.354(e)(4) provides sufficient flexibility for 
nonabusive arrangements that fully satisfy all the requirements of an 
exception other than the writing or signature requirement, while 
incenting parties to act diligently to sign and document arrangements 
within 90 consecutive calendar days of the commencement of their 
arrangement. We also stress that arrangements that fail to satisfy all 
the requirements of an applicable exception other than the writing and 
signature requirement during the first 90 days (and thereafter) would 
not be protected under Sec.  411.354(e)(4).
    Comment: Several commenters appreciated CMS' statement that the set 
in advance requirement does not require parties to set out the 
compensation in writing in advance of the furnishing of items or 
services, and that the special rule on the set in advance requirement 
at Sec.  411.354(d)(1) is a deeming provision, not a requirement. One 
commenter noted that the clarification would greatly benefit hospitals 
that inadvertently fail to document their compensation terms prior to 
starting performance. Another commenter found helpful our preamble 
guidance regarding the set in advance requirement and the use of 
practice patterns, including consistent payments patterns, to establish 
that the rate of compensation was set in advance. The commenter stated 
that a grace period of more than 90 days may be necessary in some 
circumstances to establish an identifiable pattern of payments.
    Response: As explained above, under Sec.  411.354(e)(4), other than 
the writing and signature requirements, a compensation arrangement must 
satisfy all the requirements of an applicable exception, including the 
set in advance requirement, for the entire duration of the arrangement, 
including the first 90 days of the arrangement. Thus, the compensation 
(or formula for calculating the compensation) must be determined before 
the furnishing of items or services for which compensation is to be 
paid. A party submitting a claim for payment for a designated health 
service retains the burden of proof under Sec.  411.353(c)(2) to 
establish that all the requirements of an applicable exception, 
including the set in advance requirement, if applicable, are met. The 
surest and most straightforward way for a party to establish that the 
compensation under an arrangement is set in advance is to satisfy the 
deeming provision at Sec.  411.354(d)(1)(i). Under Sec.  
411.354(d)(1)(i), parties that document the compensation in writing 
prior to the furnishing of items, services, office space, or equipment 
in sufficient detail so that it can be verified are deemed to satisfy 
the set in advance requirement. However, we are reiterating in this 
final rule that the compensation (or the formula determining the 
compensation) does not need to be documented in writing and it does not 
need to be deemed to be set in advance under Sec.  411.354(d)(1)(i) in 
order to satisfy the

[[Page 77596]]

set in advance requirement during the first 90 days of the arrangement.
    In order for an arrangement to meet the writing requirement of an 
applicable exception on an ongoing basis, the compensation (or formula 
for calculating compensation) must be documented in writing by the time 
the 90-day period under Sec.  411.354(e)(4) expires. As we explained in 
the CY 2016 PFS, to determine compliance with the writing requirement, 
the relevant inquiry is whether the available contemporaneous documents 
(that is, documents that are contemporaneous with the arrangement) 
would permit a reasonable person to verify compliance with the 
applicable exception at the time that a referral is made (80 FR 71315). 
A reasonable person could not verify whether the compensation under an 
arrangement complies with an applicable fair market value requirement, 
for example, if the person could not determine from the documentation 
what the compensation was under the arrangement. Thus, by day 91, the 
compensation terms of the arrangement must be documented in writing in 
order to satisfy the writing requirement of an applicable exception. As 
explained above, we decline to extend the ``grace period'' for 
collecting required writings beyond the 90-day period. We believe that 
90 consecutive calendar days provides sufficient time to document an 
arrangement to show compliance with the requirements of an applicable 
exception, including the set in advance requirement.
    Comment: One commenter requested additional guidance from CMS on 
the interim systems and documents that may be relied upon to satisfy 
the requirement that rental rates are set in advance during the 90-day 
grace period. Specifically, the commenter asked whether a scheduling 
platform that tracks leasing arrangements and allocates leased square 
footage, scheduling actual space utilization and rent, would be 
sufficient to satisfy the set in advance requirement.
    Response: The determination as to what constitutes sufficient 
documentation to establish that compensation under the arrangement is 
set in advance depends on the facts and circumstances in each case. 
Therefore, we cannot opine on whether the scheduling platform described 
by the commenter would be sufficient to establish that the set in 
advance requirement was met. We discussed in the proposed rule (and 
repeated above) the various documents that, depending on the facts and 
circumstances, may be used to establish that compensation is set in 
advance. We are clarifying the types of documents that, individually or 
taken together and depending on the facts and circumstances, may 
establish that compensation is set in advance. These documents include 
informal communications via email or text, internal notes to file, 
similar payments between the same parties for similar items or services 
under prior arrangements, generally applicable fee schedules, or, where 
no formal generally applicable fee schedule exists, other documents 
showing a pattern of payments to or from other similarly situated 
physicians for the same or similar items or services. This list is 
illustrative only and is not exhaustive. To avoid being overly 
prescriptive, we are not providing more determinant rules for 
establishing that compensation is set in advance.
    Comment: Several commenters stated that, even if the proposed 
special rule is finalized, there would be continuing uncertainty 
regarding how parties can establish that compensation is set in advance 
if there is no signed writing and no steady, consistent stream of 
payments. Commenters noted that informal writings between the parties 
may not be detailed enough to satisfy the set in advance requirement 
and that, in certain instances, the compensation may only have been 
determined through in-person conversations, with no paper trail. The 
commenters also noted that fee schedules and comparisons to other 
arrangements may not be useful for compensation arrangements where the 
payment methodology is more complicated or customized to the specific 
financial relationship. Given these difficulties, the commenters 
requested that compensation be deemed to comply with all the 
requirements of an applicable exception, except the writing and 
signature requirements, if the parties certify in the signed writing 
documenting the arrangement that the arrangement met all the elements 
of the exception as of the commencement date of the arrangement. The 
commenters noted that this requirement would provide an additional 
safeguard, because a false certification could expose a person to 
potential liability under the False Claims Act, because it would be 
useful evidence of scienter.
    A second group of commenters suggested that, to provide additional 
flexibility, CMS should create another special rule on the set in 
advance requirement at Sec.  411.354(d). Under the commenters' 
proposal, compensation would be considered set in advance if: (1) The 
parties agree in advance that compensation under the arrangement will 
be fair market value and not determined in any manner that takes into 
account the volume or value of the physician's referrals prior to the 
commencement of the arrangement; (2) the parties work with reasonable 
diligence to establish the specific compensation amount or methodology; 
(3) the parties, in fact, establish the specific compensation amount or 
methodology within 90 days of the commencement of the arrangement; and 
(4) the resulting compensation is fair market value and commercially 
reasonable without taking into account the volume or value of referrals 
or other business generated by the physician. The commenters asserted 
that, as long as the compensation is ultimately fair market value and 
the arrangement is commercially reasonable, then there is no risk of 
program or patient abuse. The commenters further asserted that their 
proposal would be helpful for practices located in States that prohibit 
the corporate practice of medicine, because providers in those States 
cannot rely on the exception for bona fide employment relationships, 
which does not include a set in advance requirement. One commenter 
stressed that the special rule is especially needed if CMS finalizes 
its proposed definition of ``isolated financial transaction,'' as 
parties may have relied on this exception in the past to compensate 
physicians for services furnished prior to the parties setting the 
compensation under the arrangement.
    Response: We decline to adopt the deeming provision suggested by 
the first commenters and the new special rule recommended by the second 
commenters. The set in advance requirement is a statutory requirement 
and, in our view, both proposals are inconsistent with the statutory 
requirement that the compensation is set in advance. In addition, as 
explained above, the set in advance requirement is an important 
safeguard to prevent program or patient abuse, including abuse of the 
90-day grace period under Sec.  411.354(e)(4). We believe that both 
proposals would be subject to the kinds of abuses described by the 
commenter above, namely undocumented and potentially undetectable 
adjustments of the compensation during the first 90 days of the 
arrangement that take into account the volume or value of referrals or 
other business generated by the physician. Even with a requirement that 
compensation is, in fact, fair market value, we believe that the 
proposals could be subject to abuse. Typically, fair market value is a 
range of values, and parties could use the 90-day period to adjust 
compensation upwards or downwards within this range. Therefore, we do 
not believe that we

[[Page 77597]]

have the authority under section 1877(b)(4) of the Act to waive the set 
in advance requirement for 90 days. In addition, although the Secretary 
has authority under section 1877(h)(1)(D) of the Act to determine how 
the writing requirement of various exceptions may be satisfied, we do 
not believe that this authority does not extend to the set in advance 
requirement.
    With respect to the first commenters' proposal, parties documenting 
an arrangement after it has begun, as is permitted under Sec.  
411.354(e)(4), may choose to include memoranda or other notes 
describing earlier agreements, including verbal agreements or 
agreements made by informal communications that set the compensation 
(or formula for determining the compensation) in advance. The memoranda 
would not be sufficient for the compensation to be deemed to be set in 
advance under Sec.  411.354(d)(1)(i), but, depending on the facts and 
circumstances, the memoranda could be used as evidence to help 
establish that the compensation was set in advance. We emphasize that 
there is no requirement under the physician self-referral law that 
parties create or retain such memoranda. As illustrated by our earlier 
discussion in this section II.D.5., there are a variety of ways to 
establish that compensation is set in advance, and, other than the 
deeming provision in Sec.  411.354(d)(1)(i), we are not prescribing or 
recommending any particular approach.
    With respect to the second commenters' proposed special rule, we 
note that the new rule for modifying compensation at Sec.  
411.354(d)(1)(ii) provides stakeholders certainty regarding the 
requirements that must be met in order for modified compensation to 
satisfy the set in advance requirement. Parties to an arrangement are 
permitted to enter into an arrangement that satisfies all the 
requirements of an applicable exception, including the set in advance 
requirement, and later modify the compensation terms of the 
arrangement, provided that the modified compensation is not retroactive 
and all the other conditions of Sec.  411.354(d)(1)(ii) are met. This 
policy, coupled with the new exception for limited remuneration to a 
physician at Sec.  411.357(z), which does not require compensation to 
be set in advance, should provide sufficient flexibility for all 
providers, including providers located in States that prohibit the 
corporate practice of medicine.
    Comment: Some commenters stated that, if finalized, the proposed 
90-day grace period and the clarification of the set in advance 
requirement, coupled with the newly proposed exception for limited 
remuneration to a physician, which does not require the compensation to 
be set in advance, would accommodate situations where a physician's 
services are needed on an urgent basis, and the compensation 
arrangement commences before the parties can set the compensation in 
advance or document the compensation.
    Response: We agree with the commenters that, depending on the facts 
and circumstances, parties that do not have an opportunity to set 
compensation in advance may utilize the exception for limited 
remuneration to a physician at Sec.  411.357(z) to protect an 
arrangement at its outset. If the parties decide to continue the 
arrangement on an ongoing basis, the parties may utilize another 
applicable exception without an annual limit, such as the exception for 
fair market value compensation at Sec.  411.357(l). Depending on the 
facts and circumstances, records of payments made while utilizing the 
exception at Sec.  411.357(z) may establish that the compensation under 
the ongoing arrangement satisfied the set in advance requirement of 
Sec.  411.357(l). Parties that utilize the exception at Sec.  
411.357(l) (or another exception that requires the arrangement to be in 
writing and signed by the parties) for the ongoing arrangement have 90 
consecutive calendar days to satisfy the writing and signature 
requirements under Sec.  411.354(e)(4) once the parties begin to 
utilize that exception (or another applicable exception that requires 
the arrangement to be in writing and signed by the parties).
    Comment; Several commenters urged us to finalize regulatory text, 
clearly stating CMS' policy that electronic signatures that are legally 
valid under Federal or State law are sufficient to satisfy the 
signature requirement of various exceptions. Some commenters also 
specifically asked that the regulatory text clarify that assent 
transmitted by email may satisfy the signature requirement. Other 
commenters recognized that CMS has declined in the past to specify what 
qualifies as a signature for purposes of the physician self-referral 
law, because CMS does not wish to be overly prescriptive. Nevertheless, 
the commenters requested that we explicitly confirm that a signature 
includes a sender's typed or printed name on an email or letterhead 
stationary that is one of the contemporaneous writings documenting an 
arrangement under Sec.  411.354(e)(2).
    Response: Our longstanding policy is that an electronic signature 
that is valid under applicable Federal or State law is sufficient to 
satisfy the signature requirement in various physician self-referral 
law exceptions. To provide greater clarity and certainty to 
stakeholders, we are codifying this policy at Sec.  411.354(e)(3). We 
believe that what constitutes a valid signature that is sufficient to 
satisfy the signature requirement of various exceptions to the 
physician self-referral law depends on the facts and circumstances. We 
decline to provide a general rule regarding whether a sender's typed or 
printed name on an email or letterhead stationary would satisfy the 
requirement that an arrangement is signed by the parties. However, we 
note that, if an individual's typed or printed name on an email sent by 
that individual constitutes an electronic signature for purposes of 
applicable Federal or State law, then it qualifies as a ``signature'' 
for purposes of the physician self-referral law. Similarly, if the 
individual whose name is printed on the letterhead of the document 
being relied upon to satisfy the signature requirement of an applicable 
exception is also the sender of the document and the document would be 
considered signed by the individual under applicable Federal or State 
law, then it qualifies as a ``signature'' for purposes of the physician 
self-referral law. While a hand-written ``wet'' signature is the 
paradigmatic example of a signature, there is no requirement under the 
physician self-referral law that parties sign a document by hand, nor 
is there a requirement that electronic signatures be scanned copies of 
hand-written signatures. Any electronic signature that is valid under 
applicable Federal or State law is sufficient to satisfy the signature 
requirement under the physician self-referral law.
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

[[Page 77598]]

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 is 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 physician 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 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 the 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 proposed 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 proposed 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.
    After reviewing the comments, we are finalizing the proposal 
without modification.
    We received the following comments and our responses follows.
    Comment: Several commenters supported our clarification of the 
exclusive use requirement in Sec.  411.357(a)(3) and (b)(2) as 
proposed. Commenters explained that as physician practices evolve to 
meet the rising costs of health care, the uncertainty regarding 
``exclusive use'' is challenging when multiple physicians use the same 
space or equipment, a practice which the commenter stated is common; 
for example, a physician may invite a guest physician into the premises 
in order to coordinate and jointly treat a mutual patient. Commenters 
stated it would not pose a risk of program or patient abuse to allow 
multiple parties to use space or equipment concurrently.
    Response: We agree with the commenters that the clarification of 
the exclusive use requirement in the exception for the rental of office 
space at Sec.  411.357(a)(3) and the exception for the rental of 
equipment at Sec.  411.357(b)(2) offers flexibility and certainty to 
providers, and that it does not pose a risk of program or patient abuse 
to permit multiple lessees (and their invitees) to use space or 
equipment concurrently, provided that all the other requirements of the 
exception are satisfied and that the lessor (or any person or entity 
related to the lessor) is excluded. We remind readers that the 
exceptions for the rental of office space and equipment both require, 
among other things, that the rental charges are consistent with fair 
market value, that the space or equipment that is rented or leased does 
not exceed that which is reasonable and necessary for the legitimate 
business purposes of the lease arrangement, and that the lease 
arrangement would be commercially reasonable even if no referrals were 
made between the lessee and lessor. If a lessor collects rental 
payments from multiple lessees for concurrent use of office space or 
equipment, these requirements and all the other requirements of Sec.  
411.357(a) or (b) must still be satisfied.
    Comment: Multiple commenters requested that CMS update the new 
proposed language to permit lessors to use their own space or equipment 
along with lessees, especially when the lease provides access to space 
or equipment on a part-time basis. One commenter further explained that 
lessors should have the opportunity to utilize or lease such space to 
other lessees when it is not utilized as long as the leasing 
arrangements are properly administered and that any allocations of 
space, costs, or flow of funds can be audited, monitored and otherwise 
objectively verified to ensure accountability. Another commenter stated 
that, if a hospital leases space to a physician practice, the practice 
should be permitted to sublease back an exam room to the hospital for 
use by a hospital-employed physician or technician, in order to 
coordinate care. The commenter stated that if CMS is concerned about 
the risk of abuse, CMS could provide that space subleased back to the 
lessor must be at the same rate that the lessor leases the space to the 
tenant.
    Response: Both the statute and our regulations require that leased 
office space or equipment is used exclusively by the lessee when it is 
being used by the lessee. We believe that the commenters' proposal 
would render this requirement meaningless. In addition, the exclusive 
use requirement is an important safeguard to prevent sham or ``paper'' 
leases, where a lessor collects rent from a lessee while continuing to 
use the leased office space or equipment during periods of time that 
are ostensibly reserved for the lessee. We also note that, under Sec.  
411.357(a)(3) and Sec.  411.357(b)(2), rented office space or equipment 
may not exceed that which

[[Page 77599]]

is reasonable and necessary for the legitimate business purposes of the 
lease arrangement. We question if a lease arrangement satisfies this 
requirement if the lease includes space or equipment that is 
consistently not used by the lessee. For example, assume a physician 
owns a medical office building, a hospital leases the entire building 
from the physician, the hospital (sublessor) subleases an office suite 
to the physician (sublessee), and the remainder or a significant 
portion of the medical office building remains unused and unoccupied. 
On these facts, the amount of spaced leased by the hospital (that is, 
the entire medical office building) likely exceeds that which is 
reasonable and necessary for the legitimate business purposes of the 
lease arrangement.
    We note that, as amended in this final rule, the exception for fair 
market value compensation at Sec.  411.357(l) may be used for office 
space and equipment lease arrangements. The exception for fair market 
value does not include an exclusive use requirement. Rather, the 
exception includes as a substitute the requirement that the arrangement 
not violate the anti-kickback statute. Depending on the facts and 
circumstances, the arrangements described by the commenters may be 
permitted under the exception for fair market value compensation at 
Sec.  411.357(l). We note, however, that the arrangements would have to 
satisfy the commercial reasonableness requirement at Sec.  
411.357(l)(4) and the remaining requirements of the exception for fair 
market value compensation.
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 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 that requested 
clarification with respect to who must sign the writing documenting the 
physician recruitment arrangement (72 FR 51051). 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

[[Page 77600]]

arrangement would reduce undue burden without posing a risk of program 
and patient abuse. For these reasons, we proposed to modify the 
signature requirement at Sec.  411.357(e)(4)(i). We proposed 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.
    After reviewing the comments, we are finalizing the proposal 
without modification.
    We received the following comment and our response follows.
    Comment: Several commenters supported our proposal to modify the 
signature requirement at Sec.  411.357(e)(4)(i) to require a physician 
practice to sign the writing documenting a recruitment arrangement 
between a physician and a hospital only if remuneration is provided to 
the physician indirectly through payments made to the physician 
practice and the physician practice does not pass directly through to 
the physician all the remuneration from the hospital. One commenter 
stated that eliminating the signature requirement for a physician 
practice would reduce burden without posing a risk of program and 
patient abuse.
    Response: We agree with the commenters that the proposal will 
reduce the burden of compliance with the physician self-referral law 
without posing a risk of program or patient abuse. Therefore, we are 
finalizing the modification of the exception as proposed. We note in 
this context that a ``physician practice'' under Sec.  411.357(e)(4) 
includes a sole practice consisting of only one physician. (See, for 
example, the definition of ``entity'' at Sec.  411.351). Under the 
definition of ``physician'' at Sec.  411.351, a physician and the 
professional corporation of which he or she is a sole owner are the 
same for purposes of the physician self-referral law. Thus, if a 
recruited physician joins an existing sole physician practice, and the 
recruited physician receives remuneration indirectly through payments 
made to the sole physician practice and the sole physician practice 
does not pass directly through to the recruited physician all the 
remuneration from the hospital, then the physician in the sole 
physician practice or someone authorized to sign on behalf of the 
physician's professional corporation must sign the writing documenting 
the arrangement.
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). 
Because our prior rulemaking regarding Sec.  411.357(g) was based in 
part on an interpretation of legislative history, we reviewed the 
legislative history of section 1877(e)(4) of the Act and certain 
provisions that preceded it in the proposed rule.
    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 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

[[Page 77601]]

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 proposed certain modifications to the exception at 
Sec.  411.357(g) to broaden the application of the exception. In the 
proposed rule, we stated that we continued to 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 also 
considered in the proposed rule that OBRA 1993 did not merely strike 
the term ``clinical laboratory services'' in the OBRA 1990 exception 
and substituted 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, in the proposed rule we stated 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, but rather 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. We stated in the proposed rule that, 
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.
    In the proposed rule, we reconsidered 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 based on comments 
received to the CMS RFI. We stated that we agreed with the commenters 
that the current exception is too restrictive and that the current 
Sec.  411.357(g) has an extremely limited application (84 FR 55818).
    To give appropriate meaning to the statutory exception at section 
1877(e)(4) of the Act, we proposed 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 proposed 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 proposed 
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. We noted that 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 interpreted 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 stated our belief 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 proposed 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 also stated our belief that remuneration from a 
hospital to a physician for services that are not patient care services 
or

[[Page 77602]]

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).
    In the proposed rule, we stated our belief that the concept of 
patient care services would provide a determinant and practicable 
principle for applying Sec.  411.357(g) to compensation arrangements 
between hospitals and physicians. We also noted that the proposed 
regulation at Sec.  411.357(g) retained 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 any 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 were intended to 
clarify when remuneration does not relate to the provision of 
designated health services, would not have applied to remuneration that 
is determined in any manner that takes into account the volume or value 
of a physician's referrals (84 FR 55816 through 55817).
    In the proposed rule, we stated 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, we noted in the proposed rule that 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 of 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. Under our proposal, payments for such services 
would relate to the furnishing of designated health services for 
purposes of applying the exception at proposed Sec.  411.357(g). We 
also stated that utilization review services are closely related to 
patient care services, and for this reason, we considered remuneration 
for such services to be related to the furnishing of designated health 
services (84 FR 55818).
    In contrast to the services described above, in the proposed rule 
we stated that the administrative services of a physician pertaining 
solely to the business operations of a hospital are not related to 
patient care services. Thus, under our proposal, if a physician were a 
member of a governing board along with persons who were not licensed 
medical professionals, and the physician received stipends or meals 
that were available to the other board members, we would not have 
considered the remuneration provided to the physician to relate to the 
provision of designated health services, provided that the physician's 
compensation for the administrative services was not determined in a 
manner that takes into account the volume or value of his or her 
referrals. In this instance, we stated 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. Because the services could be provided by 
persons who are not licensed medical professionals, we concluded that 
the services were not patient care services. To provide clarity for 
stakeholders, we proposed 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 stated 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 noted in this context 
that ``licensed medical professional'' would include, but would not be 
limited to, a licensed physician. That is, if a service could be 
provided legally by both a physician and a medical professional who is 
not a physician, such as a registered nurse, but the service could not 
be provided by a person who is not a licensed medical professional, it 
would still be considered a patient care service under Sec.  
411.357(g)(3) as proposed. Thus, we proposed that remuneration provided 
by a hospital to a physician for the service would not be excepted 
under Sec.  411.357(g), notwithstanding the fact that the service does 
not have to be performed by a physician (84 FR 55818 through 55819).
    In the proposed rule, we stated that 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 the rental of medical equipment and purchasing of 
medical devices from physicians. Because these items are used in the 
provision of patient care services, and patient care services may be 
designated health services or be directly correlated with the provision 
of designated health services, we concluded that remuneration for such 
items clearly relates to the provision of designated health services. 
We also stated that rental of office space where patient care services 
are provided, including patient care services that are not necessarily 
designated health services, is remuneration related to the provision of 
designated health services. In contrast, we stated that, 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, the 
remuneration would not be considered to be related to the provision of 
designated health services under our proposal. Also, we stated our 
continued belief that, as first stated in the 1998 proposed rule, Sec.  
411.357(g) is available to except 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 proposed to stipulate in 
regulation that remuneration provided in exchange for any item, supply, 
device, equipment, or office space that

[[Page 77603]]

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) (84 FR 55819).
    In the proposed rule, we stated our belief that Sec.  411.357(g)(2) 
and (3) would 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 stated that the 
requirement pertaining to the volume or value of a physician's 
referrals at Sec.  411.357(g)(1) would 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 sought 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 sought 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 (84 FR 
55819).
    We received the following comment and our response follows.
    Comment: Commenters on the proposal generally supported our efforts 
to restore utility to the statutory exception, but a few commenters 
expressed valid concerns that the expansion of the exception, 
especially without substantial guidance and examples of its 
application, would risk program or patient abuse. One commenter noted 
that ``patient care services'' is a defined term under our regulations, 
and it is not clear whether the term ``patient care services'' as used 
in Sec.  411.357(g) was intended to have the same meaning as ``patient 
care services'' as defined at Sec.  411.351. Many commenters, citing 
uncertainty in applying the proposed exception, requested codification 
of specific remuneration that would be deemed not to relate to the 
provision of designated health services.
    Response: Given the concerns raised by commenters, we are not 
finalizing our proposed revision to Sec.  411.357(g) at this time. We 
are continuing to evaluate the best way to restore utility to the 
statutory exception, and we may finalize revisions to the exception for 
remuneration unrelated to the provision of designated health services 
in future rulemaking.
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 that 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 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 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,\12\ 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

[[Page 77604]]

is not available for arrangements involving the rental of office space 
(80 FR 71325 through 71327).
---------------------------------------------------------------------------

    \12\ 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. As noted in the proposed rule, we 
found the CMS RFI comments regarding the narrowing of the statutory 
exception persuasive and, as a result, we reconsidered our position 
regarding the availability of the exception for payments by a physician 
for certain compensation arrangements (84 FR 55820).
    To explain our proposal and the policies we are setting forth in 
this final 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.\13\ 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 any 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.
---------------------------------------------------------------------------

    \13\ 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 
proposed 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 also proposed 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 in this 
section II.D.9., Sec.  411.357(i) would not be applicable to 
arrangements for the rental of office space or equipment.\14\ 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.
---------------------------------------------------------------------------

    \14\ Elsewhere in this final rule, we are finalizing our 
proposal to extend Sec.  411.357(l) to arrangements for the rental 
of office space, including rentals of less than 1 year, provided 
that all the requirements of the 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 final rule, we have more clearly explained this 
position and no longer believe it is 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). Although we are retracting our statement 
that office space is not an ``item or service,'' parties may not rely 
on the exception for personal service arrangements at Sec.  
411.357(d)(1) to protect arrangements for the rental of office space. 
We noted that 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 also proposed to remove from Sec.  411.357(i)(2) the reference 
to exceptions in Sec. Sec.  411.355 and 411.356. As noted previously, 
we interpret the exception at section 1877(e)(8) of the Act for 
payments by a physician to function 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, ``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

[[Page 77605]]

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.
    After reviewing the comments, we are finalizing our proposal at 
Sec.  411.357(i) without modification.
    We received the following comments and our responses follow.
    Comment: Most commenters that addressed this issue supported our 
proposed interpretation of the statutory payments by a physician 
exception and the proposed regulatory changes to implement the 
interpretation. One commenter asserted that our previous interpretation 
of the statute inappropriately narrowed the utility of the exception. 
Other commenters emphasized that finalizing our proposal would increase 
flexibility and reduce the cost and burden of compliance with the 
physician self-referral law. Commenters generally agreed that the 
exception should be available to protect an arrangement even if the 
arrangement is addressed by a regulatory exception, but not if another 
statutory exception, such as the exception for the rental of office 
space, is applicable to the arrangement. One commenter agreed that the 
exception for payments by a physician functions in the statutory scheme 
as a ``catch-all'' exception that applies only to arrangements that are 
not otherwise addressed in a statutory exception.
    Response: We agree with the commenters and are finalizing our 
revisions to Sec.  411.357(i) as proposed.
    Comment: Several commenters supported our retraction of our 
previous policy that office space is neither an item nor a service. The 
commenters recognized that, under the regulatory scheme of the 
physician self-referral law, retraction of the policy is key to making 
the exception for fair market value compensation at Sec.  411.357(l) 
applicable to arrangements for the rental of office space.
    Response: In this final rule, we are reiterating the retraction of 
our previous policy that office space is neither an item nor a service. 
Given our interpretation of the exception for payments by a physician 
within the statutory scheme of exceptions applicable only to 
compensation arrangements, we no longer believe that it is necessary to 
distinguish office space from items or services in order to ensure that 
the exception at Sec.  411.357(i) may not be used for rental of office 
space arrangements. As recognized by the commenters and explained in 
section II.D.10 of this final rule, parties may now use the exception 
for fair market value compensation at Sec.  411.357(l) to except 
arrangements for the rental of office space. At the same time, we are 
taking this opportunity to clarify that office space is not a service, 
and therefore the exception for personal service arrangements at Sec.  
411.357(d)(1) is not available to protect arrangements for the rental 
of office space or timeshare arrangements.
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 that 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). 
We explained our policy at that time 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 believe 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 
proposed and are now finalizing modifications to Sec.  411.357(l) to 
permit parties to rely on the exception for fair market value 
compensation 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 continue to believe that 
arrangements based on percentage compensation or per-unit of service

[[Page 77606]]

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 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 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 
proposed 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 will be permissible under 
the exception. However, as with other compensation arrangements 
permitted under Sec.  411.357(l), the parties will be permitted to 
enter into only one arrangement for the rental of the same office space 
during the course of a year. The parties will 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. Parties are not required to renew 
their arrangement in writing. Renewals effectuated through course of 
conduct or by verbal agreement are permitted under the exception for 
fair market value compensation. However, parties retain the burden of 
proof under Sec.  411.353(c)(2) to establish that the terms of the 
arrangement and the compensation for the same items, office space, or 
services did not change during the renewal arrangement. 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 and the 
requirement that the arrangement does not violate the anti-kickback 
statute, which, as explained below and in section II.D.1. of this final 
rule, is not being removed from Sec.  411.357(l)(5) in the final rule, 
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 final 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.
    In the proposed rule, we proposed to remove the requirement at 
Sec.  411.357(l)(5) that the arrangement does not violate the anti-
kickback statute or any Federal or State law or regulation governing 
billing or claims submissions. As explained in section II.D.1. of this 
final rule, with respect to the exception for fair market value 
compensation, we are finalizing this proposal with respect to Federal 
or State laws or regulations governing billing or claims submissions, 
but we are not finalizing the proposal with respect to the requirement 
that the arrangement does not violate the anti-kickback statute. We 
believe that the requirement that the arrangement does not violate the 
anti-kickback statute in Sec.  411.357(l)(5) functions as an important 
safeguard that substitutes for certain requirements included in certain 
statutory exceptions but omitted from Sec.  411.357(l), including the 
exclusive use requirement in the exceptions for the rental of office 
space and equipment. We did not propose to remove Sec.  411.357(l)(6), 
which 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. However, we 
solicited 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. As explained below, in this final 
rule we are not removing or modifying Sec.  411.357(l)(6).
    In this final rule, we are taking the opportunity to reorganize the 
exception at Sec.  411.357(l) to distinguish the writing requirement of 
the exception for fair market value compensation from other 
requirements. As the exception is currently organized, Sec.  
411.357(l)(1) requires the arrangement to be in writing and requires 
the writing to specify the items or services covered by the 
arrangement; Sec.  411.357(l)(2) requires the timeframe of the 
arrangement to be in writing, and also contains substantive 
requirements pertaining to timeframe of the arrangement and rules 
governing the frequency with which parties can enter into an 
arrangement for the same items or services; Sec.  411.357(l)(3) 
requires the compensation of the arrangement to be in writing, and also 
contains substantive requirements pertaining to the compensation under 
the arrangement. We are placing the writing requirement from these 
various provisions in Sec.  411.357(l)(1). Specifically, Sec.  
411.357(l)(1) will require the arrangement to be in writing and signed 
by the parties; while Sec.  411.357(l)(i) through Sec.  411.357(l)(iii) 
will list the information that must be specified in writing, as 
follows: The items, services, office space, or equipment covered by the 
arrangement (Sec.  411.357(l)(1)(i)); the compensation that will be 
provided under the arrangement (Sec.  411.357(l)(1)(ii)); and timeframe 
of the arrangement (Sec.  411.357(l)(1)(iii)). These organizational 
modifications are intended to clarify the exception and do not affect 
or modify the requirements of the exception in any way.
    In addition to the organizational changes explained above, after 
reviewing the comments, we are finalizing our proposal to permit 
arrangements for the lease of office space under Sec.  411.357(l) with 
certain modifications to clarify the exception and to protect against 
program or patient abuse. First, we are clarifying in the introductory 
chapeau language that the exception may be used for the lease of office 
space and not only for the use of office space. Second, we are no 
longer requiring at Sec.  411.357(l)(5) that the arrangement not 
violate any Federal or State law or regulation governing billing or 
claims submission, but we are not

[[Page 77607]]

finalizing our proposal to remove the requirement for compliance with 
the anti-kickback statute. Third, we are adding the phrase ``even if no 
referrals were made between the parties'' to the commercially 
reasonable requirement in Sec.  411.357(l)(4). Fourth, as explained in 
section II.E.1. of this final rule, we are modifying the requirement at 
Sec.  411.357(l)(2) to permit parties to rely on Sec.  411.357(l) and 
Sec.  411.357(z) to protect an arrangement for the same items, 
services, office space, or equipment during the course of a year. 
Lastly, as explained in section II.B.4, we are requiring at Sec.  
411.357(l)(7) that any arrangement that includes a directed referral 
requirement must satisfy all the conditions of Sec.  411.354(d)(4).
    We received the following comments and our responses follow.
    Comment: Commenters generally supported our proposal to allow 
parties to rely on the exception for fair market value compensation at 
Sec.  411.357(l) to protect arrangements for the rental of office 
space. Commenters recognized the flexibility afforded by the proposal, 
especially for office space leases with a term of less than one year. 
One commenter noted that the proposal would be helpful for rural 
providers, where short-term rentals may be necessary to address 
community needs, such as the need to relocate a physician due to 
facility demands or renovations. Another commenter stated that the 
exception could be helpful for situations where a laboratory leases 
space from a physician for a temporary patient service center for 
specimen collections while a permanent space is renovated or 
constructed.
    Response: We agree with the commenters that the proposal, once 
finalized, will afford greater flexibility for short-term leases of 
office space. Under the current regulations, an arrangement for the 
lease of office, which involves the transfer of dominion and control of 
the leased premises to the lessee, must have a term of at least 1 year. 
On the other hand, arrangements for the use of space, where dominion 
and control over the space are not transferred to the party making use 
of the space, are permitted for durations of less than 1 year under the 
exception for timeshare arrangements at Sec.  411.357(y). (See 80 FR 
71325 through 71326). However, the exception at Sec.  411.357(y) 
includes several requirements not found in the exception for the rental 
of office space at Sec.  411.357(a), such as a requirement at Sec.  
411.357(y)(2) that the arrangement is between a physician and a 
hospital or a physician organization and the requirement at Sec.  
411.357(y)(3)(i) that the premises covered by the arrangement is used 
predominantly for evaluation and management services to patients. Given 
the latter restrictions, an arrangement such as that identified by the 
commenter, under which a laboratory compensates a physician for space 
used on a short-term basis for specimen collections, would not be 
permissible under either Sec.  411.357(a) or Sec.  411.357(y). As 
modified in this final rule, the exception for fair market value 
compensation at Sec.  411.357(l) may be used to except such an 
arrangement, provided that all the requirements of the exception are 
satisfied. To clarify that the exception at Sec.  411.357(l) may be 
used for leases of office space, where dominion and control are 
transferred to the lessee, we are modifying the chapeau language of the 
exception to include the phrase ``lease of office space.''
    Comment: Commenters generally opposed inclusion of a requirement 
for compliance with the anti-kickback statute in regulatory exceptions, 
including the exception for fair market value compensation at Sec.  
411.357(l). One commenter that addressed our request for comments on 
Sec.  411.357(l)(6), which prohibits services furnished under an 
arrangement from involving the counseling or promotion of a business 
arrangement or other activity that violates a Federal or State law, 
specifically objected to including a requirement for compliance with 
the anti-kickback statute in the exception for fair market value 
compensation.
    Response: As explained in section II.D.1 of this final rule, we are 
not removing the requirement for compliance with the anti-kickback 
statute from the exception for fair market value compensation at Sec.  
411.357(l)(5). We believe that the requirement that the arrangement 
does not violate the anti-kickback statute in Sec.  411.357(l)(5) 
functions as an important substitute safeguard for requirements that 
are included in certain statutory exceptions but omitted from Sec.  
411.357(l), including the exclusive use requirement in the exceptions 
for the rental of office space and equipment. For similar reasons, we 
are also not removing the requirement at Sec.  411.357(l)(6), which 
requires that 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. This requirement applies 
to service arrangements and is carried over from the statutory 
exception for personal service arrangements, codified in our 
regulations at Sec.  411.357(d)(1)(vi). We are concerned that, if we 
remove the requirement at Sec.  411.357(l)(6), we would need to include 
additional safeguards to substitute for the statutory requirements in 
order to ensure that excepted service arrangements under Sec.  
411.357(l) do not pose a risk of program or patient abuse.
    Comment: One commenter supported removing the phrase ``and furthers 
the legitimate business purpose of the parties'' from Sec.  
411.357(l)(4), but requested either that the term ``commercially 
reasonable'' be defined to include a requirement that the arrangement 
must be commercially reasonable even if no referrals were made between 
the parties or that Sec.  411.357(l)(4) be modified to require an 
arrangement to be commercially reasonable ``even if no referrals were 
made between the parties.''
    Response: As we discussed in section II.B.2, we are not including 
the ``even if no referrals were made'' requirement in the definition of 
``commercially reasonable'' at final Sec.  411.351. Most exceptions 
that include a commercial reasonableness requirement, including 
exceptions that apply to arrangements that could also be excepted by 
Sec.  411.357(l), stipulate that the arrangement must be commercially 
reasonable ``even if no referrals'' were made between the parties. We 
are adopting the second approach advocated by the commenter and are 
revising the requirement at Sec.  411.357(l)(4) to clarify that the 
arrangement must be commercially reasonable ``even if no referrals were 
made between the parties.'' Without this modification, some 
stakeholders may believe that the standard articulated at Sec.  
411.357(l) is a different and less demanding standard than the 
requirement in other exceptions.
    Comment: One commenter supported our proposal at Sec.  
411.357(l)(3) to prohibit the use of percentage-based or per-unit-of 
service based compensation formulas for determining the compensation 
for the rental of office space under the exception for fair market 
value compensation.
    Response: We are finalizing this proposal. We believe that it is a 
necessary safeguard for the reasons stated in the CY 2017 PFS proposed 
rule (81 FR 46448 through 46453) and final rule (81 FR 80524 through 
80534).
    Comment: One commenter requested that CMS permit indefinite 
holdovers for arrangements under the exception for fair market value 
compensation, similar to the indefinite holdover provisions in the 
exceptions for rental of office space, rental of equipment, and 
personal service arrangements. The commenter noted that an arrangement 
may be for any period of time under

[[Page 77608]]

Sec.  411.357(l), and the exception permits the arrangement to be 
renewed any number of times if the terms of the arrangement and the 
compensation for the same items or services do not change. The 
commenter interpreted the renewal provision under Sec.  411.357(l) to 
require written documentation that the renewed arrangement was on the 
same terms and conditions, while there is no such requirement under the 
indefinite holdover provisions.
    Response: We believe that the commenter misunderstood the renewal 
provision in Sec.  411.357(l)(2). Under Sec.  411.357(l)(2), parties 
are permitted to renew an arrangement 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. Likewise, the indefinite 
holdover provisions at Sec.  411.357(a)(7), Sec.  411.357(b)(6), and 
Sec.  411.357(d)(1)(vii) require the holdover arrangement to continue 
on the same terms and conditions. Neither the indefinite holdover 
provisions in the latter exceptions nor the renewal provision in Sec.  
411.357(l)(2) require the holdover arrangement or renewal arrangement 
to be documented in a formal writing. To be sure, parties renewing an 
arrangement under Sec.  411.357(l)(2) retain the burden of proof under 
Sec.  411.353(c)(2) to establish that the renewal arrangement is on the 
same terms and conditions as the previous arrangement, but parties to a 
holdover arrangement under one of the indefinite holdover provisions 
have a similar burden. In sum, with respect to documentation and 
writing requirements, there is no substantive difference between the 
indefinite holdover provisions and the renewal provision in Sec.  
411.357(l)(2). Therefore, we are not including an indefinite holdover 
provision in Sec.  411.357(l).
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, established an exception at Sec.  411.357(w) 
for certain arrangements involving the donation of interoperable 
electronic health records software or information technology and 
training services (the EHR exception) (71 FR 45140). The EHR exception 
was initially set 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 electronic health records items and 
services under the exception, and updating the provision under which 
electronic health records 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 related to the 
exception. In addition, in its August 27, 2018 request for information 
described in section I.B.1. of this final rule, OIG requested comments 
on the safe harbor at 42 CFR 1001.952(y), which is substantively 
similar to the EHR exception at Sec.  411.357(w) (see 83 FR 43607). 
After reviewing comments related to the EHR exception and safe harbor 
submitted in response to the CMS RFI and the OIG's request for 
information, as well as recent statutory and regulatory developments 
arising from the 21st Century Cures Act (Pub. L. 114-255, enacted on 
December 13, 2016) (Cures Act), in the proposed rule, we proposed 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 at Sec.  
411.357(w)(13), and modify the definitions of ``electronic health 
record'' and ``interoperable'' at Sec.  411.351 to ensure consistency 
with the Cures Act (84 FR 55822). We also proposed to modify the 
requirement at Sec.  411.357(w)(4) that a physician contributes at 
least 15 percent of the cost of the donated electronic health records 
items and services and permit certain donations of replacement 
electronic health records items and services (84 FR 55822).
    As discussed more fully below, in this final rule we are finalizing 
certain of our proposals to revise the EHR exception. Despite the 
fundamental differences in the statutory structure, operation, and 
penalties of the respective underlying statutes, we have worked closely 
with OIG to ensure consistency between our revised EHR exception and 
the policies finalized by OIG related to its safe harbor and discussed 
elsewhere in this issue of the Federal Register.
a. Requirements Regarding Interoperability
    Currently, the requirements at Sec.  411.357(w)(2) and (3) require 
donated software to be interoperable and prohibit the donor (or a 
person on the donor's behalf) from taking action to limit the 
interoperability of the donated items or services. In the proposed rule 
(84 FR 55822), we proposed changes that would 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 proposed to implement key 
provisions in Title IV of the Cures Act.\15\ Among other things, the 
ONC NPRM proposed Conditions and Maintenance of Certification 
requirements for health IT developers under the ONC Health IT 
Certification Program (certification program) and proposed to define 
reasonable and necessary activities that do not constitute information 
blocking for purposes of section 3022(a)(1) of the Public Health 
Service Act (PHSA). We discuss our specific proposals and our final 
policies and regulations pertaining to Sec.  411.357(w)(2) and (3) 
below in subsections (1) and (2), respectively.
---------------------------------------------------------------------------

    \15\ 84 FR 7424 (March 4, 2019). At the time our proposed rule 
was published on October 17, 2019, ONC had not yet issued its final 
rule implementing the Cures Act. ONC published its final rule on May 
1, 2020 (85 FR 25642).
---------------------------------------------------------------------------

(1) The ``Deeming Provision'' (Sec.  411.357(w)(2))
    The existing regulation at Sec.  411.357(w)(2) requires that 
software donated under the EHR exception is interoperable. The deeming 
provision at Sec.  411.357(w)(2) provides certainty to parties that 
donated software satisfies the interoperability requirement at Sec.  
411.357(w)(2). Specifically, Sec.  411.357(w)(2) currently provides 
that software is deemed to be interoperable if it has been certified 
under ONC's certification program to electronic health record 
certification criteria identified in the then-applicable version of 45 
CFR part 170. 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). In the proposed 
rule, we proposed to retain this general construct for the updated EHR 
exception, but proposed two clarifications to the deeming provision at 
Sec.  411.357(w)(2) (84 FR 55823). Our current regulation at Sec.  
411.357(w)(2) 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

[[Page 77609]]

certifying body to an edition of the electronic health record 
certification criteria identified in the then-applicable version of 45 
CFR part 170. We proposed to modify this language to replace the phrase 
``has been certified'' with the phrase ``is certified'' (84 FR 55823). 
The proposed modification was intended to clarify that 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 
(and potentially no longer maintaining certification on the date of the 
donation). We also proposed to remove the reference to ``an edition'' 
of certification criteria to align with changes to ONC's certification 
program (84 FR 55823). As we describe in more detail below, we proposed 
and are finalizing an updated definition of ``interoperable'' (84 FR 
55824 through 55825). Although the revised definition would not require 
a change to the text of Sec.  411.357(w)(2), the revision would impact 
the deeming provision, and we solicited comments regarding this update 
to the definition of ``interoperable'' (84 FR 55823). We emphasized in 
the proposed rule and reaffirm here that an arrangement for the 
donation of software that met the definition of interoperable and that 
satisfied the requirements of Sec.  411.357(w) at the time the donation 
was made will not cease to be protected by the exception, even though 
we are finalizing certain changes to these provisions (84 FR 55823).
    After reviewing comments on our proposal, we are finalizing our 
clarifying revisions to the deeming provision at Sec.  411.357(w)(2) as 
proposed, with one modification to the regulation text. We are removing 
the phrase ``electronic health record'' preceding ``certification 
criteria'' because the phrase ``electronic health records certification 
criteria'' has been removed from 45 CFR part 170 as of June 30, 2020.
    We received the following comments and our responses follow.
    Comment: Commenters generally agreed with our proposal to clarify 
that software would be deemed to be interoperable under Sec.  
411.357(w)(2) if, on the date it is donated, it ``is'' certified by a 
certifying body authorized by ONC, rather than ``has been certified.'' 
Some commenters had questions about our removal of the phrase ``an 
edition'' before ``the electronic health record certification 
criteria'' and inquired whether we should specify that the criteria are 
the ``latest'' or ``current'' certification criteria. One commenter 
recommended that we modify the deeming provision to state that the 
certification must be current as of the date that the donor has entered 
into a binding agreement with the recipient or the electronic health 
records vendor. This commenter stated that a reasonable time limit, 
such as 1 year, could be applied in order to prevent potential fraud or 
abuse.
    Response: We are finalizing our proposal to modify Sec.  
411.357(w)(2) to specify that the donated software ``is'' certified on 
the date that it is donated, as opposed to ``has been certified'' on 
that date, and to delete the phrase ``an edition.'' We agree that the 
certification criteria should be the latest or current criteria; that 
is, current as of the date of donation. However, we believe that our 
proposal, which provides that the software must be certified to the 
``then-applicable'' version of 45 CFR part 170, already includes this 
requirement, and we are finalizing the regulation text as proposed. As 
noted above, we are removing the phrase ``electronic health record'' 
before ``certification criteria'' in Sec.  411.357(w)(2), because the 
phrase ``electronic health records certification criteria'' has been 
removed from 45 CFR part 170 as of June 30, 2020. We note that the 
latter change does not alter the scope of the remuneration to which the 
EHR exception applies. The exception continues to apply only to 
donations of items or services that are necessary and used 
predominantly to create, maintain, transmit, receive, or protect 
electronic health records. We also decline to adopt the commenter's 
suggestion that the certification must be current on the date that the 
donor has entered into a binding agreement with the recipient. To help 
ensure that donations of health information technology will further the 
policy goal of fully interoperable health information systems (71 FR 
45149), we believe that parties that enjoy the benefit of donated 
software being deemed to be interoperable must ensure that it is 
certified to the current certification criteria on the date it is 
donated. However, depending on the facts and circumstances, donations 
that do not satisfy the requirements of the deeming provision may still 
satisfy the requirement at Sec.  411.357(w)(2) that the donated 
software is interoperable.
    Comment: One commenter opposed the concept of an ``optional'' 
deeming provision, asserting that it is critical to require that 
software be certified by a certifying body authorized by ONC to further 
support the goal of value-based arrangements. In contrast, another 
commenter was concerned that the EHR exception applies only to 
donations of software that has been certified by ONC.
    Response: Although we agree that the interoperability of software 
is a critical requirement of the EHR exception, we disagree with the 
first commenter that certification by a certifying body authorized by 
ONC should be the only way of meeting this requirement. This 
certification provides donors and recipients with assurance that the 
electronic health records software donated under their arrangement is 
interoperable for purposes of the EHR exception, but such certification 
is not required under the exception. We emphasize that the exception 
does not require that donated software is certified as interoperable by 
a certifying body authorized by ONC; rather, the exception requires 
that donated software is interoperable. We believe that requiring only 
that donated software is interoperable--allowing parties to demonstrate 
that donated software is interoperable even if it is not certified as 
interoperable by a certifying body authorized by ONC--coupled with the 
optional method for assuring that software is interoperable through 
satisfaction of the deeming provision at Sec.  411.357(w)(2), affords 
parties sufficient flexibility under the exception for donations of 
electronic health records items or services.
    Comment: One commenter suggested that the proposed change to the 
deeming provision creates compliance uncertainty in the context of an 
ongoing software donation. In particular, the commenter was concerned 
that the proposed wording change would mean that, if at any time after 
the initial software donation the electronic health records software 
loses its certification, the continued provision of the software, 
including maintenance, would implicate the fraud and abuse laws. Other 
commenters supported the proposal to require that software is certified 
at the time it is provided to a recipient, with one commenter noting 
that any updates to donated systems should also need to be certified to 
the most recent standards. Another commenter requested that we provide 
for a 5-year grace period under the interoperability deeming provision 
so that physicians not participating in the Quality Payment Program 
could continue to use donated electronic health records software 
certified to the 2015 edition.
    Response: As we explained in response to the comment immediately 
above, the deeming provision is optional. Certification of donated 
electronic health records software by a certifying body authorized by 
ONC is not required to satisfy the requirement at Sec.  411.357(w)(2) 
that the software is interoperable, as defined at Sec.  411.351; the 
exception merely requires that the

[[Page 77610]]

software is interoperable at the time it is provided to the recipient. 
Regardless of whether the physician recipient participates in the 
Quality Payment Program, electronic health records software is not 
required to satisfy the deeming provision at Sec.  411.357(w)(2) in 
order to be ``interoperable'' as defined at Sec.  411.351. With respect 
to ongoing donations of maintenance, updates, or other items or 
services in connection with previously donated electronic health 
records software, we note the following. If the electronic health 
records software loses its certification, then new donations of that 
electronic health records software, including updates and patches of 
that software, will not be deemed to be interoperable under the deeming 
provision in Sec.  411.357(w)(2). However, if the electronic health 
records software is still interoperable (as defined at Sec.  411.351), 
then the EHR exception will remain available to protect ongoing 
donations of such electronic health records software, including updates 
and patches, provided that all other requirements of the exception are 
satisfied. If, on the other hand, software that loses its certification 
is no longer interoperable (as defined at Sec.  411.351), then new 
donations of such electronic health records software, including updates 
and patches of the software, would not be protected under the EHR 
exception.
(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 donated 
items or services with other electronic prescribing or electronic 
health records 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 2006 EHR final rule and 2013 EHR final rule, 
significant legislative, regulatory, policy, and other Federal 
government action further defined the data lock-in problem (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 that constitutes information blocking by health care 
providers, health IT developers of certified health IT, health 
information exchanges, and health information networks. 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 for purposes of section 3022(a)(1) of 
the PHSA. The ONC NPRM included proposals to implement the statutory 
definition of ``information blocking,'' define certain terms related to 
the statutory definition of ``information blocking,'' and establish 
exceptions to the definition of ``information blocking.'' ONC published 
its final rule on May 1, 2020 (85 FR 25642).
    In the proposed rule, we proposed modifications to Sec.  
411.357(w)(3) to recognize these significant updates since the 2013 EHR 
final rule (84 FR 55823). Specifically, we proposed 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. We stated that, 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 
finalized the proposals described in the proposed rule (84 FR 55823).
    We noted in the proposed rule that the current requirements of the 
EHR exception, while not using the term ``information blocking,'' 
already include concepts similar to those found in the Cures Act's 
prohibition on information blocking (84 FR 55823). For example, in 
prior rulemaking, we stated our concern about donors (or those on the 
donor's behalf) taking steps to limit the interoperability of donated 
software to lock in or steer referrals (see, for example, 71 FR 45156 
and 78 FR 78762 through 78763). We stated in the proposed rule that the 
proposed modifications of Sec.  411.357(w)(3) were 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 (84 FR 55823).\16\ We 
solicited comments on aligning the requirement at Sec.  411.357(w)(3) 
with the PHSA information blocking provision and the information 
blocking definition in 45 CFR part 171.
---------------------------------------------------------------------------

    \16\ We recognized in the proposed rule that the ONC NPRM was 
not a final rule and was subject to change (84 FR 55823). However, 
we based our proposals on both the statutory language and the 
language in ONC's NPRM for purposes of soliciting public input on 
our proposals.
---------------------------------------------------------------------------

    After reviewing comments on our proposal, we are not finalizing the 
proposed modification of Sec.  411.357(w)(3). Rather, based on the 
comments and for the reasons explained below, we are removing Sec.  
411.357(w)(3) from our regulations.
    We received the following comments and our responses follow.
    Comment: We received a number of comments about incorporating the 
``information blocking'' prohibitions from the Cures Act or the ONC 
NPRM into the EHR exception at Sec.  411.357(w)(3). Several commenters 
supported aligning the EHR exception with the concepts of 
interoperability and information blocking from the Cures Act and the 
ONC NPRM, including our proposal to expressly prohibit information 
blocking at Sec.  411.357(w)(3). One commenter agreed with CMS' 
assessment that the incorporation of the concept of information 
blocking into the regulation does not change the underlying purpose of 
the existing interoperability requirements. Another commenter that 
supported the prohibition on information blocking asserted that large 
health systems can control referrals and increase market share by 
limiting access to patients' records to specific providers on the same 
health information network, thereby shutting out independent providers 
and negatively impacting patient care. Other commenters did not 
disagree that information blocking should be prohibited, but raised a 
number of questions and concerns regarding how such a provision would 
work in the EHR exception. For example, a number of commenters 
expressed concern about relying on the ONC NPRM, which was not yet 
final at the time our proposed rule was published. Some commenters were 
particularly concerned about the array of exceptions to the definition 
of ``information blocking'' and incorporation of the definition of 
``electronic health information'' as proposed in the ONC NPRM.
    Some commenters asked that we clarify which party is responsible to 
ensure that information blocking does not occur, asserting that a donor 
cannot

[[Page 77611]]

control what happens to software after it is donated. Several 
commenters recommended removing or revising the requirement in the EHR 
exception that a donor (or any person on a donor's behalf) does not 
engage in a practice constituting information blocking, explaining that 
a vendor may engage in information blocking without the donor's 
knowledge. Another commenter expressed concern that, if a determination 
of information blocking against either a donor or recipient occurs at 
some time after the donation, the recipient may be vulnerable to 
unexpected costs or loss of access to its health information technology 
if the arrangement suddenly ends. Another commenter asserted that the 
incorporation of ONC's proposals into the exception at Sec.  
411.357(w)(3) would introduce an intent-based requirement into the 
strict-liability framework of the physician self-referral law.
    A few commenters suggested that, rather than including a 
prohibition on information blocking (as that term is defined in the 
Cures Act or in 45 CFR part 171) as a requirement of the EHR exception, 
CMS should assume that information blocking will not be tolerated and 
will be enforced through other authorities. One commenter explained 
that, when the EHR exception was first issued in 2006, interoperability 
was in its infancy, and there was no separate regulatory guidance on 
interoperability and information blocking, whereas now these concepts 
are separately addressed and regulated by ONC. Given these changes, the 
commenters maintained that incorporation of information blocking 
provisions into the EHR exception is duplicative and unnecessary.
    Response: Based on the comments and after assessing the final rule 
published by ONC, ``21st Century Cures Act: Interoperability, 
Information Blocking, and the ONC Health IT Certification Program'' 
(ONC final rule),\17\ we are removing the requirement at Sec.  
411.357(w)(3) in its entirety. This requirement, when originally 
implemented in the 2006 EHR final rule, was intended to ``help ensure 
that donations of health information technology will further the policy 
goal of fully interoperable health information systems and will not be 
misused to steer business to the donor.'' (71 FR 45156). The 2013 EHR 
final rule also explained that the Department was considering other 
policies to improve interoperability and noted that those policy 
efforts are ``better suited than this exception to consider and respond 
to evolving functionality related to the interoperability of electronic 
health record technology'' (78 FR 78763). At that time, the Department 
had few other authorities to directly address information blocking. 
However, there are now other enforcement authorities designed to 
address information blocking. For example, the Cures Act gave ONC and 
OIG more direct authority to address information blocking. 
Additionally, CMS has separate authority to address providers that 
information block, and OCR has authorities related to patient access.
---------------------------------------------------------------------------

    \17\ 85 FR 25642 (May 1, 2020).
---------------------------------------------------------------------------

    The Cures Act and the ONC final rule recognize that certain 
practices likely to interfere with, prevent, or materially discourage 
access, exchange, or use of electronic health information may 
nonetheless be reasonable and necessary. That is why the Cures Act 
directed the Secretary to identify exceptions to the definition of 
information blocking. The ONC final rule implements eight exceptions 
that apply to practices likely to interfere with the access, exchange, 
or use of electronic health information provided that the practice 
meets the conditions of an exception. However, Sec.  411.357(w)(3), as 
implemented by the 2006 EHR final rule, required that a party not take 
``any action to limit or restrict the use, compatibility, or 
interoperability'' of the donated electronic health records items or 
services. The requirement did not account for actions that may be 
reasonable and necessary, such as implementing privacy and security 
measures.
    Recognizing the developments since 2013, we agree with the 
commenter that newer and separate authorities are better suited than a 
requirement of an exception to the physician self-referral law to deter 
information blocking and hold individuals and entities that engage in 
information blocking appropriately accountable. We also agree with 
commenters that a recipient is unlikely to have the capabilities to 
determine if a donor (or someone on the donor's behalf) engaged in 
information blocking, which includes a level of intent set by statute, 
or met an exception to information blocking as set forth in the ONC 
final rule. Given these potential issues with the proposed 
modifications to Sec.  411.357(w)(3) and limitations of the original 
requirement at Sec.  411.357(w)(3) discussed above, we no longer 
believe that the requirement is an effective way to achieve the policy 
goals that served as its original basis. Removing the requirement at 
Sec.  411.357(w)(3) should sufficiently address the concerns of the 
commenters that had questions about the scope of information blocking 
practices, how CMS would determine the party responsible, and how the 
information blocking knowledge standards in the Cures Act and ONC final 
rule would be assessed in context of this exception and the strict-
liability framework of the physician self-referral law. We emphasize 
that we are maintaining the interoperability requirement at Sec.  
411.357(w)(2). We believe that this requirement and the optional 
deeming provision at Sec.  411.357(w)(2) will ensure that donations of 
items and services under Sec.  411.357(w) that satisfy all the 
requirements of the EHR exception further the Department's policy goal 
of an interoperable health system and prevent donations of items and 
services intended to lock in referrals by limiting the flow of 
electronic health information.
    Comment: One commenter requested that we include in the EHR 
exception a requirement that donors must also provide access to 
electronic health records to pharmacists. The commenter stated that 
some health information technology systems block pharmacists' 
visibility into relevant clinical information from other health care 
providers.
    Response: The EHR exception does not limit the scope of permissible 
donors to those donors that grant access to electronic health records 
to a specified set of providers or suppliers. However, for a donation 
to be permissible under the EHR exception, among other things, the 
software must be interoperable and should not inappropriately interfere 
with, prevent, or materially discourage legally permissible access, 
exchange, or use of relevant clinical information. We encourage parties 
to report concerns regarding potential information blocking to https://healthit.gov/report-info-blocking.
b. Cybersecurity
    We proposed to amend the EHR exception to clarify that the 
exception is applicable (and always has been applicable) to certain 
cybersecurity software and services,\18\ and to more broadly protect 
the donation of software and services related to cybersecurity (84 FR 
55823). Currently, the exception at Sec.  411.357(w) protects 
electronic health records software or information technology and 
training services necessary and used predominantly to create, maintain, 
transmit, or receive

[[Page 77612]]

electronic health records. We proposed to modify this language to 
expressly include software that ``protects'' electronic health records, 
and to expressly include software and services related to 
cybersecurity.
---------------------------------------------------------------------------

    \18\ 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 items or services that may be 
protected under the existing EHR exception.
---------------------------------------------------------------------------

    In the 2006 EHR final rule, we emphasized that software and 
information technology and training services donated under Sec.  
411.357(w) must create, maintain, transmit, or receive electronic 
health records, and those functions must predominate (71 FR 54151). We 
stated that the core functionality of the items and services must be 
the creation, maintenance, transmission, or receipt of individual 
patients' electronic health records, but, recognizing that electronic 
health records 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 (71 FR 45151). Under our proposal, the same 
criteria would apply to cybersecurity software and services, provided 
that the predominant use of the software or services is cybersecurity 
associated with the electronic health records.
    In section II.E.2. of this final rule, we discuss the new exception 
at Sec.  411.357(bb), which applies specifically to arrangements 
involving the donation of cybersecurity technology and related services 
(the cybersecurity exception), and the definition of ``cybersecurity'' 
at Sec.  411.351 that will apply to both the EHR exception and the 
cybersecurity exception at Sec.  411.357(bb). As finalized, the 
cybersecurity exception at Sec.  411.357(bb) is broader and includes 
fewer requirements than the EHR exception as applied to cybersecurity 
software and services that are necessary and used predominantly to 
protect electronic health records. Among other things, the 
cybersecurity exception at final Sec.  411.357(bb) does not require 
recipients to contribute to the cost of the donated cybersecurity 
technology or services, while the EHR exception retains the cost 
contribution requirement at Sec.  411.357(w)(4) for donations of 
electronic health records items or services. In the proposed rule, we 
solicited comments on whether it is necessary to modify the EHR 
exception to expressly include cybersecurity, given our proposed 
addition of a standalone exception for cybersecurity technology and 
related services at Sec.  411.357(bb), and we stated that 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 (84 FR 55824).
    After reviewing the comments on our proposed rule, we are 
finalizing our proposal to expand the EHR exception to expressly 
include cybersecurity software and services so that it is clear that an 
entity donating electronic health records software and providing 
training and other related services may also utilize the EHR exception 
to protect donations of related cybersecurity software and services to 
protect the electronic health records, provided that all the 
requirements of the EHR exception are satisfied. In the final 
exception, we removed the word ``certain'' before ``cybersecurity 
software and services'' in the introductory chapeau language to avoid 
ambiguity regarding the scope of the EHR exception.
    We received the following comments and our responses follow.
    Comment: A number of commenters supported stating in regulation 
text that the EHR exception applies to donations of cybersecurity 
software and services that protect electronic health records. These 
commenters stated that the proposal, if finalized, would clarify the 
regulations, and one of the commenters also noted that the revision 
would reduce administrative overhead by avoiding real or perceived 
disparities between donations of electronic health records items and 
services and cybersecurity donations. One commenter supported our 
proposal to include certain cybersecurity donations under the EHR 
exception, as well as in proposed Sec.  411.357(bb). The commenter 
appreciated our statement that cybersecurity donations only need to 
satisfy one of the exceptions, and noted that having two exceptions 
available allows a donor to tailor its donation strategy.
    Response: We are finalizing our proposal to expressly permit 
donations of cybersecurity software and services that protect 
electronic health records under the EHR exception. We agree with the 
commenter that having two exceptions available to protect donations of 
cybersecurity software and services increases flexibility under our 
regulations.
    Comment: A few commenters expressed concern that the proposal 
related to cybersecurity software and services with respect to the EHR 
exception and the separately proposed cybersecurity exception at Sec.  
411.357(bb) overlap significantly and could lead to confusion if both 
are finalized. The commenters stated that, if CMS finalizes a separate 
cybersecurity exception at Sec.  411.357(bb), the proposed 
cybersecurity-related clarifications to the EHR exception would not be 
necessary. One of the commenters questioned how the cost contribution 
requirement under the EHR exception at Sec.  411.357(w)(4) would apply 
to donations of cybersecurity software under Sec.  411.357(w), given 
that there is no cost contribution requirement in the cybersecurity 
exception at proposed Sec.  411.357(bb), and also asked whether the 
electronic health records or cybersecurity function must predominate in 
software that includes both electronic health records and cybersecurity 
functions. A different commenter requested that, if we finalize 
protection for certain cybersecurity software and services under the 
EHR exception, we also clarify that the predominant purpose of the 
software or service must be cybersecurity associated with electronic 
health records. Another commenter suggested that creating separate 
exceptions for electronic health records items and services and 
cybersecurity technology and related services is taking a piecemeal 
approach to tools that must work together for care coordination.
    Response: We recognize that there is a certain amount of overlap 
between the cybersecurity exception established in this final rule at 
Sec.  411.357(bb) and the EHR exception, as amended by this final rule, 
although we do not agree that this overlap will result in the type of 
confusion suggested by the commenter. The revision to the introductory 
language of Sec.  411.357(w) merely confirms in regulation text that 
the EHR exception has always been applicable to (and remains applicable 
to) arrangements that include the donation of cybersecurity software 
and services that have a predominant purpose of protecting electronic 
health records. In application, if a party is donating electronic 
health records items and services under the EHR exception, and the 
donation includes cybersecurity software or services that are necessary 
and used predominantly to protect electronic health records, the 
parties may structure their entire arrangement to satisfy the 
requirements of the EHR exception, instead of structuring the 
arrangement to satisfy two different exceptions. We believe that having 
this option available will reduce administrative burden for some 
parties. Other parties may wish to structure such donations as two 
separate arrangements that each satisfy the requirements of the 
respective exception at Sec.  411.357(w) and Sec.  411.357(bb). As 
noted in the proposed rule and reiterated above, parties seeking to

[[Page 77613]]

protect an arrangement involving the donation of cybersecurity software 
and services only need to satisfy the requirements of one applicable 
exception (84 FR 55824).
    Regarding the requirement in the EHR exception that a physician 
recipient must contribute 15 percent of the donor's cost of the donated 
items and services, under this final rule, the EHR exception retains 
the 15 percent cost contribution requirement at Sec.  411.357(w)(4), 
but there is no cost contribution requirement under the standalone 
cybersecurity exception at Sec.  411.357(bb). Thus, if parties rely on 
the exception at Sec.  411.357(w) to protect an arrangement for a 
donation that includes both electronic health records items and 
services and related cybersecurity software or services, the physician 
recipient must contribute 15 percent of the donor's cost for the 
cybersecurity software or services under Sec.  411.357(w)(4). If 
parties structure such a donation to satisfy the requirements of Sec.  
411.357(w) and Sec.  411.357(bb) respectively, then the physician does 
not have to pay the 15 percent cost contribution for the cybersecurity 
software and services if the arrangement related to the cybersecurity 
software and services satisfies all the requirements of Sec.  
411.357(bb).
    We reiterate here that, with respect to cybersecurity technology 
and related services, the scope of the EHR exception is more limited 
than the standalone cybersecurity exception at Sec.  411.357(bb). 
Arrangements for the donation of standalone cybersecurity hardware or 
items or services that are not used predominantly to protect electronic 
health records (but are used predominantly to implement, maintain, or 
reestablish cybersecurity) are not excepted under the EHR exception, 
but may be protected under the cybersecurity exception if all the 
requirements of Sec.  411.357(bb) are satisfied.
    Comment: Some commenters requested that CMS broaden the application 
of the EHR exception to additional cybersecurity technology and 
services, for example, to cybersecurity hardware, such as network 
appliances. One commenter requested that we make the EHR exception 
applicable to donations of cybersecurity hardware, software, 
infrastructure and services, without exception and without a 
requirement that the recipient contribute 15 percent of the donor's 
cost for the items or services. Another commenter suggested that, if 
the expanded exception does not protect hardware, CMS should permit 
donors to place cybersecurity hardware at the recipient's location as 
long as the donor retains title to or a leasehold interest in the 
equipment.
    Response: By including the word ``protect'' in the introductory 
chapeau language of Sec.  411.357(w), we are clarifying that the scope 
of the EHR exception applies to cybersecurity software or other 
information technology and training services that are necessary and 
used predominantly to protect electronic health records. We decline to 
expand the EHR exception to apply to additional services or hardware, 
including hardware that is donated or loaned to a recipient. There is a 
separate, standalone exception at final Sec.  411.357(bb) that applies 
to broader cybersecurity donations, including donations of 
cybersecurity hardware, and that exception does not include a 
contribution requirement.
c. The Sunset Provision
    The EHR exception originally was scheduled to expire on December 
31, 2013. In the 2006 EHR final rule, we stated that the need for an 
exception for donations of electronic health records items and services 
should diminish substantially over time as the use of electronic health 
records technology becomes a standard and expected part of medical 
practice. In our 2013 proposal to revise the EHR exception (78 FR 
21308), we recognized that, although the adoption of electronic health 
records had risen dramatically, its use was not yet universal 
nationwide. Because continued adoption of electronic health records 
remained an important goal of the Department, we solicited comments 
regarding an extension of the EHR exception (78 FR 21311 through 
21312). 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 electronic health records Medicaid 
incentives (78 FR 78755 through 78757). We stated our continued belief 
that, as progress on the goal of nationwide electronic health records 
adoption is achieved, the need for an exception for donations should 
continue to diminish over time. Nonetheless, commenters on the CMS RFI 
and on OIG's request for information requested that we make the EHR 
exception and safe harbor permanent.
    Although widespread (though not universal) adoption of electronic 
health records largely has been achieved at this time, we no longer 
believe that the need for an exception for arrangements involving the 
donation of electronic health records items and services will diminish 
over time or completely disappear. The continued availability of the 
EHR exception provides certainty with respect to the contribution costs 
related to donations of electronic health records items and services 
for recipients, facilitates 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 
electronic health records system, and helps preserve the gains already 
made in the adoption of interoperable electronic health records 
technology (84 FR 55824). Therefore, in the proposed rule, we proposed 
to eliminate the sunset provision at Sec.  411.357(w)(13) (84 FR 
55824). In the alternative, we considered an extension of the sunset 
date. We sought comment on whether we should extend the sunset date 
instead of making the exception permanent, and if so, the duration of 
any such extension. Based on the comments we received on the proposed 
rule, we are finalizing our proposal to make the EHR exception 
permanent by removing the sunset provision at Sec.  411.357(w)(13).
    We received the following comment and our response follows.
    Comment: We received almost unanimous support to remove the sunset 
date in the EHR exception. Commenters asserted that the elimination of 
the sunset date would provide certainty regarding the availability of 
an exception to the physician self-referral law for ongoing donations 
of electronic health records items and services. Commenters also agreed 
with our statement in the proposed rule that the exception will remain 
necessary after 2021, given new entrants, aging electronic health 
records technology at existing practices, and emerging and improved 
technology. In contrast, one commenter suggested that, after 2021, the 
exception should only be available to rural providers and to physicians 
entering into solo practice in a health professional shortage area or 
medically underserved area. According to the commenter, making the 
current exception permanent could incentivize entities to reward high 
referring physicians with new electronic health records systems or 
updates.
    Response: We are finalizing our proposal to make the EHR exception 
permanent by removing the sunset date. We note that, as finalized, the 
exception continues to require at Sec.  411.357(w)(6) that neither the 
eligibility of a physician to receive items or services nor the amount 
or nature of the items or services may be determined in any manner that 
directly takes into account

[[Page 77614]]

the volume or value of the physician's referrals or other business 
generated between the parties. Given this requirement, as well as the 
other requirements of the exception, we do not believe that making the 
EHR exception permanent poses a risk of program or patient abuse.
d. Definitions
    In the proposed rule, we proposed to modify the definitions of 
``electronic health record'' and ``interoperable'' (84 FR 55824 through 
55825). We adopted definitions for these terms in the 2006 EHR final 
rule based on contemporaneous terminology, the emerging standards for 
electronic health records, and other resources cited by commenters at 
that time. Our proposed modifications to these definitions were largely 
based on terms and provisions in the Cures Act that update or supersede 
terminology we used in the 2006 EHR final rule (84 FR 55824 through 
55825). We discuss our specific proposals and our final policies and 
regulations pertaining to definitions of ``electronic health record'' 
and ``interoperable'' below in subsections (1) and (2), respectively.
(1) ``Electronic Health Record''
    The term ``electronic health record'' is 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 proposed to revise this definition so 
that ``electronic health record'' would mean 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 (84 FR 55824). We proposed the modifications 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. We based our proposed modifications, in part, 
on ONC's proposed definition of ``electronic health information'' in 
the ONC NPRM (84 FR 7513), which reflects more modern terminology used 
to describe the type of information that is part of an electronic 
health record. We solicited comments on this updated definition (84 FR 
55824).
    After reviewing the comments on our proposed definition of 
``electronic health record,'' we are not finalizing our proposal to 
modify the definition. Rather, we are retaining the current definition 
of ``electronic health record'' at Sec.  411.351.
    We received the following comments and our responses follow.
    Comment: Several commenters expressed general support for our 
proposed revision to the definition of ``electronic health record,'' 
particularly to the extent that the definition would align with the 
definition included in the Cures Act. Some commenters supported our 
proposal to incorporate the term ``electronic health information,'' 
which ONC proposed to define in the ONC NPRM. According to one 
commenter, the broad definition of ``electronic health information'' in 
the ONC NPRM would ensure that data related to medical imaging, such as 
electronic orders and referrals for radiology services, would be 
subject to the information blocking provisions. The commenter suggested 
that, if ONC does not finalize a broad definition of ``electronic 
health information,'' CMS should retain the term ``consumer health 
status information'' in the definition of ``electronic health record.'' 
Another commenter maintained that, to further the agency's price 
transparency goals, CMS should explicitly define ``electronic health 
record'' to include electronic health information that relates to the 
past, present, or future payment for the provision of health care to an 
individual.
    In contrast, several other commenters objected to the inclusion of 
the term ``electronic health information'' in the definition of 
``electronic health record.'' Noting that, at the time we issued our 
proposed rule, ONC had not finalized its definition of ``electronic 
health information,'' these commenters maintained that the definition 
proposed by ONC is overly broad. For example, one commenter asserted 
that, under the proposed definition, a patient's computer or mobile 
telephone could be considered an electronic health record if the 
patient obtained a copy of his or her health record through electronic 
transmittal. Some commenters specifically stated that the proposed 
definition of ``electronic health record'' was too broad because, as 
proposed, it would have included financial information pertaining to 
payment for the provision of health care to an individual. Several 
commenters also made suggestions to limit the scope of ``electronic 
health information.''
    Response: As stated in the proposed rule and reiterated above, our 
proposal to modify the definition of ``electronic health information'' 
was meant to update terminology that we adopted in the 2006 EHR final 
rule (84 FR 55824). We did not intend for our proposed modifications to 
the definition of ``electronic health record'' to make a substantive 
change to the scope of the exception at Sec.  411.357(w). We agree with 
commenters that our proposed changes might have inadvertently 
introduced undesirable complexity. To remain true to our intent, we are 
not finalizing any of the proposed changes to the definition of 
``electronic health record,'' and we are retaining the existing 
definition in our regulations. We also note that ONC published its 
final definition of ``electronic health information'' in the Federal 
Register on May 1, 2020, well after the comment period for our proposed 
rule closed on December 31, 2019, and the final definition of 
``electronic health information'' (85 FR 25955) differs from the 
definition that ONC proposed (84 FR 7601). Among other things, as ONC 
explained in its final rule, the definition of ``electronic health 
information'' in ONC's final rule does not expressly include or exclude 
price information (85 FR 25804). Given that ONC's final definition 
differs from the definition in the ONC NPRM, which we cited in our 
proposed rule, and that ONC's final rule was published after the 
comment period for our proposed rule closed, we are concerned that the 
public may have not had sufficient information to comment on our 
proposal to incorporate the concept of ``electronic health 
information'' in the definition of ``electronic health record.'' 
Finally, although CMS remains committed to the price transparency 
initiative, at this time, we do not believe that modifying the 
definition of ``electronic health record'' with the resulting impact on 
the scope and requirements of the EHR exception is the best means to 
achieve this goal.
(2) ``Interoperable''
    The term ``interoperable'' is currently defined at Sec.  411.351 to 
mean 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 our 2005 rulemaking proposing 
exceptions for certain electronic prescribing and electronic health 
records arrangements (70 FR 59182) that

[[Page 77615]]

referenced emerging industry definitions and standards related to 
interoperability (71 FR 45155 through 45156).
    In the proposed rule, we proposed 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 (84 FR 55824 through 55825). Consistent with section 3000(9) of 
the PHSA, we proposed 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 (84 FR 55824 through 55825). We stated that, 
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 (84 FR 55825).
    We also noted in the proposed rule that 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) (84 FR 55825). Two new concepts in the statutory definition 
were included in our proposed modification of the definition: (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 (Section 
3000(9) of the PHSA; (42 U.S.C. 300jj(9)). We stated that, as a 
practical matter, we believe that these two concepts are not 
substantively different from the existing definition and only reflect 
an updated understanding of interoperability and related terminology, 
and solicited comments on a definition that would align the definition 
of ``interoperable'' at Sec.  411.351 (for purposes of the physician 
self-referral law) with the statutory definition ``interoperability'' 
at 3000(9) of the PHSA (84 FR 55825).
    As an alternative proposal, we considered revising our regulations 
to eliminate the term ``interoperable'' and instead define the term 
``interoperability'' by reference to section 3000(9) of the PHSA and 45 
CFR part 170 (if finalized) (84 FR 55825). In conjunction, we would 
revise the EHR exception to incorporate the term ``interoperability'' 
and remove the term ``interoperable.'' We sought 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' varying terminology related to the singular concept of 
interoperability (84 FR 55825). We are not finalizing this alternative 
proposal.
    After reviewing the comments on our proposals, we are revising the 
definition of ``interoperable,'' but omitting the provision related to 
information blocking and deleting the phrase ``without special effort 
on the part of the user'' from proposed subparagraph (1). Specifically, 
at revised Sec.  411.351, ``interoperable'' means: (1) Able to securely 
exchange data with and use data from other health information 
technology; and (2) allows for complete access, exchange, and use of 
all electronically accessible health information for authorized use 
under applicable State or Federal law.
    We received the following comments and our response follows.
    Comment: We received general support for our effort to align the 
definition of ``interoperable'' with the statutory definition of 
``interoperability'' in the Cures Act. However, citing uncertainty 
regarding the proposals in the ONC NPRM, one commenter requested that 
CMS not define ``interoperable'' with reference to ONC's proposed 
definition. The commenter also requested that CMS not replace the 
definition of ``interoperable'' with a definition of 
``interoperability'' that cites ONC's proposed definition at 45 CFR 
170.102. One commenter supported including a provision pertaining to 
information blocking in the definition, while several other commenters 
raised questions about the incorporation of information blocking in the 
definition of ``interoperable.'' For example, these commenters asked 
when the test for interoperability occurs and whether a prior donation 
of electronic health records items or services would cease to satisfy 
the requirements of the EHR exception if there was a finding of 
information blocking sometime after the donation. One commenter asked 
for further clarification of the phrase ``without special effort on the 
part of the user.''
    Response: As we explain above in the discussion of our proposal to 
include the concept of ``information blocking'' in the exception at 
Sec.  411.357(w)(3), we believe that newer and separate authorities are 
better suited than the EHR exception to deter information blocking and 
hold individuals and entities that engage in information blocking 
appropriately accountable. We are concerned that, if we include the 
phrase ``does not constitute information blocking'' in the definition 
of ``interoperable'' at Sec.  411.351, then Sec.  411.357(w)(2), which 
requires that the donated software is interoperable, could be 
interpreted to prohibit parties from engaging in practices that 
constitute ``information blocking'' but that might not be prohibited 
under ONC rules. Therefore, we are not including the phrase ``does not 
constitute information blocking'' in the definition of 
``interoperable'' at Sec.  411.351.
    With respect to the phrase ``without special effort on the part of 
the user,'' we note that, the phrase is used in the definition of 
``interoperability'' at section 4003(a)(2) of the Cures Act and the 
partial phrase ``without special effort'' is used in the conditions of 
certification at section 4002(a) of the Cures Act. As explained above, 
although software certified by ONC is deemed to be interoperable for 
purposes of the physician self-referral law, certification is not 
required for compliance with Sec.  411.357(w)(2). To avoid any 
implication that we are incorporating a certification requirement into 
the definition of ``interoperable'' at Sec.  411.351, we are removing 
the phrase ``without special effort on the part of the user'' from the 
definition.
e. Additional Proposals and Considerations
(1) 15 Percent Recipient Contribution (Sec.  411.357(w)(4))
    In the 2006 EHR final rule, we agreed with a number of commenters 
that suggested that cost sharing is an appropriate method to address 
some of the program integrity risks inherent in unlimited donations of 
electronic health records items and services (71 FR 45160 through 
45161). Accordingly, we incorporated a requirement at Sec.  
411.357(w)(4) that, before the receipt of the items or services, the 
physician pays 15 percent of the donor's cost of the items or services. 
We stated our belief that the 15 percent cost sharing requirement is 
high enough to encourage prudent and robust electronic health records 
arrangements without imposing a prohibitive financial burden on 
recipients. Moreover, we stated that this approach requires recipients 
to contribute toward the benefits they may experience from the adoption 
of interoperable electronic health records software (for example, a 
decrease in

[[Page 77616]]

practice expenses or access to incentive payments related to the 
adoption of electronic health records technology).
    We received a number of comments in response to the CMS RFI, and 
OIG received similar comments in response to its request for 
information, asserting that the 15 percent contribution requirement of 
the EHR exception has been burdensome to some recipients and acts as a 
barrier to adoption of electronic health records. Some commenters on 
the requests for information asserted that this burden may be 
particularly acute for small and rural practices that cannot afford the 
contribution. Other suggested that applying the 15 percent contribution 
requirement to upgrades and updates to electronic health records 
software is restrictive and cumbersome and similarly acts as a barrier.
    In the proposed rule, we considered and solicited comments on two 
alternatives to the existing requirement at Sec.  411.357(w)(4) as 
outlined below, but did not propose specific regulation text along with 
the proposals (85 FR 55825). First, we considered eliminating the 
contribution requirement or reducing the percentage that small or rural 
physician organizations would be required to contribute. In conjunction 
with this proposal, we solicited comments on how we should define 
``small or rural physician organization.'' We also solicited 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 ``rural 
provider'' at Sec.  411.356(c)(1). We also solicited comments on other 
subsets of potential physician recipients for which the 15 percent 
contribution is a particular burden. As an alternative, we proposed to 
reduce or eliminate the 15 percent contribution requirement in the EHR 
exception for all physician recipients. We solicited comments regarding 
the impact this might have on the use and adoption of electronic health 
records technology, as well as any attendant program integrity 
concerns. We solicited comments requesting specific examples of any 
prohibitive costs associated with the 15 percent contribution 
requirement, both for the initial donation of electronic health records 
items and services, and subsequent upgrades and updates to previously 
donated electronic health records items and services.
    Finally, in the proposed rule, we also considered modifying or 
eliminating the contribution requirement for updates to previously 
donated electronic health records software or services, regardless of 
whether we determined to retain the 15 percent contribution requirement 
or reduce that contribution requirement for some or all physician 
recipients (85 FR 55825). We solicited comments on this approach as 
well as what such a modification should entail. For example, we 
considered requiring a contribution for the initial donation only, as 
well as any new electronic health records software modules, but not 
requiring a contribution for any update of the software already 
donated. We solicited 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 of the software already 
donated.
    After reviewing the comments, we are retaining the 15 percent cost 
contribution requirement for all physician recipients. However, in 
response to comments, we are revising Sec.  411.357(w)(4) as it 
pertains to the timing of payments. Under revised Sec.  
411.357(w)(4)(i), a physician must pay the required cost contribution 
amount before receiving an initial donation of electronic health 
records items and services or a donation of replacement items and 
services. However, with respect to items or services donated after the 
initial donation or the replacement donation, final Sec.  
411.357(w)(4)(ii) requires that the cost contribution amount must be 
paid at reasonable intervals. Specifically, as finalized, Sec.  
411.357(w)(4)(i) and (ii) require that: (i) Before receipt of the 
initial donation of items and services or the donation of replacement 
items and services, the physician pays 15 percent of the donor's cost 
for the items and services; and (ii) except as provided in subparagraph 
(i), with respect to items or services received from the donor after 
the initial donation of items and services or the donation of 
replacement items and services, the physician pays 15 percent of the 
donor's cost for the items and services at reasonable intervals. We are 
not modifying Sec.  411.357(w)(4)(iii), which requires that the donor 
(or any party related to the donor) does not finance the physician's 
payment or loan funds to be used by the physician to pay for the items 
and services.
    We received the following comments and our responses follow.
    Comment: A large number of commenters recommended that we remove 
the 15 percent contribution requirement for all donations and for all 
recipients or, in the alternative, reduce the contribution requirement 
to 5 percent of the donor's cost for the items and services. Commenters 
provided a number of reasons in support of their request to remove the 
contribution requirement. One commenter noted that the contribution 
requirement may pose a barrier to physicians who have not yet adopted 
electronic health records software, and added that, even if the 
contribution requirement is eliminated, physicians would still be 
required to bear other costs related to electronic health records 
implementation, such as hardware, staff time, and other resources. A 
few commenters stated that the contribution requirement may be an 
unreasonable constraint on how health systems and hospitals finance the 
needed infrastructure to implement new value-based payment models and 
promote coordination of care. One of these commenters asserted that a 
common electronic health records system across a network of hospitals 
and physicians fosters a higher degree of integrated care, better and 
more timely access to services through coordinated systems, alignment 
of quality standards across all participating providers, and a more 
structured approach to optimizing utilization, thus contributing to 
higher quality and more affordable care. However, according to the 
commenter, small and independent practices typically cannot afford the 
electronic health records systems used by a larger health care system, 
even at a discount, which leads to a network of disjointed care and 
service offerings. Other commenters cited the added burden involved in 
setting the contribution amount in writing and the necessary, ongoing 
monitoring to ensure compliance. One of these commenters also 
highlighted that eliminating the requirement would align the EHR 
exception with the proposed cybersecurity exception at Sec.  
411.357(bb), which does not include a contribution requirement. Several 
commenters that supported eliminating the contribution requirement as a 
requirement of the EHR exception suggested that CMS should still allow 
the donor to require a contribution. One of the commenters suggested 
that any contribution requirement should be left up to market forces 
and negotiation between the parties, and another suggested that the 
contribution amount should be at the discretion of the donor, as long 
as the donor consistently and fairly applies its policy to all 
recipients.
    In contrast, some commenters raised concerns about eliminating the 
contribution requirement. One of these commenters maintained that 
physician adoption and use of an electronic health

[[Page 77617]]

records system is improved when physicians have a certain level of buy-
in and share in the financial cost. Similarly, other commenters 
suggested that 15 percent represents a fair contribution amount, the 
contribution requirement serves as a reasonable safeguard to reduce 
wasteful spending, and it is important for recipients to have a stake 
in the purchased technology.
    Response: After careful consideration, we continue to believe that 
the contribution requirement is an important safeguard to protect 
against program or patient abuse. When recipients of valuable 
remuneration have some responsibility to contribute to the cost of the 
items or services, they are more likely to make economically prudent 
decisions and accept only items and services that they need. As 
described below, we are revising the requirement at Sec.  411.357(w)(4) 
to increase flexibility in connection with administering the 
contribution requirement. We note that, depending on the facts and 
circumstances, donations of electronic health records items and 
services may be permissible under the new exceptions for arrangements 
that facilitate value-based health care delivery and payment at Sec.  
411.357(aa). There is no requirement in the exceptions at final Sec.  
411.357(aa)(1), (2), or (3) that recipients of the electronic health 
records items or services contribute to the donor's cost for the items 
or services.
    Comment: Many commenters suggested that, if CMS determines not to 
eliminate the 15 percent contribution requirement for all physician 
recipients, it should eliminate the requirement for at least a subset 
of recipients, such as small, rural, or tribal physician practices; 
free and charitable clinics; physicians with demonstrable financial 
need; or physician practices located in underserved areas, including 
urban practices serving low-income Medicaid populations. Several 
commenters stated that the contribution requirement presents a 
significant financial barrier for these physician practices that could 
negatively impact patient care, and one commenter maintained that the 
contribution requirement ``prices out'' physicians in small, rural, or 
underserved practices, while another stated that the 15 percent 
contribution requirement is ``too steep'' for many small practices. 
Another commenter believed that the contribution requirement could be 
lowered for small and rural physician organizations, provided that the 
donor is still permitted to decide the cost sharing amount required.
    Some commenters that favored eliminating the contribution 
requirement for a subset of physician practices, such as small or rural 
practices and practices in underserved areas, provided a variety of 
definitions for small, rural, and underserved practices, including 
definitions based on the Quality Payment Program; the anti-kickback 
statute safe harbor for local transportation; the North American 
Industry Classification System for small businesses; and the 
Secretary's designation of medically underserved areas and primary 
health care geographic health professional shortage areas. Some 
commenters expressed concern that different contribution requirements 
for different sets of physician practices may be difficult to 
administer and increase burden and, therefore, supported removing the 
contribution requirement for all physicians.
    Response: As we explained in response to the immediately previous 
comment, we are retaining the 15 percent contribution requirement for 
all recipients seeking to protect donations of electronic health 
records items and services under the EHR exception. We agree with the 
commenters that identified the challenges of defining subgroups of 
entities to exempt from this requirement. Even if we were to adopt 
definitions for the categories of physician recipients who would be 
exempted from the contribution requirement--whether by adopting 
definitions existing in other regulations or definitions suggested by 
commenters--we are cognizant that qualification under a designation can 
change over time (for example, a physician practice may qualify as a 
``small practice'' at some points in time but not at others, depending 
on staffing changes), resulting in significant compliance challenges 
when such a change occurs. In addition, the program integrity risks 
associated with donations of electronic health records items and 
services apply regardless of the geography or size of the donation 
recipient. Again, we note that, to the extent that the donation of 
electronic health records items and services is made under a value-
based arrangement (as defined at Sec.  411.351), no recipient 
contribution is required, provided that the arrangement satisfies all 
the requirements of an applicable exception at final Sec.  411.357(aa).
    Comment: A number of commenters asked that, if CMS retains a 
contribution requirement on the initial donation of electronic health 
records items and services, the contribution requirement be eliminated 
for updates to the original donation. Commenters noted that updates may 
ensure that an electronic health records donation continues to function 
as needed and to meet current Federal standards for data exchange. One 
commenter stated that it is not uncommon for a donor's electronic 
health records system to be linked to a recipient's system, and the two 
systems must be in sync if they share an ``instance'' of electronic 
health records software. According to the commenter, updates to the 
donor's system must also be passed on to the recipient's electronic 
health records system, even if the recipient does not need, want, or 
use the updates. The commenter contended that, with respect to such 
updates, the 15 percent cost contribution requirement functions as a 
tax that damages the financial stability of small practices. Another 
commenter recommended that CMS consider retaining a contribution 
requirement only for the provision of replacement software while 
eliminating it for the initial donation and any updates to that 
initially donated system.
    Response: As explained in response to comments above, we are 
retaining the contribution requirement for all electronic health 
records donations, including updates. We recognize that updates are 
crucial for the continuing functionality of an electronic health 
records system; however, we do not believe that it is appropriate to 
retain a contribution requirement for certain donations and eliminate 
it for others. We are concerned about gaming under such a regulatory 
scheme; for example, the parties could structure the ``initial'' 
donation to consist of a functionality with a low cost, and 
consequently, a small required contribution, with the most valuable 
functionality provided later as an ``update'' with no required 
contribution. For this reason, we believe that a cost contribution 
requirement is appropriate for all donations, including updates. 
However, as explained in our response to comments below, for updates to 
previously donated electronic health records items or services, we are 
no longer requiring that the contribution be made before the receipt of 
items and services.
    Comment: Some commenters addressed other aspects of the 
contribution requirement at Sec.  411.357(w)(4). For example, one 
commenter expressed concern about the requirement that the physician 
recipient must pay the required contribution before the items or 
services are received. This commenter noted that recipients may 
unintentionally fail to satisfy this requirement due to inadvertent 
late payments and requested that CMS add

[[Page 77618]]

a remedy period for mistakes to be corrected. Another commenter 
recommended eliminating the requirement that the physician make the 
required contribution payment prior to the receipt of services and 
recommended instead that CMS require that the parties have in place a 
commercially reasonable collections process.
    Response: We are aware that assessing a contribution for each 
update could create compliance challenges and increase administrative 
burden. We recognize that updates may need to take place quickly to 
remedy security or other problems in an electronic health records 
system, and we understand the commenter's concern about inadvertent 
late payments under such circumstances. We do not believe that it would 
pose a risk of program or patient abuse to permit a physician to pay 
required contribution amounts after receipt of an update, provided that 
payments are made at reasonable intervals. In contrast, with respect to 
an initial donation of items or services, or a donation that will 
replace existing items or services, we believe that parties can 
effectively plan the donation, with all expenses known in advance. 
Thus, there does not exist the same administrative burden or potential 
for inadvertent late payments that may exist with the timing of 
payments for periodic updates. In light of this, we are modifying the 
requirement at Sec.  411.357(w)(4) to permit payments of the cost 
contribution for items and services received after the initial donation 
or replacement donation at reasonable intervals, rather than in advance 
of the receipt of the items and services. Of course, parties remain 
free to require advance payments under their electronic health records 
donation arrangement. The regulation continues to require that the 
physician recipient pays the cost contribution amount for the initial 
donation of items or services or the donation of replacement items or 
services before the items or services are received. We note that the 
EHR exception does not require a specific billing method, but the 
contribution amounts must actually be paid by the physician and be paid 
at reasonable intervals. A donor could choose to bill a recipient 
separately for each update or could bill the recipient monthly or 
quarterly to combine the contribution payments for all updates during a 
select period of time. Given the modifications to Sec.  411.357(w)(4) 
that we are finalizing here, we do not believe that it is necessary to 
add a remedy period for mistakes to be corrected, as suggested by the 
commenter.
    Comment: One commenter recommended that we not require a 15 percent 
contribution for cybersecurity donations under the EHR exception. The 
commenter noted that some organizations will only permit practices to 
use their electronic health records systems if the practice has certain 
cybersecurity protections, and thus the commenter suggested that the 
party requiring the cybersecurity protection should pay any costs 
associated with it.
    Response: We are not finalizing separate requirements for different 
types of donations within this exception. If a party seeks to protect a 
donation of cybersecurity software or services under the EHR exception, 
then a contribution toward the cost of the items and services is 
required. However, as explained in our response to comments above, a 
physician need not pay the 15 percent cost contribution for 
cybersecurity technology and services donated in conjunction with 
electronic health records items and services if the donation of the 
cybersecurity technology or services satisfies all the requirements of 
final Sec.  411.357(bb).
    Comment: One commenter stated that donations of items and services 
under the EHR exception are typically made to a physician practice, as 
opposed to an individual physician. However, the cost contribution 
requirement at Sec.  411.357(w)(4) requires the physician to pay 15 
percent of the donor's cost. The commenter stated that, given this 
language, it is unclear whether individual physicians or the physician 
practice must pay the cost contribution. The commenter requested that 
CMS clarify that donations may be made to a physician organization as 
the sole contracting party and as the sole contributor to the donor's 
cost.
    Response: Because the physician self-referral law is implicated 
when a financial relationship exists between a physician (or an 
immediate family member of a physician) and an entity, the exception 
for electronic health records items or services at Sec.  411.357(w) is 
structured to apply to remuneration from an entity to a physician. The 
commenter correctly notes that the cost contribution requirement at 
Sec.  411.357(w)(4) requires the physician to pay 15 percent of the 
donor's cost. The required contribution amount may be paid by the 
physician or on behalf of the physician by his or her physician 
organization.
    With respect to donations to physicians in a physician organization 
consisting of more than one physician, we note the following. We 
acknowledge, as the commenter stated, that donations of items and 
services under the EHR exception are often made to a physician 
organization, as opposed to an individual physician. When an 
arrangement for the donation of electronic health records items and 
services is between the donor entity and a physician organization, 
under our regulation at Sec.  411.354(c)(1), each physician who stands 
in the shoes of the physician organization is deemed to have the same 
compensation arrangement as the physician organization. Thus, the 
donation of the electronic health records items and services to the 
physician organization is deemed to establish a direct compensation 
arrangement between each physician who stands in the shoes of the 
physician organization and the entity donating the electronic health 
records items and services. Each of those ``deemed direct'' 
compensation arrangements must satisfy the requirements of an 
applicable exception in order to avoid the physician self-referral 
law's referral and billing prohibitions. However, unlike many other 
forms of nonmonetary compensation, the cost of electronic health 
records items and services is oftentimes capable of being allocated on 
a per-user basis. Thus, when a donor entity divides the cost of 
electronic health records items and services among physician recipients 
in an appropriate manner (for example, per capita or by estimated usage 
based on their portions of the physician organization's patient 
universe or visits), the donation of electronic health records items 
and services to the physicians in a physician organization is properly 
viewed as a direct compensation arrangement between the donor entity 
and each recipient physician, rather than ``deemed direct'' 
compensation arrangements that result from applying the ``stand in the 
shoes'' provisions at Sec.  411.354(c)(1). In such circumstances, each 
physician recipient would be required to contribute 15 percent of the 
cost of the electronic health records items and services specifically 
allocated to him or her, rather than the cost of the entire suite of 
electronic health records items and services provided to the physician 
organization as a whole. The required contribution amount may be paid 
by each individual physician or on behalf of the physicians by the 
physician organization.
    To illustrate, assume that a donor entity wishes to provide 
licenses for the physicians in a physician organization to access and 
utilize electronic health records items and services, and the cost

[[Page 77619]]

of the license is $100,000 per year for 25 licenses. The donor entity 
may divide the cost of the 25 licenses among the potential licensees, 
and allocate $4,000 to each physician recipient. Thus, if the donor 
entity provided 10 licenses to a physician organization, it could 
allocate $4,000 per physician recipient, establishing a direct 
compensation arrangement with each physician recipient. In these 
circumstances, each physician recipient must pay 15 percent (or $600) 
of the cost of the license before receipt of the license in order to 
satisfy the requirement at Sec.  411.357(w)(4). In contrast, assume 
that a donor entity provides information technology and training 
services that are not readily or appropriately divisible by any 
particular number of licensees or users. If the cost of the items and 
services provided to a physician organization cannot readily and 
appropriately be divided among the individual physician recipients of 
the items and services, under the regulation at Sec.  411.354(c)(1), 
the entirety of the items and services are deemed to be provided to 
each physician who stands in the shoes of the physician organization.
(2) Equivalent Items and Services (Sec.  411.357(w)(8))
    In the 2013 EHR final rule, we highlighted a commenter's assertion 
that the prohibition on donating equivalent items or services currently 
included in the exception at Sec.  411.357(w)(8) locks physician 
practices into a vendor, even if they are dissatisfied with the donated 
items or services, because the recipient must choose between paying the 
full amount for a new electronic health records system and continuing 
to pay 15 percent of the cost of the substandard system (78 FR 78766). 
That commenter asserted that the cost differential between these two 
options is high enough to effectively locks physician practices into 
electronic health records technology vendors. In the 2013 EHR final 
rule, we responded that we continued 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 
stated 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 electronic health records 
technology are continuous and rapid. According to commenters on the CMS 
RFI and OIG's request for information, in some situations replacement 
electronic health records items or services are appropriate but 
prohibitively expensive. In the proposed rule, we proposed to permit 
donations of replacement electronic health records items or services 
under the EHR exception (84 FR 55826). We specifically sought comment 
as to the types of situations in which the donation of replacement 
items and services would be appropriate. We further solicited comment 
as to how we might safeguard against donors inappropriately offering, 
or physician recipients inappropriately soliciting, unnecessary items 
and services instead of upgrading their existing technology for 
appropriate reasons. Based on our review of the comments, we are 
finalizing our proposal to permit donations of replacement items and 
services by removing the requirement at Sec.  411.357(w)(8) that the 
donor does not have actual knowledge of, or and does not act in 
reckless disregard or deliberate ignorance of, the fact that the 
physician possesses or has obtained items or services equivalent to 
those provided by the donor, which we have historically interpreted as 
a prohibition on the donation of replacement technology.
    We received the following comment and our response follows.
    Comment: Commenters broadly supported removing the requirement at 
Sec.  411.357(w)(8) that effectively prohibits a donor from donating 
replacement items and services under the EHR exception. Commenters 
provided a number of reasons for their support of the elimination of 
this requirement, highlighting that, because they cannot afford the 
full cost to replace their electronic health records systems, some 
physician practices may work with an electronic health records system 
that no longer meets their needs, is outdated, or is otherwise 
substandard. Similar to the commenter on the 2013 EHR proposed rule, a 
few commenters maintained that the prohibition on replacement items and 
services locks a physician recipient into a particular vendor, even if 
the physician is not satisfied with its current electronic health 
records system, because the cost for a new system is significantly 
higher than continued payment of a 15 percent contribution for updates 
to the physician's current electronic health records software. One 
commenter stated that one of its clinically integrated networks 
operates with more than two dozen electronic health records systems. 
The commenter explained that, although it has developed a system to 
aggregate all patient information, the diverse electronic health 
records systems made the solution less than optimal. The commenter 
explained that, if the restriction on donations of replacement items 
and services were lifted, it could achieve greater efficiency and care 
coordination by migrating the network to one unified electronic health 
records system. A different commenter recommended that CMS eliminate 
the requirement at Sec.  411.357(w)(8) but require a documented 
rationale for the need of replacement items and services, while another 
commenter suggested that donations of replacement items and services 
should be permitted only if the recipient contributes 15 percent of the 
cost of the replacement software and services and demonstrates in 
writing, accompanied by documentation from an objective third party, 
that the recipient's current electronic health records system is 
substandard such that it poses a threat to patient safety. Similarly, 
one commenter suggested that donations of replacement software should 
only be permitted if the software that the physician is currently using 
no longer meets certification criteria.
    Response: We are removing the requirement at Sec.  411.357(w)(8) 
from the EHR exception. We recognize that there may be valid business 
or clinical reasons for a physician recipient to replace an entire 
electronic health records system rather than update existing items and 
services, even if the existing software meets current certification 
criteria and does not pose a threat to patient safety. Under the 
revised EHR exception, replacement items and services are treated the 
same as a new donation and arrangements for the donation of replacement 
electronic health records items and services would need to satisfy all 
the requirements of the exception to avoid the referral and billing 
prohibitions of the physician self-referral law. For example, under 
Sec.  411.357(w)(4)(i), a recipient of replacement items and services 
would be required to pay at least 15 percent of the donor's cost for 
the items and services before receiving them. We believe that treating 
a donation of replacement items and services the same as a new donation 
strikes an appropriate balance between making necessary replacements 
financially feasible for recipients and maintaining safeguards to 
protect against program or patient abuse, such as recipients 
inappropriately soliciting or accepting unnecessary electronic health 
records items and services.

[[Page 77620]]

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 one 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 (or other compensation arrangement with) 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. As we noted in the proposed rule, 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.''
    As we explained in the proposed rule, the definition of ``patient 
care services'' found at Sec.  411.351 relates to tasks performed by a 
physician only (84 FR 55826). To clarify the meaning of ``patient care 
services'' for purposes of the exception for assistance to compensate 
an NPP, we proposed 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 proposed 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 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 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 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) 
(84 FR 55826).
    We also proposed conforming changes to the term ``referral'' as 
defined at Sec.  411.357(x)(4) for purposes of the exception. 
Specifically, we proposed 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 stated, 
and affirm here, 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 (``referral'') 
that applies only for purposes of the exception at Sec.  411.357(x). We 
did not propose substantive changes to the definition itself; however, 
we proposed 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) (84 FR 55826).
    We also proposed a related change to Sec.  411.357(x)(1)(v)(A). As 
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 interpreted to include the 
provision of NPP patient care services (as we proposed 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 proposed 
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 proposed to define the term at Sec.  
411.357(x)(4)(i) (84 FR 55826 through 55827).
    In addition to the inquiries related to the meaning of the terms 
``patient care services'' and ``practice,'' we noted our awareness 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

[[Page 77621]]

commencement of the compensation arrangement between the hospital, 
FQHC, or RHC and the physician, noting 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 proposed 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 arrangement with the NPP (84 FR 55827). 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.
    We received a number of comments in support of our clarifying 
proposals. Although we received a few comments addressing issues 
outside the scope of our proposals, we did not receive any comments 
objecting to our proposals or suggesting alternatives for clarifying 
the requirements of the exception for assistance to compensate a 
nonphysician practitioner. We are finalizing the proposed revisions to 
Sec.  411.357(x) without modification.
    We received the following comments and our responses follow.
    Comment: Most commenters that commented on our proposal supported 
the proposed modifications to clarify the terminology used in the 
exception and that the exception cannot be used to reimburse physicians 
for compensation, signing bonus, and benefits expenses related to NPPs 
who were employed or contracted before the commencement of the 
compensation arrangement between the hospital and the physician.
    Response: As discussed above, we are finalizing our clarifying 
revisions in the exception for assistance to compensate a nonphysician 
practitioner at Sec.  411.357(x). We believe that the revisions 
finalized here will provide the clarity sought by stakeholders prior to 
the proposed rule.
    Comment: Two commenters requested that CMS revise the exception at 
Sec.  411.357(x) to remove any limits on the practice specialties of 
nonphysician practitioners for whom physicians may receive assistance. 
One of the commenters asserted that surgery, neurology, urology, and 
many other specialty services are areas of acute need for many 
communities. The commenter also recommended that we not limit the 
medical specialties of physicians who may receive assistance under the 
exception to physicians who provide ``primary care services or mental 
health services.'' The other commenter asserted that, although most 
nurse practitioners provide primary care or behavioral health services, 
nurse practitioners practice in nearly all practice specialties, and 
these medical practices are also in need of nurse practitioners, 
particularly in rural and underserved communities. This commenter 
suggested that CMS align the exception for assistance to compensate a 
nonphysician practitioner with the exception for physician recruitment, 
noting that the former exception is limited to nonphysician 
practitioners who, for the most part, provide primary care or 
behavioral health services, while no similar restriction applies to 
physician recruitment.
    Response: The exception for assistance to compensate a nonphysician 
practitioner was proposed in the CY 2016 PFS proposed rule (80 FR 
41686) and finalized in the CY 2016 PFS final rule (80 FR 70866). In 
the CY 2016 PFS proposed rule, we stated that our goal in proposing 
(and ultimately finalizing) the exception was to promote the expansion 
of access to primary care services, but sought comment regarding 
whether there was a compelling need to expand the scope of the 
exception to nonphysician practitioners who provide services that are 
not considered primary care services (80 FR 41911). In response, 
commenters requested that we broaden the scope of the exception. 
Commenters that suggested an expansion to mental health services 
provided convincing evidence of the compelling need for access to 
mental health care services throughout the country (80 FR 71306). 
However, commenters that requested the expansion of the exception to 
any other specialty services provided no documentation or other 
evidence of the compelling need for such an expansion (80 FR 71306 
through 71307).
    We did not propose to expand the scope of the exception for 
assistance to compensate a nonphysician practitioner in the proposed 
rule, and make no attempt to finalize such a regulatory modification in 
this final rule. However, we note that the commenters that made the 
requests for expansion of the scope of the exception, like those that 
commented on the CY 2016 PFS proposed rule, failed to provide any 
documentation or other evidence of the compelling need for such an 
expansion at this time. With respect to the commenter that suggested 
the exception for assistance to compensate a nonphysician practitioner 
at Sec.  411.357(x) should be aligned with the exception for physician 
recruitment at Sec.  411.357(e), we note that the exception for 
physician recruitment is statutory and covers only remuneration from a 
hospital to a physician to induce the physician to relocate his or her 
medical practice to the geographic area served by the hospital to 
become a member of the hospital's medical staff. In contrast, the 
underlying purpose of the exception to assist a physician to compensate 
a nonphysician practitioner is to promote expansion of access to 
primary care and mental health care services. There is no reason for 
the two exceptions to have identical requirements and scope.
13. Updating and Eliminating 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

[[Page 77622]]

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 35003 through 
35004). (We declined to include Medicare+Choice medical savings account 
plans and Medicare+Choice private FFS 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 
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 proposed 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 protect designated health services furnished to enrollees of 
coordinated care plans and exclude medical savings account plans and 
private FFS plans from the scope of Sec.  411.355(c)(5). In light of 
this, we sought 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 were 
interested in commenters' views on which, if any, other Medicare 
Advantage plans we should include within the scope of Sec.  
411.355(c)(5).
    We received the following comment and our response follows.
    Comment: Multiple commenters supported the proposed updates and 
elimination of references to ``Medicare+Choice.'' We did not receive 
any comments opposing these changes.
    Response: We are finalizing the changes as proposed.
b. Website
    We proposed to modernize the regulatory text by changing ``Web 
site'' 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.
    After reviewing the comments, we are finalizing our proposal to 
change ``Web site'' to ``website'' wherever the term appears in our 
regulations.
    We received the following comment and our response follows.
    Comment: Multiple commenters supported the proposed updates and 
elimination of references to ``Web site.'' We did not receive any 
comments opposing these changes.
    Response: We are finalizing the changes as proposed.

E. Providing Flexibility for Nonabusive Business Practices

1. Limited Remuneration to a Physician (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 $423 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 is 
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 agreement 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

[[Page 77623]]

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 $36 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 provided sporadically or for a low rate of 
compensation; in others, services were provided 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 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 the 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 arrangement if it was 
not documented in contemporaneous signed writings and the amount of or 
formula for calculating the compensation was not set in advance of the 
provision of the items or services, even if the compensation 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.
    In the proposed rule, we stated that, based on our review of 
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 is commercially reasonable 
(4) the 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. We stated that, under these 
circumstances, remuneration that is held within reasonable limits is 
unlikely to cause overutilization or similar harms to the Medicare 
program. Therefore, relying on the Secretary's authority under section 
1877(b)(4) of the Act, we proposed an exception for limited 
remuneration from an entity to a physician for items or services 
actually provided by the physician (84 FR 55828 through 55829).
    We proposed that the exception for limited remuneration to a 
physician would apply only when 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 (CPI-U) for the 12-month 
period ending the preceding September 30. We stated our belief that an 
annual aggregate remuneration limit of $3,500 would be 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. We also proposed that the 
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. We sought 
public comment on whether the $3,500 annual aggregate remuneration 
limit is appropriate, too high, or too low to accommodate nonabusive 
compensation arrangements for the provision of items or services by a 
physician. We also sought 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. In keeping with our proposal to decouple exceptions issued under 
our authority at section 1877(b)(4) of the Act from the anti-kickback 
statute, we did not propose to include a requirement under Sec.  
411.357(z) 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 solicited 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 also proposed that 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. Finally, 
we proposed limits on the percentage-based and per-unit compensation 
formulas for the lease of office space, the lease of equipment, and the 
use of premises, equipment, personnel, items, supplies, or services (84 
FR 55829).
    After reviewing the comments, we are finalizing the exception for 
limited remuneration to a physician at Sec.  411.357(z) with several 
modifications.

[[Page 77624]]

First, we are setting the annual aggregate remuneration limit to the 
physician at $5,000 instead of at $3,500, adjusted annually for 
inflation and indexed to the CPI-U. Second, the exception permits the 
physician to provide items or services through employees whom the 
physician has hired for the purpose of performing the services; through 
a wholly-owned entity; or through locum tenens physicians (as defined 
at Sec.  411.351, except that the regular physician need not be a 
member of a group practice). Third, we are requiring that the 
arrangement is commercially reasonable even if no referrals were made 
between the parties. Fourth, to address our concerns regarding the 
preservation of patient choice, we are requiring compliance with the 
special rule at Sec.  411.354(d)(4) if remuneration to the physician is 
conditioned on the physician's referrals to a particular provider, 
practitioner, or supplier. Lastly, we are modifying the per-click and 
percentage-based compensation provisions at Sec.  411.357(z)(1)(v), to 
clarify that these provisions only apply to timeshare arrangements for 
the use of premises or equipment.
    Given the relatively low annual aggregate remuneration limit of the 
exception and the other safeguards of the exception, we believe that 
the exception for limited remuneration to a physician, as finalized, 
does not pose a risk of program or patient abuse. However, when the 
remuneration a physician receives from an entity for items or services 
exceeds the annual aggregate remuneration limit of $5,000, as adjusted 
annually for inflation, the additional safeguards of other applicable 
exceptions are necessary to protect against 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 the annual aggregate remuneration limit of the 
exception at new Sec.  411.357(z), 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 aggregate remuneration limit for the exception at Sec.  
411.357(z) 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 provided 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.
    The final exception at Sec.  411.357(z) for limited remuneration to 
a physician applies to the provision of both items and services by a 
physician. In the proposed rule, we retracted our prior statements that 
office space is neither an ``item'' nor a ``service.'' Thus, the 
exception for limited remuneration to a physician is available to 
protect compensation arrangements involving the lease of office space 
or equipment from a physician. For the reasons articulated in section 
II.D.10. of this final rule and the CY 2017 PFS proposed rule (81 FR 
46448 through 46453) and final rule (81 FR 80524 through 80534), the 
exception at Sec.  411.357(z) incorporates 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.
    We explained in the proposed rule and reaffirm here our policy 
that, in determining whether payments to a physician under the 
exception for limited remuneration to a physician exceed the annual 
aggregate remuneration limit in Sec.  411.357(z), we will 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 fails to document 
the arrangement in a writing signed by the parties. In determining 
whether the supervision arrangement satisfies the requirements of the 
exception for limited remuneration to a physician, we will not count 
the compensation provided under the call coverage arrangement towards 
the annual aggregate remuneration limit in Sec.  411.357(z). However, 
if an entity has multiple undocumented, unsigned arrangements under 
which it provides compensation to a physician for items or services 
provided by the physician, we 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 may 
not exceed the annual aggregate remuneration limit of Sec.  411.357(z) 
during the calendar year in order for the exception to protect the 
remuneration to the physician. To illustrate, assume the entity in the 
previous example also engages 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 the annual aggregate 
remuneration limit.\19\ Assuming neither arrangement satisfies the 
requirements of any other applicable exception, the exception for 
limited remuneration to a physician will not protect either arrangement 
(which, as noted, we treat as a single arrangement for multiple 
services) after the annual aggregate remuneration limit is exceeded 
during the calendar year.
---------------------------------------------------------------------------

    \19\ As noted, compensation paid under the call coverage 
arrangement would not be included when determining whether the 
annual aggregate remuneration limit was exceeded, because the call 
coverage arrangement in this example fully complies with an 
applicable exception.
---------------------------------------------------------------------------

    As we explained in the proposed rule, the exception for limited 
remuneration to a physician may be used in conjunction with other 
exceptions to protect an arrangement during the course of a calendar 
year in certain circumstances (84 FR 55830). 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 may rely on the exception at Sec.  
411.357(z) to protect payments to the physician up to the $5,000 annual 
aggregate remuneration limit, provided that all the requirements of the 
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 that exception are satisfied. 
(We remind readers that, under Sec.  411.354(e)(4), the parties would

[[Page 77625]]

have up to 90 consecutive calendar days to document and sign the 
arrangement.)
    In the proposed rule, we noted 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. As we stated in the proposed rule, for 
purposes of Sec.  411.357(d)(1)(ii), we will not require an arrangement 
for items or services that satisfies all the requirements of the final 
exception for limited remuneration to a physician to be covered by a 
personal service arrangement protected under Sec.  411.357(d)(1) or 
listed in a master list of contracts (84 FR 55830). Likewise, with 
respect to the restriction in the exception for fair market value 
compensation at Sec.  411.357(l)(2), we will not consider an 
arrangement for items or services that is protected under the 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.
    The vast majority of commenters supported our proposal, stating 
that the exception would increase flexibility under our regulations and 
reduce the burden of compliance without posing a risk of program or 
patient abuse. After reviewing the comments, we are finalizing the 
proposed exception for limited remuneration to a physician at Sec.  
411.357(z) with certain modifications, as noted above. We are also 
making certain modifications to the exception for personal service 
arrangements at Sec.  411.357(d)(1) and the exception for fair market 
value compensation at Sec.  411.357(l) to ensure that Sec.  411.357(z) 
may be used in conjunction with these exceptions.
    We received the following comments and our response follows.
    Comment: We received numerous comments regarding who may provide 
items and services and to whom the payments for items and services 
under the new exception at Sec.  411.357(z) may be made. Many 
commenters requested that we not limit the exception at Sec.  
411.357(z) to items or services that are personally provided by 
physicians. One commenter suggested that the exception should be 
available for payments to a physician for items or services provided by 
someone at the direction of and under the control of the physician 
through a contract or employment arrangement. In contrast, one 
commenter expressed concern that the exception, as proposed, is subject 
to abuse and urged CMS to limit the applicability of the exception to 
items or services that are personally provided by the physician. One 
commenter suggested that the exception should apply to payments to a 
group practice for the services of a midlevel practitioner employed by 
the group or to a physician's immediate family members for items or 
services provided by the immediate family members.
    Response: In the 1998 proposed rule, we interpreted the exception 
for personal service arrangements at Sec.  411.357(d)(1) to permit 
physicians to provide services through employees (63 FR 1701). In Phase 
II, we added that a physician may provide services under Sec.  
411.357(d)(1)(ii) through a wholly owned entity or a locum tenens 
physician, but we declined to permit physicians to provide services 
under the exception through independent contractors (69 FR 16090 
through 16093). We explained that, if physicians were permitted to 
provide services through independent contractors, a physician could 
enter into a broad range of service arrangements and take a fee as a 
middleperson without performing any actual service. In contrast, when a 
physician provides services through an employee or a wholly owned 
entity, the relationship evidences a bona fide business operated by the 
physician to provide the services. We find this reasoning to be 
convincing and applicable to the exception for limited remuneration to 
a physician, and therefore we are clarifying at Sec.  411.357(z)(2) 
that a physician may provide items or services through an employee, a 
wholly owned entity, or a locum tenens physician, but not through an 
independent contractor. With respect to items, office space, or 
equipment provided by a physician through a physician's employee, 
wholly-owned entity, or locum tenens physician, we stress that the 
items, office space, or equipment provided must be the items, office 
space, or equipment of the physician.
    For purposes of determining whether payments comply with the annual 
aggregate remuneration limit, any payments for items, office space, 
equipment, or services provided through a physician's employee, wholly 
owned entity, or locum tenens physician would be counted towards the 
annual aggregate remuneration limit applicable to the physician. In 
other words, there are not separate limits for a physician and his or 
her employees. For example, if an entity pays a physician $1,000 for 
personally performed services, $400 for services provided through the 
physician's employee, and $150 for items provided through the 
physician's employee, assuming no other previous payments for the 
calendar year, the sum of $1,550 is counted towards the annual 
aggregate remuneration limit applicable to the physician. (See below 
for a discussion of payments to a group practice or physician 
organization, and the application of the physician ``stand in the 
shoes'' rules at Sec.  411.354(c) under the exception for limited 
remuneration to a physician.) Given our clarification that payments to 
a physician for items or services provided through a physician's 
employee, wholly owned entity, or locum tenens physician count towards 
the physician's annual aggregate remuneration limit and the other 
requirements of the exception, including the low annual compensation 
limit and requirements pertaining to fair market value, the volume or 
value of referrals and other business generated, and commercial 
reasonableness, we do not believe that our final policy poses a risk of 
program or patient abuse.
    We are not convinced that the exception at Sec.  411.357(z) should 
be applicable to payments to a physician's immediate family member for 
items or services provided by the family member. As explained above, 
the limited remuneration to a physician exception is designed in part 
to allow entities to compensate physicians for short-term or infrequent 
arrangements, many of which commence under exigent circumstances, with 
little time to reduce the arrangement to writing or set the 
compensation in advance. We do not believe that such situations 
typically arise with respect to physicians' immediate family members. 
In addition, if each immediate family member had a separate annual 
aggregate remuneration limit under the exception, the sum total of 
remuneration to a physician and his or her immediate family members 
could be substantial, depending on the number of immediate family 
members. We believe that such a policy may pose a risk of program or 
patient abuse. We note that an entity is permitted under the exception 
to compensate a physician for services provided through the physician's 
immediate family member if the family member is an employee of the 
physician acting at the direction of the physician, provided that all 
the requirements of the exception are met. However, as noted above, any 
payments to the physician for such services would be counted towards 
the physician's annual aggregate remuneration limit.
    Comment: A significant number of commenters supported the proposed 
exception, but requested that the limit be higher than $3,500 per 
calendar year,

[[Page 77626]]

as adjusted for inflation. Many commenters asserted that the proposed 
limit of $3,500 could be easily exceeded in a day or a weekend, for 
example, if a hospital has a sudden and immediate need to secure 
emergency on-call coverage in an area with high labor costs or a 
shortage of physicians. Other commenters suggested that a higher annual 
aggregate remuneration limit would better reflect what they consider 
the typical range of commercially reasonable arrangements that 
physicians might enter into with entities on a short-term or infrequent 
basis. Most commenters requested an annual aggregate remuneration limit 
of either $5,000, $7,000, or $10,000. A few commenters requested limits 
over $10,000, such as $35,000 per calendar year or 10 percent of the 
physician's total cash compensation from an entity (or its affiliates) 
over the most recent fiscal year. One commenter stated that, as an 
alternative to raising the annual aggregate remuneration limit, CMS 
could cap the amount of remuneration per episode of service during a 
defined period of time, such as 2 or 3 months. In contrast, one 
commenter urged us to not raise the annual aggregate remuneration limit 
above $3,500.
    Response: In establishing the appropriate annual aggregate 
remuneration limit in the final exception for limited remuneration to a 
physician at Sec.  411.357(z), we relied on our experience 
administering the SRDP and working with law enforcement, as well as 
comments we received on our proposed rule. In light of the comments we 
received, we are convinced that the proposed limit of $3,500 per 
calendar year, as adjusted for inflation, is not high enough to 
accommodate the broad range of nonabusive infrequent or temporary 
arrangements that an entity and a physician might enter into over the 
course of a year. Given the other requirements of the finalized 
exception, an annual aggregate remuneration limit of $5,000 for items 
or services actually provided by a physician to an entity does not pose 
a risk of program or patient abuse. We believe that an annual amount of 
remuneration greater than $5,000 per calendar year, as adjusted for 
inflation, may be high enough in certain instances to improperly incent 
physicians and affect medical decision-making. Without transparency 
safeguards that require an arrangement to be set forth in writing and 
signed by the parties and the safeguard of requiring that compensation 
is set in advance of the provision of items or services under the 
arrangement, we do not believe that an annual aggregate remuneration 
limit greater than $5,000 is appropriate. We believe that the per-
episode methodology suggested by the commenter would increase burden, 
be difficult to administer and enforce, and could easily result in 
failure to comply with the requirements of the exception if parties do 
not meticulously track payments to the physician. For these reasons, we 
are finalizing a limit of $5,000 per calendar year, as adjusted for 
inflation.
    Comment: One commenter requested clarification whether the annual 
aggregate remuneration limit on remuneration applies to an individual 
physician or a physician practice comprised of more than one physician. 
Another commenter suggested that the annual aggregate remuneration 
limit, when applied to physicians in physician organizations, should 
apply to physicians individually, as opposed to the entire physician 
organization.
    Response: Because the physician self-referral law is implicated 
when a financial relationship exists between physicians and entities 
that furnish designated health services, the exception for limited 
remuneration to a physician at Sec.  411.357(z) is structured to apply 
to remuneration from an entity to a physician. We did not propose, nor 
are we finalizing, an exception that permits a specific amount of 
remuneration from an entity to a physician organization under the 
conditions outlined in the new exception at Sec.  411.357(z).
    Under our regulations at Sec.  411.354(c), remuneration from an 
entity to a physician organization would be deemed to be a direct 
compensation arrangement between the entity and each physician who 
stands in the shoes of the physician organization. A ``deemed'' direct 
compensation arrangement must satisfy the requirements of an applicable 
exception if the physician makes referrals to the entity and the entity 
bills the Medicare program for designated health services furnished as 
a result of the physician's referrals. The exception for limited 
remuneration to a physician is available to protect a direct 
compensation arrangement between an entity providing remuneration to an 
individual physician, as well as a ``deemed'' direct compensation 
arrangement between an entity and a physician who stands in the shoes 
of the physician organization to which the entity provides the 
remuneration. If an entity that makes payment to a physician 
organization relies on new Sec.  411.357(z), under Sec.  411.354(c)(1), 
the payment will create a ``deemed'' direct compensation arrangement 
with each physician who stands in the shoes of the organization. That 
is, each physician who stands in the shoes of the physician 
organization will be deemed to have the same compensation arrangement 
with the entity making the payment to the physician organization. 
Compensation received by the physician organization under such 
circumstances is counted towards the annual aggregate remuneration 
limit of each physician who stands in the shoes of the physician 
organization. For example, if an entity pays a physician organization 
$1,000 under Sec.  411.357(z) for lease of the physician organization's 
equipment, and the physician organization consists of two owners (Drs. 
A and B) who stand in the shoes of the organization, then $1,000 is 
counted towards the annual aggregate remuneration limit of both Drs. A 
and B. The $1,000 payment would not count toward the annual aggregate 
remuneration limit of other physicians in the physician organization 
who are not required to stand in the shoes of the physician 
organization and are not treated as permissibly standing in the shoes 
of the physician organization.
    Remuneration from an entity to a physician under a direct 
compensation arrangement between the entity and the individual 
physician (as opposed to a ``deemed direct'' compensation arrangement 
under the stand in the shoes rules) is counted only towards the 
individual physician's annual aggregate remuneration limit under Sec.  
411.357(z). Returning to the example earlier in this response, if, in a 
direct compensation arrangement under Sec.  411.354(c)(1)(i), the 
entity paid Dr. A $500 for her services relying on Sec.  411.357(z), 
assuming no other payments during the calendar year relying on Sec.  
411.357(z), the amount counted towards Dr. A's annual aggregate 
remuneration limit for payments received from the entity under Sec.  
411.357(z) would be $1,500; that is, $500 for the services provided 
under the direct compensation arrangement and $1,000 for the equipment 
rental arising from the ``deemed'' direct compensation arrangement with 
the physician organization. Importantly, the $500 paid under the direct 
compensation arrangement between the entity and Dr. A would not be 
counted towards the annual aggregate remuneration limit of Dr. B or any 
other physician in the physician organization.
    Under certain circumstances, a payment from an entity to a 
physician organization may be considered to be a payment directly to 
the physician who provided the items or services to the entity, with 
the physician organization only passing the remuneration through

[[Page 77627]]

from the entity to the physician. What constitutes a direct 
compensation arrangement with an individual physician under Sec.  
411.354(c)(1)(i), as opposed to an arrangement with a physician 
organization that creates a ``deemed direct'' compensation arrangement 
with a physician standing in the shoes of the organization under Sec.  
411.354(c)(ii) or (iii), depends on the facts and circumstances of each 
arrangement. Important factors include, but are not limited to, whether 
the physician (or the physician's employee, wholly owned entity, or 
locum tenens physician) provides the services under the arrangement, as 
opposed to the services being provided by another physician in the 
physician organization (or the physician organization's employee, 
wholly owned entity, or locum tenens physician); whether any items, 
office space, or equipment provided by the physician under the 
arrangement are owned or leased by the individual physician (as opposed 
to being owned or leased by the physician organization); and whether 
payment is made directly to the individual physician or, if payment is 
made to the physician organization, whether the physician organization 
acts as a pure go-between or middleman, transferring all of the 
compensation received from the entity under the arrangement to the 
physician who provided the items or services. (See section II.D.9. of 
this final rule for a discussion of our policy on pure ``pass-through'' 
payments.) Payments made to and retained by a physician organization 
for services provided through an employee of the physician organization 
are permitted under Sec.  411.357(z), but the payment amount would be 
counted toward the annual aggregate remuneration limit of each 
physician who stands in the shoes of the organization.
    Comment: A number of commenters requested clarification whether, if 
compensation exceeds the proposed annual aggregate remuneration limit 
in a given calendar year (as adjusted for inflation), the entity can 
rely on the exception up to the point immediately prior to when the 
remuneration exceeded the limit. The commenters also requested 
clarification on how the exception would apply when remuneration 
straddles a calendar year. Specifically, the commenter asked if the 
remuneration limit resets at the beginning of each calendar year, or 
whether CMS would apply the exception for a different period, such as a 
12-month period beginning with the commencement of the compensation 
arrangement.
    Response: An entity may rely on the exception at Sec.  411.357(z) 
up to the point in a calendar year immediately prior to when the annual 
aggregate remuneration limit is exceeded. After that point, if the 
arrangement does not fit into another applicable exception, the 
physician is not permitted to make referrals to the entity for 
designated health services, and the entity may not bill Medicare for 
such improperly referred services. For example, if the aggregate 
payments from an entity to a physician exceed the annual aggregate 
remuneration limit on April 1 of a given year, the exception is 
available to protect referrals from January 1 to March 31, but not for 
referrals from April 1 to December 31. We stress, however, that 
structuring arrangements to satisfy the requirements of an applicable 
exception that does not impose a cap on the amount of remuneration paid 
to the physician under the arrangement (other than the requirement that 
compensation is fair market value for the items and services provided 
by the physician) is a best practice and the best way to avoid 
exceeding the annual aggregate remuneration limit imposed at Sec.  
411.357(z)(1).
    The annual aggregate remuneration limit on remuneration under Sec.  
411.357(z) resets each calendar year. As explained in section II.D.2.e. 
of this rule, the provision of remuneration in the form of items or 
services commences a compensation arrangement at the time the items or 
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. Thus, for arrangements that 
straddle a calendar year, remuneration should be allocated to the 
annual aggregate remuneration limit of a calendar year based on the 
date that the items or services are provided. To illustrate, assume 
that an entity engages a physician to present at an educational program 
series held periodically throughout an academic year spanning September 
2020 through May 2021. Assume also that, on December 15, 2020, the 
entity pays the physician $2,000 for services provided during the fall 
semester and, on May 15, 2021, the entity pays the physician $4,000 for 
services provided during the spring semester. The $2,000 paid under the 
arrangement for the fall semester is counted toward the annual 
aggregate remuneration limit for 2020 and the $4,000 paid for the 
spring semester is counted toward the annual aggregate remuneration 
limit for 2021.
    It is possible that the services for which the physician is paid 
will more directly straddle the change from one calendar year to the 
next. For example, assume a physician is engaged to provide a single 
weekend of emergency call coverage and is paid $2,000 for coverage 
provided on December 31, 2021 and January 1, 2022, and the physician is 
paid for the services on January 31, 2022. Assuming no unusual 
circumstances that would require the payment to be weighted for one day 
over another, $1,000 would be counted towards the physician's 2021 
annual aggregate remuneration limit and $1,000 would be counted towards 
the physician's 2022 annual aggregate remuneration limit.
    Comment: One commenter requested that CMS clarify whether the 
exception for limited remuneration to a physician can apply to multiple 
types of services or arrangements.
    Response: During any given calendar year, the exception at Sec.  
411.357(z) may be applied to the provision of different types of items 
or services, including office space and equipment. The annual aggregate 
remuneration limit on remuneration from an entity to a physician is 
determined by adding compensation for all of the various items and 
services provided by the physician. For example, if, in a calendar 
year, a physician is paid $500 for one service, $350 for a separate 
service, $150 for certain items, and $400 for a short-term lease of 
equipment, the amount allocated to the annual aggregate remuneration 
limit under Sec.  411.357(z) for that year is $1,400. As explained 
above, if the parties had additional arrangements in the same calendar 
year that fully satisfied all the requirements of an applicable 
exception other than Sec.  411.357(z), the remuneration under those 
arrangements would not be counted towards the physician's annual limit 
under Sec.  411.357(z).
    Comment: One commenter expressed concern that the exception for 
limited remuneration to a physician may allow for business arrangements 
that the commenter deemed ``questionable'' and asserted are subject to 
abuse. This commenter urged CMS to include additional safeguards in the 
exception, including a requirement that the arrangement does not 
violate the anti-kickback statute or other Federal or State law or 
regulation governing billing or claims submission. Other commenters 
objected to including any additional requirements pertaining to the 
anti-kickback statute or Federal or State laws or regulations governing

[[Page 77628]]

billing or claims submissions. These commenters stressed that parties 
already have an independent obligation to not violate these other laws 
and expressed concern that the introduction of the intent-based anti-
kickback statute into the strict liability framework of the physician 
self-referral law would increase the burden of compliance without 
affording any additional safeguards to protect against program or 
patient abuse.
    Response: As explained in sections II.D.1. and II.D.10. of this 
final rule, we generally believe that certain regulatory exceptions 
need not include requirements pertaining to the anti-kickback statute 
or other Federal or State laws or regulations governing billing or 
claims submissions in order to ensure that financial relationships to 
which the exceptions apply do not pose a risk of program or patient 
abuse. Even so, we believe that a requirement for compliance with the 
anti-kickback statute is appropriate in certain instances, particularly 
where both a regulatory and statutory exception could apply to an 
arrangement and the regulatory exception does not contain all of the 
requirements or safeguards that are included in the statutory 
exception. For example, as explained in section II.D.10, the 
requirement in the regulatory exception for fair market value 
compensation at Sec.  411.357(l) that the arrangement does not violate 
the anti-kickback statute acts as a substitute safeguard for certain 
requirements that are included in the statutory exception for the 
rental of office space but omitted in the regulatory exception, such as 
the exclusive use requirement at section 1877(e)(1)(A)(ii) of the Act 
and Sec.  411.357(a)(3) of our regulations. With respect to the final 
exception for limited remuneration to a physician at Sec.  411.357(z), 
the regulatory exception omits certain requirements that are found in 
many statutory exceptions that are potentially applicable to 
arrangements excepted under Sec.  411.357(z), such as the set in 
advance, writing, and signature requirements. However, the low annual 
cap on aggregate remuneration under the exception provides a strong and 
sufficient substitute safeguard for the omitted requirements. 
Therefore, we are not requiring under Sec.  411.357(z) that the 
arrangement not violate the anti-kickback statute or other Federal or 
State law or regulation governing billing or claims submissions. 
Nonetheless, we agree with the commenter that certain additional 
safeguards are necessary to prevent program or patient abuse, 
especially in light of our final policy to raise the annual aggregate 
remuneration limit under the exception from $3,500 to $5,000.
    As proposed, the exception for limited remuneration to a physician 
required the compensation arrangement to be commercially reasonable. As 
explained elsewhere in this final rule, we believe that the requirement 
that an arrangement is commercially reasonable is uniformly interpreted 
wherever it appears. Most exceptions that include a commercial 
reasonableness requirement, including exceptions that apply to 
arrangements that could also be excepted by Sec.  411.357(z), stipulate 
that the arrangement must be commercially reasonable ``even if no 
referrals were made'' between the parties. We are modifying the 
requirement at Sec.  411.357(z)(1)(iii) to clarify that the arrangement 
must be commercially reasonable ``even if no referrals were made 
between the parties.'' We are concerned that, without this 
modification, some stakeholders may believe that the commercial 
reasonableness standard in Sec.  411.357(z) is a different and less 
demanding standard than the commercial reasonableness requirement in 
other exceptions.
    Because we do not have the same transparency into arrangements 
protected under the finalized exception at Sec.  411.357(z) and, as 
explained elsewhere in this final rule, because we prioritize the 
protection of patient choice, we are also requiring at Sec.  
411.357(z)(1)(vi) that, if remuneration to the physician is conditioned 
on the physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement must satisfy all the conditions of Sec.  
411.354(d)(4). As revised in this final rule, Sec.  411.354(d)(4) 
provides that, 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, then certain conditions must be 
met, including that the compensation is set in advance for the duration 
of the arrangement; the requirement to make referrals to a particular 
provider, practitioner, or supplier is set out in writing and signed by 
the parties; and neither the existence of the compensation arrangement 
nor the amount of the compensation is contingent on the volume or value 
of the physician's referrals to the particular provider, practitioner, 
or supplier. As explained in section II.B.4. of this final rule, the 
conditions in Sec.  411.354(d)(4) play an important role in preserving 
patient choice, protecting the physician's professional medical 
judgment, and avoiding interference in the operations of a managed care 
organization. Furthermore, prior to our interpretation of the volume or 
value standard in this final rule, a service arrangement that included 
a directed referral requirement would have had to comply Sec.  
411.354(d)(4) in order to be deemed not to take into account the volume 
or value of a physician's referrals to the entity. Given our final 
rules interpreting the volume or value standard and other business 
generated standard, to ensure that arrangements excepted under Sec.  
411.357(z) protect patient choice and the physician's professional 
medical judgement and avoid interfering in the operation of a managed 
care organization, we are requiring compliance with Sec.  411.354(d)(4) 
for arrangements that condition a physician's compensation on referrals 
to a particular provider, practitioner, or supplier.
    We stress that, under Sec.  411.357(z)(1)(vi), the conditions of 
Sec.  411.354(d)(4), including the set in advance and writing 
requirement, must be satisfied only if the arrangement to be excepted 
under Sec.  411.357(z) conditions a physician's compensation on 
referrals to a particular provider, practitioner, or supplier. To be 
excepted under Sec.  411.357(z), an arrangement need not satisfy the 
conditions of Sec.  411.354(d)(4) if compensation under the arrangement 
to be excepted is not conditioned in this manner, even if the parties 
have other, separate arrangements that condition a physician's 
compensation on referrals to a particular provider, practitioner, or 
supplier. Likewise, if the parties begin an arrangement relying on 
Sec.  411.357(z) and the arrangement at its outset does not condition 
compensation on referrals to a particular provider, practitioner, or 
supplier, then the arrangement need not comply with Sec.  411.354(d)(4) 
at its outset. However, if the entity later requires the physician to 
refer to a particular provider, practitioner, or supplier, the parties 
must set the compensation and document the referral requirement in 
writing in advance of the applicability of the requirement.
    Although we are not including a requirement for compliance with the 
anti-kickback statute in Sec.  411.357(z), we reiterate here that, to 
the extent that remuneration implicates the anti-kickback statute, 
nothing in our proposals or this final rule affects the parties' 
obligation to comply with the anti-kickback statute, and compliance 
with the exception for limited remuneration to a physician does not 
necessarily result in compliance with

[[Page 77629]]

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).
    Comment: One commenter requested that we limit the applicability of 
the exception for limited remuneration to a physician to service 
arrangements and not permit use of the exception for the rental of 
office space or equipment or for timeshare arrangements. The commenter 
stated that such arrangements carry a heightened risk and, therefore, 
should be documented in writing so that they can be audited, monitored, 
and objectively verified.
    Response: Although we appreciate the importance of ensuring that an 
exception issued by the Secretary under his authority at section 
1877(b)(4) of the Act does not undermine the integrity of the Medicare 
program, we believe that the safeguards incorporated in final Sec.  
411.357(z), including the annual aggregate remuneration limit capping 
the total remuneration permissible under the exception at a relatively 
low level and the requirement that the remuneration is for items or 
services actually provided by the physician, are sufficient to protect 
against program or patient abuse even with respect to arrangements for 
the rental of office space or equipment and timeshare arrangements. 
Therefore, the final exception for limited remuneration to a physician 
at Sec.  411.357(z) is not limited to arrangements for items and 
services that are not office space or equipment. The prohibitions on 
percentage-based compensation and per-unit of service (``per-click'') 
fees for the rental or use, as modified in this final rule, of office 
space and equipment serve to protect against certain abusive 
arrangements.
    Comment: Some commenters requested that CMS not finalize the 
proposed prohibition on certain percentage-based and per-unit of 
service compensation formulas for the use of premises, equipment, 
personnel, items, supplies, or services under a timeshare arrangement. 
The commenter assumed that the proposed requirement is apparently 
intended to address timeshare arrangements and other arrangements 
similar to traditional lease of office space and equipment, but 
asserted that the requirement, as drafted, is so broad that its scope 
is unclear.
    Response: The commenter is correct that the requirement prohibiting 
a compensation formula under a timeshare arrangement that is based on 
percentage of revenue or per-unit of service fees that are not time-
based relates to the use of premises (including office space), and 
equipment protected under final Sec.  411.357(z). Under timeshare 
arrangements, where dominion and control are not transferred for the 
use of premises, equipment, personnel, items, supplies, or services, we 
believe that prohibitions on percentage-based compensation and per-unit 
of service fees are required to ensure that excepted timeshare 
arrangements do not pose a risk of program or patient abuse. (See 80 FR 
71331 through 71332.) Therefore, we are not convinced that Sec.  
411.357(z)(1)(v) should be removed. However, we agree that the 
requirement, as proposed, could have an unintended impact on 
arrangements other than timeshare arrangements, and we are revising the 
requirement to address our specific concern. Under final Sec.  
411.357(z)(1)(v), compensation for the use of premises (including 
office space) or equipment may not be determined using a formula based 
on: (1) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services provided while using the 
premises (including office space) or equipment; or (2) 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 (including office space) or equipment.
    Comment: Several commenters supported our policy that the exception 
for limited remuneration to a physician be used in conjunction with 
other exceptions during the course of a calendar year, noting that the 
exception, if finalized, would provide relief for parties that begin an 
arrangement for items or services before the arrangement squarely fits 
in another exception. One commenter requested that we finalize certain 
modifications to the exceptions for personal service arrangements at 
Sec.  411.357(d) and fair market value compensation at Sec.  411.357(l) 
to ensure consistency with our policy regarding the application of 
Sec.  411.357(z). Specifically, the commenter requested that we revise 
Sec.  411.357(d)(1)(ii) to explicitly provide that an arrangement that 
satisfies all the requirements of Sec.  411.357(z) need not be covered 
by a personal service arrangement protected under Sec.  411.357(d)(1) 
or be listed on a master list of contracts. Similarly, the commenter 
requested that we revise Sec.  411.357(l)(2) to explicitly provide 
that, if an arrangement for items or services fully satisfied the 
requirements of Sec.  411.357(z), the parties could also rely on Sec.  
411.357(l) to except an arrangement for the same items and services 
during a calendar year.
    Response: As explained in the proposed rule and in this final rule, 
the exception at Sec.  411.357(z) may be used during the course of a 
calendar year in conjunction with other exceptions to the physician 
self-referral law. The commenters are correct that the exception for 
limited remuneration to a physician may be used in succession with 
another applicable exception to protect an ongoing arrangement. For 
example, if parties do not initially document an arrangement or set the 
compensation in advance, the arrangement may be excepted under Sec.  
411.357(z) if all its requirements are satisfied, including that the 
remuneration does not exceed the annual aggregate remuneration limit 
established at final Sec.  411.357(z)(1). If the parties continue the 
arrangement, they may rely on another applicable exception to protect 
the arrangement on a going forward basis, provided that all the 
requirements of the other applicable exception are met, including any 
writing, signature, and set in advance requirements. All the 
requirements of the other applicable exception, including the set in 
advance requirement, would have to be met beginning on the date that 
the parties rely on the other exception, except that the parties would 
have up to 90 consecutive calendar days to document and sign the 
arrangement under Sec.  411.354(e)(4). Remuneration provided to a 
physician for items or services provided prior to the date that the 
arrangement satisfies all the requirements of an applicable exception 
other than Sec.  411.357(z) would be counted towards the annual 
aggregate remuneration limit in Sec.  411.357(z)(1).
    The provision at 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) to the entity, and states that this 
requirement is met if all the separate arrangements between the entity 
and the physician (or immediate family member) incorporate each other 
by reference or if they cross list a master list of contracts. We share 
the commenter's concern that this requirement could undermine the 
applicability and utility of the exception for personal service 
arrangements if the parties to an arrangement concurrently rely on the 
new exception at Sec.  411.357(z) to protect a separate arrangement for 
the provision of personal services. Therefore, we are modifying Sec.  
411.357(d)(1)(ii) to state

[[Page 77630]]

that a personal service arrangement excepted under Sec.  411.357(d)(1) 
does not have to cover personal services that are provided by a 
physician under an arrangement that satisfies all the requirement of 
Sec.  411.357(z). Without this modification, there may be confusion as 
to whether the exception for limited remuneration to a physician may be 
used for one service arrangement while the parties concurrently use 
Sec.  411.357(d)(1) for a separate personal service arrangement. 
Insofar as personal services provided under an arrangement that 
satisfies all the requirements at Sec.  411.357(z) are excluded from 
the ``covers all services'' requirement in Sec.  411.357(d)(1)(ii), it 
is not necessary to incorporate a personal service arrangement excepted 
under Sec.  411.357(z) by reference or list it on a master list of 
contracts.
    The exception for fair market value compensation provides at Sec.  
411.357(l)(2) that the parties may enter into only one arrangement for 
the same items or services during the course of a year. We share the 
commenter's concern that this requirement could undermine the utility 
of the exception for fair market value compensation if parties first 
rely on the new exception at Sec.  411.357(z) to protect an arrangement 
for the same items or services during a single year. (We note that a 
``year'' for purposes of the exception at Sec.  411.357(l) is not 
defined as a ``calendar year'' and refers, instead, to any 365-day 
period.) We are modifying this provision to state that, other than an 
arrangement that satisfies all the requirements of Sec.  411.357(z), 
the parties may not enter into more than one arrangement for the same 
items and services during the course of a year. With this modification, 
parties may use the exception for limited remuneration to a physician 
to protect an arrangement for the provision of items and services, and, 
during the course of a year, also rely on Sec.  411.357(l) to protect 
an arrangement for the same items and services.
    Comment: One commenter asked for clarification as to whether the 
proposed exception for limited remuneration to a physician could be 
relied on by an entity to provide continuing medical education (CME) to 
physicians for free or at a reduced cost. The commenter characterized 
our proposal as ``increasing the limit from $300 to $3,500 per year.''
    Response: We believe that the commenter is confusing the new 
exception for limited remuneration to a physician at Sec.  411.357(z) 
with the exception for nonmonetary compensation at Sec.  411.357(k), 
which has an annual limit of $300, adjusted annually for inflation. 
There are significant differences between these exceptions. Among other 
things, the exception for limited remuneration to a physician protects 
compensation that does not exceed fair market value for items or 
services actually provided by the physician. Unlike the exception for 
nonmonetary compensation at Sec.  411.357(k), the new exception at 
Sec.  411.357(z) does not permit entities to provide remuneration to a 
physician, including valuable in-kind remuneration such as free or 
reduced cost CME, without a fair market value exchange for items or 
services actually provided by the physician. The exception for 
nonmonetary compensation permits an entity to gift (or otherwise 
provide) a physician a limited amount of noncash remuneration during 
the course of a calendar year, not to exceed $300, as indexed to 
inflation and currently $423 per year, in the aggregate. No exchange of 
items or services from the physician is required. An entity may provide 
CME to a physician under the exception at Sec.  411.357(k), provided 
that the value of the CME does not exceed the annual limit on 
nonmonetary compensation when aggregated with any other nonmonetary 
compensation provided to the physician during the same calendar year.
2. Cybersecurity Technology and Related Services (Sec.  411.357(bb))
    Relying on our authority under section 1877(b)(4) of the Act, in 
the proposed rule, we proposed an exception at Sec.  411.357(bb) (the 
cybersecurity exception) applicable to arrangements involving the 
donation of cybersecurity technology and related services (84 FR 
55830). We believe that establishing such an exception will help 
improve the cybersecurity posture of the health care industry by 
removing a perceived barrier to donations of technology and services 
that 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 
establishing 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 the exception to the 
physician self-referral law and the safe harbor to the anti-kickback 
statute.
    In recent years, both CMS and OIG have received numerous comments 
and suggestions urging the creation of an exception and a safe harbor, 
respectively, applicable to donations of cybersecurity technology and 
related services.\20\ The digitization of health care delivery and 
rules designed to increase interoperability and data sharing in the 
delivery of health care create abundant targets for cyberattacks. For 
instance, a large health system with over 400 locations was recently 
the victim of a system-wide cyberattack that took medication, medical 
record, and other patient care systems offline.\21\ The health care 
industry and the technology used in health care delivery have been 
described as an interconnected ecosystem where the weakest link in the 
system can compromise the entire system.\22\ 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 that originate with ``weak links'' 
are borne by every component of the system.
---------------------------------------------------------------------------

    \20\ 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.
    \21\ ``Cyberattack hits major hospital system, possibly one of 
the largest in U.S. History,'' NBC News, September 28, 2020, 
available at https://www.msn.com/en-us/news/us/cyberattack-hits-major-hospital-system-possibly-one-of-the-largest-in-u-s-history/ar-BB19vtPQ?li=BBnbcA1.
    \22\ 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 establish an 
exception to protect the donation of cybersecurity technology and 
related services. 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 highlighted the increasing prevalence of cyberattacks and 
other threats. These 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

[[Page 77631]]

(CISA),\23\ was established in March 2016 and is comprised of 
government and private sector experts. The HCIC Task Force produced its 
HCIC Task Force Report in June 2017.\24\ 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 to the anti-kickback 
statute for EHR items and services could serve as a template for a new 
statutory exception.\25\
---------------------------------------------------------------------------

    \23\ Public Law 114-113, 129 Stat. 2242.
    \24\ HCIC Task Force Report, available at https://www.phe.gov/preparedness/planning/cybertf/documents/report2017.pdf.
    \25\ Id. at 27.
---------------------------------------------------------------------------

    Based on responses to OIG's request for information and our 
proposed rule, we understand that the cost of cybersecurity technology 
and related services has increased dramatically, to the point where 
many providers and suppliers are unable to invest in and, therefore, 
have not invested in, adequate cybersecurity measures. As previously 
noted, the risks associated with a cyberattack on a single provider or 
supplier in an interconnected system are ultimately borne by every 
component in the system. Therefore, an entity wishing to protect itself 
by preventing, detecting, and responding to cyberattacks has a vested 
interest in ensuring that the physicians with whom the entity exchanges 
data are also able to prevent, detect, and respond to 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 a primary reason 
that an entity would provide cybersecurity technology and related 
services to a physician is to protect itself from cyberattacks; 
however, we recognize that donated cybersecurity technology and 
services may have value for a physician recipient insomuch as the 
recipient would be able to use his or her resources for needs other 
than cybersecurity expenses. Even so, it is our position that allowing 
entities to donate cybersecurity technology and related services to 
physicians will lead to strengthening of the entire health care 
ecosystem. We believe that, with appropriate safeguards, arrangements 
for the donation of cybersecurity technology and related services will 
not pose a risk of program or patient abuse, provided that they satisfy 
all the requirements of the exception at final Sec.  411.357(bb). In 
addition, we believe that the exception established in this final rule 
will promote increased security for interconnected and interoperable 
health care IT systems without protecting potentially abusive 
arrangements.
    In the proposed rule, we proposed that the exception at Sec.  
411.357(bb) would be applicable to nonmonetary remuneration in the form 
of certain types of cybersecurity technology and related services (84 
FR 55831). In an effort to foster beneficial cybersecurity donation 
arrangements without permitting arrangements that pose a risk of 
program or patient abuse, we proposed the following requirements for 
cybersecurity donations made under Sec.  411.357(bb): The technology 
and services are necessary and used predominantly to implement, 
maintain, or reestablish cybersecurity; 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; 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; 
and the arrangement is documented in writing. After reviewing comments 
on our proposed rule, we are finalizing the exception for cybersecurity 
donations and related services at Sec.  411.357(bb) with certain 
modifications related to the types of nonmonetary remuneration 
permitted under the exception, as well as nonsubstantive modifications 
to the text of the regulation.
    We received the following general comments and our responses 
follow.
    Comment: The majority of commenters generally supported the 
proposed exception for cybersecurity technology and related services. 
Commenters noted that cybersecurity is necessary to enable secure and 
effective exchange of health information and thus is crucial for care 
coordination and improved health outcomes. One commenter explained that 
patient safety is the most critical concern when cyberattacks occur, 
especially when the cyberattacks impact the patient's electronic health 
records and medical devices. The commenter added that cyberattacks can 
result in disclosure of sensitive patient information and can alter the 
treatment a patient is prescribed, among other negative consequences. 
One commenter highlighted the trend in health care towards greater 
interconnectivity, even as costs for cybersecurity rise, and concluded 
that cybersecurity donations make sense from affordability, efficiency, 
and social responsibility standpoints. Another commenter stated its 
belief that health care providers are insufficiently prepared to meet 
cybersecurity challenges that arise in an increasingly digitized health 
care delivery system. The commenter stated that the proposed 
cybersecurity exception would help address these challenges and be part 
of a national strategy to improve the safety, resilience, and security 
of the health care industry.
    Response: We believe that the exception as finalized at Sec.  
411.357(bb) will remove real and perceived barriers to beneficial 
cybersecurity technology donations, addressing an urgent need to 
improve cybersecurity hygiene in the health care industry and protect 
patients and the health care ecosystem overall. With respect to care 
coordination, we note that, depending on the facts and circumstances, 
an arrangement for the donation of cybersecurity technology and 
services may qualify as a value-based arrangement (as defined at final 
Sec.  411.351) to which the new exceptions at Sec.  411.357(aa)(1), 
(2), and (3) for arrangements that facilitate value-based health care 
delivery and payments may be applicable.
    Comment: A few commenters generally objected to the proposed 
cybersecurity exception. One commenter expressed concern that the 
requirements of the proposed exception are inadequate because, 
according to the commenter, they are difficult to monitor and less 
stringent than the requirements of the EHR exception. Another commenter 
asked CMS to reconsider the exception and whether cybersecurity 
technology and arrangements involving the donation of such technology 
are understood sufficiently at this time to warrant an exception. Some 
commenters expressed concern that the exception could be used to 
support anti-competitive behavior. One of the commenters maintained 
that, while health IT donations by large health care entities appear to 
advance interoperability, the actual result is that physician 
recipients lose their autonomy as independent providers, the lack of 
competition increases the costs of health care, and smaller providers 
are

[[Page 77632]]

closed by the larger health system when they do not create a profit. 
Instead of finalizing the proposal, the commenter urged CMS to fund a 
program that would allow small or rural providers to gain access to 
cybersecurity technology. Another commenter expressed concern that the 
proposed cybersecurity exception could inadvertently bolster 
information blocking, as some providers cite cybersecurity as a reason 
for not sharing data or providing data access to physicians.
    Response: We do not understand the basis for the commeners' 
assertions that the provision of cybersecurity items and services to 
protect information by preventing, detecting, and responding to 
cyberattacks would limit physician autonomy or lead to inappropriate 
information blocking. Although we are concerned, in general, about 
anti-competitive behavior, we believe that an exception for 
arrangements involving the donation of cybersecurity technology and 
related services is a necessary and critical tool to assist the health 
care industry in addressing the prevalent and increasing cybersecurity 
threats facing the industry, which, among other things, can negatively 
impact the quality of care delivered to beneficiaries.\26\ The 
cybersecurity exception incorporates many of the core requirements of 
the EHR exception, including the requirements that: (1) The 
remuneration is necessary and used predominantly for the purposes 
outlined in the exception; (2) neither the eligibility of the 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; (3) neither the physician recipient nor 
the physician's practice makes the receipt of the technology or 
services or the amount or nature of the technology or services a 
condition of doing business with the donor entity; and (4) the 
arrangement is documented in writing. In addition, as explained above, 
we believe that many donors will make cybersecurity donations as a 
self-protective measure. Given these safeguards, we do not believe that 
the cybersecurity exception, as finalized, permits financial 
relationships that pose a risk of program or patient abuse.
---------------------------------------------------------------------------

    \26\ 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. 
(recommending an exception for cybersecurity donations).
---------------------------------------------------------------------------

a. Covered Technology and Services
    In the proposed rule, we proposed to limit the applicability of the 
cybersecurity exception to nonmonetary remuneration consisting of 
technology or services that are necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity (84 FR 55832).\27\ We 
explained that our goal is to ensure that donations are made for the 
purposes of addressing legitimate cybersecurity needs of donors and 
recipients; therefore, the core function of the donated technology or 
service must be to protect information by preventing, detecting, and 
responding to cyberattacks (84 FR 55832). As proposed, the exception at 
Sec.  411.357(bb) would apply to the provision of a wide range of 
technology and services that are predominantly used for the purpose of, 
and are necessary for, ensuring that donors and recipients have 
cybersecurity.
---------------------------------------------------------------------------

    \27\ In the proposed rule, the ``necessary and used 
predominantly'' condition was included in the proposed regulations 
at Sec.  411.357(bb)(1)(i). As explained at the end of this section, 
in the final rule, this condition appears in the chapeau of the 
exception at Sec.  411.357(bb)(1).
---------------------------------------------------------------------------

    We are taking a neutral position with respect to the types of 
technology to which the final cybersecurity exception is applicable, 
including the types and versions of software that an entity may provide 
to a physician recipient when all the requirements of the exception are 
satisfied. We did not propose to distinguish, and the cybersecurity 
exception as finalized here does not distinguish, between cloud-based 
software and software that must be installed locally (84 FR 55832). The 
types of technology to which the cybersecurity exception is applicable 
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 (84 FR 55832). 
As we stated in the proposed rule, these examples are indicative of the 
types of technology that are necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity (84 FR 55832). In 
addition, as explained in section II.E.2.b. below, the cybersecurity 
exception as finalized also applies to hardware that is necessary and 
used predominantly to implement, maintain, or reestablish 
cybersecurity. We solicited comments on the scope of the technology to 
which the cybersecurity exception should be applicable, as well as 
whether we should expressly include (or exclude) other technology or 
categories of technology in the exception.
    We also proposed that the cybersecurity exception would apply to a 
broad range of services (84 FR 55832). We stated that such services 
could include--
    <bullet> Services associated with developing, installing, and 
updating cybersecurity software;
    <bullet> 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);
    <bullet> Cybersecurity services for business continuity and data 
recovery services to ensure the recipient's operations can continue 
during and after a cybersecurity attack;
    <bullet> ``Cybersecurity as a service'' models that rely on a 
third-party service provider to manage, monitor, or operate 
cybersecurity of a recipient;
    <bullet> Services associated with performing a cybersecurity risk 
assessment or analysis, vulnerability analysis, or penetration test; or
    <bullet> Services associated with sharing information about known 
cyber threats, and assisting recipients responding to threats or 
attacks on their systems.
    We stated further that these types of services are indicative of 
the types of services that are necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity, and solicited 
comments on the scope of the services to which the cybersecurity 
exception should be applicable, as well as whether we should expressly 
include (or exclude) other services or categories of services (84 FR 
55832). We noted in the proposed rule and reiterate here that, in all 
cases, the technology and services provided by an entity must be 
nonmonetary.
    With respect to both technology and services, we emphasize that, 
although donated technology or services may have multiple uses, the 
cybersecurity exception only applies to technology and services that 
are necessary and used predominantly to implement, maintain, and 
reestablish cybersecurity. The exception does not apply to technology 
or services that are otherwise used predominantly in the normal course 
of the recipient's business (for example, general help desk services 
related to use of a practice's IT). We solicited comment on whether 
this limitation would prohibit the donation of cybersecurity technology 
and related services that are vital to improving the

[[Page 77633]]

cybersecurity posture of the health care industry.
    With respect to the requirement that the technology or services are 
necessary to implement, maintain, or reestablish cybersecurity, we 
considered, and sought comment on, whether to deem certain arrangements 
to satisfy this requirement (84 FR 55832). We explained in the proposed 
rule that such a deeming provision, if adopted, would not affect the 
requirement that the technology or services are used predominantly to 
implement, maintain, or reestablish cybersecurity. We emphasized that 
parties would have to show on a case-by-case basis that the ``used 
predominantly'' requirement is met (84 FR 55832). In the proposed rule, 
we stated that, if we adopted a deeming provision for the purpose of 
applying the ``necessary'' requirement at proposed Sec.  
411.357(bb)(1)(i), we would deem donors and recipients to satisfy the 
requirement if the parties demonstrated 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 (84 FR 55832). Examples of such frameworks and sets of 
standards include those developed or endorsed by the National Institute 
for Standards and Technology (NIST), another American National 
Standards Institute-accredited standards body, or an international 
voluntary standards body such as the International Organization for 
Standardization. As explained below in response to comments below, we 
are not adopting this proposed deeming provision.
    We are finalizing our proposal to limit the applicability of the 
cybersecurity exception to technology and services that are necessary 
and used predominantly to implement, maintain, or reestablish 
cybersecurity. However, in the final cybersecurity exception as 
established here, we state the scope of the exception in the chapeau of 
the exception at Sec.  411.357(bb)(1) instead of including a 
requirement in the exception that the technology and services are 
necessary and used predominantly to implement, maintain, or reestablish 
cybersecurity. (The remaining requirements of the exception are 
redesignated to account for this organizational change; for example, 
proposed Sec.  411.357(bb)(1)(ii) is finalized at Sec.  
411.357(bb)(1)(i), and so forth). We are also removing the phrase 
``certain types of'' before ``cybersecurity technology and services'' 
from the chapeau to avoid ambiguity regarding the scope of the 
exception. Most exceptions to the physician self-referral law are 
structured such that the chapeau delineates the scope of remuneration 
that may be provided under the exception, provided that the 
requirements enumerated under the chapeau language are satisfied. The 
chapeau of an exception contains specific pre-conditions that must be 
satisfied in order for the exception to be available to except a 
particular arrangement. The ``necessary and used predominantly'' 
condition in the cybersecurity exception serves this function. The 
remuneration that may be provided under the cybersecurity exception is 
limited to nonmonetary compensation, consisting of technology and 
services, that are necessary and used predominantly to implement, 
maintain, or reestablish cybersecurity. In addition, the structural 
reorganization of the final cybersecurity exception creates greater 
consistency with the EHR exception. As finalized, the chapeau of the 
cybersecurity exception mirrors the chapeau in the EHR exception at 
Sec.  411.357(w)(1), which provides that donated items or services must 
be necessary and used predominantly to create, maintain, transmit, 
receive, or protect electronic health records. Inclusion of the 
``necessary and used predominantly'' condition in the chapeau of the 
cybersecurity exception underscores that ``necessary and used 
predominantly'' has the same meaning in both the EHR and cybersecurity 
exceptions. We believe this consistency is especially important insofar 
as cybersecurity software may be donated under both exceptions.
    We received the following comments and our responses follow:
    Comment: One commenter urged CMS to permit, with appropriate 
safeguards, the donation of both nonmonetary remuneration consisting of 
cybersecurity technology and services and monetary remuneration to be 
used for the purchase of cybersecurity technologies and services. The 
commenter asserted that permitting monetary remuneration in appropriate 
circumstances could help alleviate what the commenter characterized as 
the cybersecurity exception's unintended adverse effects on 
competition, such as a situation where a donor wished to supply 
cybersecurity technology to two competing small providers and one of 
the small providers had already purchased the technology but the other 
had not. The commenter asserted that protecting monetary reimbursement 
to the first provider and an in-kind donation to the second provider 
would be fairer than permitting a donation to one competitor and not 
the other.
    Response: We decline to permit reimbursement of previously incurred 
cybersecurity expenses, as well as the provision of cash remuneration 
to a physician that is intended to be used for the future purchase of 
cybersecurity technology and services. We believe that this would pose 
a risk of program or patient abuse, as the former would simply be a 
subsidy of practice expenses that a physician--rather than the donor 
entity--determined to incur, and the latter involves the provision of 
cash, some or all of which could be used to offset other practice 
expenses without ultimately enhancing the cybersecurity posture of the 
donor entity or the health care ecosystem as a whole. We also highlight 
that the example provided by the commenter likely would not satisfy the 
other conditions of this exception even if the exception permitted an 
entity to provide monetary remuneration. For instance, if a physician 
has already obtained cybersecurity technology or services, the 
provision of remuneration in the form of reimbursement would not be 
necessary to implement, maintain, or reestablish cybersecurity.
    Comment: A number of commenters supported the requirement at 
proposed Sec.  411.357(bb)(1)(i) that the technology and related 
services must be necessary and used predominantly to implement, 
maintain, or reestablish cybersecurity. One of the commenters suggested 
that this provision would ensure the legitimacy of donations and help 
differentiate the technology and services that may be donated under the 
cybersecurity exception from technology and services that have multiple 
uses beyond cybersecurity. Another commenter urged CMS to require a 
clear nexus between the cybersecurity donation and the business 
relationship between the donor and recipient. The commenter explained 
that the cybersecurity technology should be necessary for the provision 
of the services involved, such as where a hospital donates 
cybersecurity technology to a physician to ensure the secure transfer 
of personal health information and thus improve care coordination for 
shared patients. The commenter stated that the cybersecurity exception 
should not protect donations that are used as a way to entice new 
business. A different commenter suggested that, provided that donated 
cybersecurity technology and services substantially further the 
interests of strengthening cybersecurity for the end user, their 
donation should be permissible. The commenter agreed with CMS that 
donors should have the

[[Page 77634]]

discretion to choose the amount and nature of cybersecurity technology 
and services they donate to physicians based on a risk assessment of 
the potential recipient or based on the risks associated with the type 
of interface between the parties.
    Response: As explained above, the cybersecurity exception is 
limited to technology and services that are necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity. 
However, we are including this limitation in the chapeau of the final 
cybersecurity exception rather than as a separate requirement of the 
exception as we proposed. The change in the organization of the 
exception does not affect or alter the meaning, scope, or application 
of the requirement that donated technology and services must be 
necessary and used predominantly to implement, maintain, or reestablish 
cybersecurity, as that requirement was explained in the proposed rule 
(84 FR 55831).
    The ``necessary and used predominantly'' language at final Sec.  
411.357(bb)(1) delineates the scope of the exception and will ensure 
that donations are made to address legitimate cybersecurity needs of 
donors and recipients. With respect to technology and services with 
multiple uses or functions other than cybersecurity, we note the 
following. In the 2006 EHR final rule, we acknowledged that electronic 
health records software is often integrated with other software and 
functionality, but we explained that such software may still be 
necessary and used predominantly to create, maintain, transmit, or 
receive electronic health records if the electronic health records 
functions predominate (71 FR 45151). We added that the ``core 
functionality'' of the technology must be the creation, maintenance, 
transmission, or receipt of electronic health records. The same 
principle applies to technology (as defined at Sec.  411.357(bb)(2)) 
and services donated under the cybersecurity exception. While donated 
technology and services may include functions other than cybersecurity, 
the core functionality of the technology and services must be 
implementing, maintaining, or reestablishing cybersecurity, and the 
cybersecurity use must predominate. Such technology and services must 
also be necessary for implementing, maintaining, or reestablishing 
cybersecurity. Although we are not adopting the ``clear nexus'' 
standard suggested by the commenter, we question whether donated 
technology or services would be necessary for the donor or recipient to 
implement, maintain, or reestablish cybersecurity if the technology or 
services are not connected to the underlying services furnished by 
either party. We note also that we are finalizing a requirement that a 
donor may not directly take into account the volume or value of 
referrals or other business generated between the parties when 
determining the eligibility of a potential recipient for donated 
technology or services, or when determining the amount or nature of the 
donated technology or services. This requirement addresses the concern 
expressed by the commenters regarding parties that improperly use the 
exception for donations to entice new business. With respect to the 
last comment, we decline to adopt the commenter's proposal that 
donations should be permitted under the cybersecurity exception if the 
donated technology or services ``substantially further the interests of 
strengthening cybersecurity for the end user.'' We believe that 
stakeholders are familiar with the ``necessary and used predominantly'' 
condition from the EHR exception, and, insofar as the EHR exception 
applies to cybersecurity software and services, we believe that it 
reduces administrative burden to use a similar standard for both the 
EHR and cybersecurity exceptions.
    Comment: Most commenters recommended that we finalize an exception 
that covers a broad range of cybersecurity technology and services, and 
some requested specific language or clarifications. In particular, 
several commenters asked CMS to consider how the proposed exception 
would apply to cloud-based and subscription-based products and 
services. One commenter supported many of the examples from the 
proposed rule of services that could be covered under the cybersecurity 
exception, while other commenters requested that CMS provide clarity 
related to the scope of potentially permissible donations through 
additional examples of the types and amounts of technology and services 
allowed. Specifically, commenters asked CMS to clarify whether the 
exception is applicable to the following services: Assurance, 
assessment, and certification programs that allow physicians to assess 
their own cybersecurity and demonstrate that they are trusted 
participants in health care data exchange; risk assessment and gap 
analysis services; consulting services to work with a physician to 
develop and implement specific cybersecurity policies and procedures; 
subscription fees required by vendor security products that assist 
physicians in developing policies and procedures in support of a risk 
assessment; implementation, management, and remediation services; and 
provision of a full-time cybersecurity officer. Some commenters noted 
that a cybersecurity-specific help desk may not be realistic and 
recommended that CMS permit donations of general help desk services, 
whether through the donor's IT department or the vendor's help desk 
services.
    Although many commenters expressed concern about the utility of the 
exception if it does not apply to a broad enough scope of technology 
and services, other commenters recommended limiting the scope of 
cybersecurity technology and services that may be provided to a 
physician under the exception. One of these commenters cautioned 
against permitting donations of ``cybersecurity as a service.'' The 
commenter asserted that the ``cybersecurity as a service'' model, where 
a third-party manages, monitors, or operates the cybersecurity of a 
recipient, goes beyond what is reasonable for donated cybersecurity, 
but did not provide further detail as to how ``cybersecurity as a 
service'' would pose a risk of program or patient abuse.
    Response: As finalized, the exception protects donations of a broad 
range of technology and services. Cybersecurity technology and services 
include both locally installed cybersecurity software and cloud-based 
cybersecurity software. As explained in section II.E.2.b. below, the 
exception also applies to hardware that is necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity. We 
provided multiple examples of items and services to which the 
cybersecurity exception would apply in the preamble to the proposed 
rule (84 FR 55832), which is repeated above in this final rule. We 
continue to believe that the cybersecurity exception is applicable to 
the examples provided in the proposed rule. We also stated in the 
proposed rule and reiterate here that ``cybersecurity as a service'' 
may be protected, including third-party services managing and 
monitoring the cybersecurity of a recipient. Other than a general 
statement of caution, the commenter that addressed ``cybersecurity as a 
service'' did not provide any specific reasons why such a service 
presents a risk of program or patient abuse, and we see no reason why 
this cybersecurity format requires a different analysis than 
cybersecurity installed locally or should be excluded from the scope of 
the cybersecurity exception. All of the examples provided in the 
proposed rule

[[Page 77635]]

are illustrative only, and the list of examples in the proposed rule is 
not exhaustive. We intend the exception to be applicable to technology 
and services that are currently available, as well as technologies and 
services that will be developed in the future. Donated technology and 
services, however, must be necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity. To the extent that 
the services described by commenters are necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity, 
they may be donated under the cybersecurity exception (if all the 
remaining requirements of the exception are also satisfied).
    We recognize that cybersecurity functionality is often incorporated 
into software or other information technology whose primary use and 
functionality is not cybersecurity and, further, that certain services 
may be useful for implementing, maintaining, or reestablishing 
cybersecurity while also generally serving purposes other than 
cybersecurity (for example, general IT services that include a 
cybersecurity component). However, in order for technology or services 
to be donated under the cybersecurity exception, the core functionality 
of the technology or services must be implementing, maintaining, or 
reestablishing cybersecurity, and the cybersecurity use must 
predominate. For instance, depending on the facts and circumstances of 
a particular arrangement, donating a virtual desktop that includes 
access to programs and services beyond cybersecurity software likely 
would not be protected because the technology would include functions 
not necessary and predominantly used to implement, maintain, or 
reestablish cybersecurity, such as, for example, word processing or 
claims and billing applications. Similarly, the exception is likely not 
applicable to general IT help desk services, because the services would 
not be used predominantly for cybersecurity. However, we are aware of 
cybersecurity-specific software and services that include customer 
service and help desk features for cybersecurity assistance. The 
cybersecurity exception is applicable to such help desk services if all 
the requirements of the exception are satisfied. The cybersecurity 
exception could also be applicable to services provided through an 
entity's primary help desk, if the services are necessary and used 
predominantly for cybersecurity (for example, to report cybersecurity 
incidents). The provision of a full-time cybersecurity officer in a 
physician recipient's practice must be necessary, the cybersecurity 
officer's services must be used predominantly to implement, maintain, 
or reestablish cybersecurity, and all other requirements of the 
exception at final Sec.  411.357(bb) must be satisfied in order to 
avoid violation of the physician self-referral law.
    Comment: Several commenters interpreted our discussion in the 
proposed rule of the difficulty of collecting cost contribution amounts 
for patches and updates to mean that donations of patches or updates to 
previously donated technology would not fall within the scope of the 
cybersecurity exception. The commenters highlighted that patching and 
updates are critical to managing cybersecurity risks and prohibiting 
their donation could neutralize any benefits resulting from the 
cybersecurity exception. One of these commenters noted that, given the 
fast-paced nature of developments in cybersecurity, it is likely that 
new tools will need to be deployed on at least an annual basis. The 
commenters asked that we ensure that the cybersecurity exception, if 
finalized, applies to ongoing cybersecurity software updates and other 
patches. Another commenter requested clarification regarding whether 
the provision to a physician of a routine or critical update would 
cause an arrangement to fail to satisfy all the requirements of the 
cybersecurity exception, noting that patching is sometimes given to 
physicians for free (because it is built into the contracts with 
vendors), and some patches may be focused on security while others may 
be more general. A different commenter asked CMS to provide greater 
clarity regarding donations of replacement technology in light of the 
rapid development of new cybersecurity technology.
    Response: Constant vigilance is required to maintain the 
cybersecurity of the health care ecosystem, and we agree with the 
commenters that patching and updates are critical to managing 
cybersecurity risks. As we discussed in response to previous comments, 
we are not excluding any particular type of technology or services--
including patches and updates--from the application of the final 
cybersecurity exception. The ongoing donation of cybersecurity patches 
and updates will not result in noncompliance with the physician self-
referral law, provided that all the requirements of the cybersecurity 
exception (or another applicable exception) are satisfied at the time 
of their donation. We note that the written documentation evidencing 
the arrangement for the donation of cybersecurity technology or 
services may account for the future provision of patches and updates, 
relieving the parties from developing additional documentation each 
time a patch or update is issued. Also, as described below in section 
II.E.2.d., the exception at final Sec.  411.357(bb) does not require a 
financial contribution from the recipient. Therefore, routine patches 
and upgrades provided to recipients at no cost will not cause the 
arrangement between the parties to fall out of compliance with the 
physician self-referral law, provided that all the requirements of the 
exception are satisfied at the time of their issuance.
    Regarding donations of cybersecurity technology or services to 
physicians who already have some technology or services, the final 
exception at Sec.  411.357(bb) does not prohibit the donation of 
replacement technology; however, an arrangement for the provision of 
cybersecurity technology and services must satisfy all the requirements 
of the exception. We note that donating replacement technology could 
satisfy the requirement that the technology or services are necessary 
to implement, maintain, or reestablish cybersecurity if, for example, 
the technology that is replaced is outdated or poses a cybersecurity 
risk.
    Comment: One commenter recommended that CMS clarify the scope of 
the intended ``object'' to be protected by the cybersecurity technology 
and services; for example, cybersecurity to protect electronic health 
records, medical devices, or other IT that uses, captures, or maintains 
individually identifiable health information. The commenter noted that 
the proposed cybersecurity exception was silent as to the ``object'' of 
the cybersecurity protection, and asserted that an explicit statement 
setting broad parameters about the purpose of donated cybersecurity 
technology and services would provide guidance and potentially cover 
future technology advances. Another commenter encouraged CMS to 
specifically permit donations of technology and services related to 
medical device cybersecurity.
    Response: We decline to set parameters or requirements for the 
intended ``object'' (or ``subject'') of the cybersecurity protection 
because we are concerned that this could unintentionally limit the 
scope of the technology and services to which the cybersecurity 
exception is applicable. If all the requirements of the exception are 
satisfied, the exception is applicable to cybersecurity technology and 
services that, among other things, protect

[[Page 77636]]

electronic health records, medical devices, or other IT that uses, 
captures, or maintains individually identifiable health information.
    Comment: One commenter objected to what it considered to be CMS' 
``piecemeal'' approach to health care technology, with different 
exceptions for different types of technology (for example, EHR and 
cybersecurity) that the commenter asserted must work together to drive 
care coordination. The commenter urged CMS to broaden the scope of the 
cybersecurity and EHR exceptions to ensure flexibility to protect 
technology that can help facilitate the transition to a value-based 
health care delivery and payment system. The commenter specifically 
recommended that we make any final cybersecurity exception applicable 
to data analytics and reporting functionalities. The commenter provided 
as an example predictive data analytics tools that allow a hospital to 
identify and decrease the number of high-risk heart failure patients 
presenting for admission to the hospital or emergency room.
    Response: We are not extending the scope of the cybersecurity 
exception at final Sec.  411.357(bb) to all data analytics and 
reporting functionality specifically designed to facilitate the 
transition to a value-based health care delivery and payment system, as 
requested by the commenter. As illustrated by the commenter's example, 
the use and purpose of data analytics and reporting functionality may 
differ significantly from those of cybersecurity technology and 
services. The cybersecurity exception at Sec.  411.357(bb) is limited 
to technology and services that are necessary and used predominantly to 
implement, maintain, and reestablish cybersecurity, and its 
requirements of the exception at Sec.  411.357(bb) are not designed to 
adequately protect against Medicare program or patient abuse where data 
analytics and reporting functionality are provided at no cost (or 
reduced cost) to a physician. Other exceptions to the physician self-
referral law address the items and services described by the commenter. 
We believe that the requirements of those exceptions are appropriate to 
protect the Medicare program and its patients from abuse when such 
remuneration is provided by an entity to a physician (or vice versa). 
With respect to the commenter's concern regarding a piecemeal approach 
to exceptions under the physician self-referral law, we note that 
parties seeking to except an arrangement for the donation of technology 
are not required to utilize multiple exceptions if the separate 
functions of the technology and the donation satisfy the requirements 
of a single exception.
    Comment: One commenter that generally opposed the cybersecurity 
exception maintained that effective cybersecurity protection could 
require a whole suite of services, such as active management, 
monitoring, and developing an effective response system if an issue 
arises, and it may not be possible for an outside entity to provide 
such a broad range of services. The commenter asserted that more 
limited donations of cybersecurity technology or services, on the other 
hand, may not provide effective cybersecurity protection for the 
recipients and may expose the donor to liability in case of a 
cyberattack.
    Response: As described in our responses to other comments, the 
final cybersecurity exception applies to a wide range of technology and 
services that implement, maintain, or reestablish cybersecurity (as 
defined at final Sec.  411.351). Although we established the 
cybersecurity exception to address real or perceived barriers to 
improving the cybersecurity posture of the health care industry, the 
exception does not apply to all remuneration that may be relevant to 
cybersecurity needs. The final cybersecurity exception permits 
technology and services that are necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity. The protection 
afforded under the exception is not limited to cybersecurity that is 
``effective.'' In the strict liability context of the physician self-
referral law, we are concerned that requiring ``effective'' 
cybersecurity at Sec.  411.357(bb)(1) may chill otherwise beneficial 
cybersecurity donations, as donors and recipients may lack the 
expertise to understand and determine what constitutes ``effective'' 
cybersecurity or there may be disagreement as to whether cybersecurity 
measures are ``effective.'' Although donor liability is outside the 
scope of this rulemaking, we note that nothing in the cybersecurity 
exception prohibits donors and recipients from addressing such issues 
through contracts or other agreements.
    Comment: A number of commenters supported the inclusion of a 
deeming provision that would allow donors or recipients to demonstrate 
that the compensation arrangement satisfies the requirement that the 
technology or services are ``necessary'' if the donation furthers a 
recipient's compliance with a written cybersecurity program that 
reasonably conforms to a widely-recognized cybersecurity framework, 
such as those developed by NIST, or guidelines developed by the 
Department of Health and Human Services Office for Civil Rights (OCR) 
in collaboration with ONC. One commenter recommended that, in cases 
where cybersecurity is built into software that gives physicians access 
to a hospital's computer system, the technology should be deemed to be 
necessary and used predominantly for cybersecurity. The commenter 
explained that such a deeming provision is warranted because, as noted 
in the proposed rule (84 FR 55831), a hospital that has granted 
physicians access to its system has a vested interest in ensuring that 
the physicians with whom it shares information are also protected from 
cyberattacks, particularly where the connections allow the physicians 
to establish bidirectional interfaces with the entity. A different 
commenter recommended that any deeming provision remain voluntary, 
while another commenter supported a deeming provision when the cost of 
the donation of technology and services exceeds a specified monetary 
limit. One commenter supported the inclusion of a deeming provision but 
only if the parties to the donation arrangement, through an independent 
third party, demonstrate and certify that the donation ensures 
compliance with a written cybersecurity program or framework that 
conforms to NIST standards. In contrast, several commenters objected to 
the inclusion of any deeming provision, maintaining that it would add 
unnecessary burden without providing any meaningful protection against 
program and patient abuse. One of these commenters stated that 
physicians may struggle to understand what ``reasonable conformance'' 
looks like or when a cybersecurity framework or standard is considered 
``widely recognized.''
    Response: We are not including a deeming provision for establishing 
compliance with the condition that donated technology and services are 
necessary for cybersecurity in the final rule. We are concerned that 
any deeming provision that is specific enough to address our program 
integrity concerns will be of limited or no utility for stakeholders. 
We also agree with the commenter that parties may struggle to 
understand what ``reasonable conformance'' looks like or when a 
framework or standard is considered ``widely recognized.'' Without 
selection of one or more specific frameworks, any deeming provision 
could be challenging to understand and difficult to enforce. Regarding 
the commenter's suggestion that software that grants access to a 
hospital's system should be deemed to

[[Page 77637]]

be necessary and used predominantly for cybersecurity, we agree that 
the type of connection between a donor and a physician (bidirectional 
read-write connection versus unidirectional read-only access) is an 
important factor in determining whether particular technology or 
services are necessary for cybersecurity. However, we do not believe 
that any software or other information technology should be deemed to 
be necessary for cybersecurity simply because the technology permits a 
physician to access a hospital's computer system. Moreover, the 
determination of whether technology or services are used predominantly 
to implement, maintain, or reestablish cybersecurity depends on how the 
donated technology or services are used in fact and, therefore, not 
appropriate for a deeming provision. Although technology or services 
donated under the cybersecurity exception may have uses or functions 
other than cybersecurity (for example, software that allows a physician 
to access a hospital's computer system), the cybersecurity use must in 
fact predominate.
b. Definitions of ``Cybersecurity'' and ``Technology''
    In the proposed rule, we proposed to define the term 
``cybersecurity'' to mean the process of protecting information by 
preventing, detecting, and responding to cyberattacks and to define the 
term ``technology'' to mean any software or other type of information 
technology, other than hardware (84 FR 55831). Because the term 
``cybersecurity'' also appears in the EHR exception at Sec.  
411.357(w), which expressly applies to the donation of cybersecurity 
software and services, we proposed to include the definition of 
``cybersecurity'' in our regulations at Sec.  411.351. Because the term 
``technology,'' as used in the new exception for cybersecurity 
technology and related services, would be defined solely for purposes 
of the exception at Sec.  411.357(bb), we proposed to include its 
definition at Sec.  411.357(bb)(2) (84 FR 55831). We note that the term 
``technology'' is included in several instances in our regulations as 
part of the term ``information technology'' and at Sec.  
411.357(w)(6)(iv) to describe one of the ways in which the 
determination of the eligibility of a physician for a donation of EHR 
items or services, or the amount or nature of the items or services, 
would be deemed not to be determined in a manner that directly takes 
into account the volume or value of referrals or other business 
generated between the parties. The proposed definition of 
``technology'' was not intended to affect the meaning of the term 
``information technology'' or the interpretation of Sec.  
411.357(w)(6)(iv).
    In the proposed rule, we proposed a broad definition of 
``cybersecurity'' derived from the NIST Framework for Improving 
Critical Infrastructure,\28\ a framework that does not apply 
specifically to the health care industry, but applies generally to any 
United States critical infrastructure (84 FR 55831). We proposed a 
broad definition of ``cybersecurity'' to avoid unintentionally limiting 
donations by relying on a narrow definition or a definition that might 
become obsolete over time, although we solicited comments whether a 
definition tailored to the health care industry would be more 
appropriate (84 FR 55831). We proposed a similarly broad definition of 
``technology'' that is neutral with respect to the types of 
cybersecurity technology to which the exception applies (84 FR 55831). 
We explained in the proposed rule that the definition of ``technology'' 
is 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, as well as technology that may become available as the industry 
continues to develop. As proposed, ``technology'' would have excluded 
hardware. We explained our concern in the proposed rule that donations 
of valuable multiuse hardware could pose a risk of program or patient 
abuse (84 FR 55832).
---------------------------------------------------------------------------

    \28\ Appendix B, Version 1.1 (April 16, 2018) available at 
https://nvlpubs.nist.gov/nistpubs/CSWP/NIST.CSWP.04162018.pdf.
---------------------------------------------------------------------------

    In the proposed rule, we also considered two alternative proposals 
that would allow for the donation of certain cybersecurity hardware (84 
FR 55831 through 55832). Under the first alternative proposal, the 
cybersecurity exception would cover certain 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 solicited comments on what types of hardware might meet 
these criteria and whether such hardware should fall within the scope 
of the exception. Under the second alternative proposal, parties would 
be permitted to make more robust donations of cybersecurity hardware if 
the donor had a cybersecurity risk assessment that identifies the 
recipient as a risk to its cybersecurity, and the recipient had a 
cybersecurity risk assessment that provided a reasonable basis to 
determine that the donated cybersecurity hardware is needed to address 
a risk or threat identified by a risk assessment (84 FR 55834).
    We noted in the proposed rule and reiterate here that the exception 
at Sec.  411.357(bb), both as proposed and finalized, covers only items 
and services that qualify as cybersecurity technology and services (84 
FR 55832). It does not extend to other types of cybersecurity measures 
outside of technology or services. For example, the exception does not 
apply to 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, permitting an entity to provide such services at no cost to the 
physician recipient would present a risk of program or patient abuse.
    As explained in more detail below, in response to comments we are 
finalizing the definition of ``cybersecurity'' as proposed, and 
finalizing the definition of ``technology'' without the phrase ``other 
than hardware.''
    We received the following comments and our responses follow.
    Comment: Several commenters agreed with the proposed industry-
neutral definition of ``cybersecurity,'' derived from the NIST 
Cybersecurity Framework (NIST CSF), and most commenters generally 
agreed that the final rule should include a broad definition of 
``cybersecurity'' to provide sufficient flexibility for future changes, 
adaptations, and variations in the dynamic world of cybersecurity. One 
commenter was generally supportive of the proposed definition of 
``cybersecurity'' but believed it should include the process of 
protecting information through ``identifying'' and ``recovering'' from 
cyberattacks in order to account for the entire lifecycle of a 
cyberattack. The commenter presumed that the addition of ``recovering'' 
would protect ``back-up services'' that support reestablishing 
cybersecurity and reduce the impact of ransomware extortion. Another 
commenter supported the definition of ``cybersecurity'' for being 
fairly broad and including donations of APIs, but requested that we 
modify the definition to account for what the commenter identified as 
the three pillars of information security: Confidentiality of 
information, integrity of information, and availability of information.

[[Page 77638]]

    Response: We agree with the commenters that we should adopt a 
broad, industry-neutral definition of ``cybersecurity.'' Consequently, 
we are finalizing a definition derived from the NIST CSF. The NIST CSF 
is industry-neutral and widely accepted across public and private 
sectors and international organizations, and it applies to any critical 
infrastructure in the United States, which includes health care. It 
provides a commonly understood language for donors and recipients 
seeking to use the cybersecurity exception to improve their 
cybersecurity posture. We are not adopting a definition of 
``cybersecurity'' that would incorporate specific technology solutions 
for cyberattacks. We are concerned that, as new cybersecurity 
technologies are developed and implemented, a definition that 
incorporates specific technology solutions for cyberattacks could 
become obsolete. We believe that the final definition of 
``cybersecurity'' at Sec.  411.351 provides sufficient flexibility 
while also permitting parties a clear understanding of the technology 
to which the exception is applicable. Although the cybersecurity 
exception does not require compliance with the NIST CSF, we encourage 
potential donors and recipients to ensure a comprehensive, systematic 
approach to identifying, assessing, and managing cybersecurity risks.
    We decline to add the terms ``identifying'' and ``recovering'' to 
the definition of ``cybersecurity,'' as suggested by the commenter, and 
we noted that these terms also appear in the NIST CSF. The NIST CSF 
organizes basic ``cybersecurity activities'' into five functions: 
Identify, protect, detect, respond, and recover. The exception at final 
Sec.  411.357(bb) applies to donations of cybersecurity technology and 
services that are necessary and used predominantly for one or more of 
these five functions and the related subfunctions and cybersecurity 
outcomes that are part of the NIST CSF. We are not persuaded to adopt a 
more specific definition of cybersecurity by incorporating additional 
terminology from the NIST CSF and are finalizing the definition of 
``cybersecurity'' at Sec.  411.351 as proposed. With respect to 
recovering from cyberattacks in particular, we stress that, although 
the cybersecurity exception applies to donations of nonmonetary 
remuneration consisting of technology and services that are necessary 
and used predominantly for reestablishing cybersecurity, 
``reestablishing'' cybersecurity does not include payment by an entity 
of any ransom on behalf of a physician recipient in response to a 
cyberattack (or to reimburse a physician for a ransom paid by the 
physician). Moreover, the payment or reimbursement of a ransom would 
not be nonmonetary remuneration.
    We also decline to modify the definition of ``cybersecurity'' to 
expressly include the three pillars of information security, as 
requested by the last commenter. We agree that the concepts described 
by the commenter as the ``three pillars'' of confidentiality, 
integrity, and availability of information are fundamental aspects of 
cybersecurity. The NIST CSF similarly recognizes these concepts; an 
outcome category under the ``protect'' function of cybersecurity 
includes management of data ``consistent with the organization's risk 
strategy to protect the confidentiality, integrity, and availability of 
information.'' Therefore, the final definition of ``cybersecurity'' at 
Sec.  411.351, which includes ``the process of protecting 
information,'' accounts for these principles while also providing 
flexibility and certainty to donors as to the scope of the 
cybersecurity exception.
    Comment: One commenter stated that the proposed definition of 
``cybersecurity'' seems oversimplified and not comprehensive. The 
commenter suggested that the definition of ``cybersecurity'' should be 
inclusive of any unauthorized use, even without deliberate criminal 
activity or a specific cyberattack, and recommended broadening the 
definition accordingly. A different commenter maintained that the 
proposed definition of ``cybersecurity'' fails to capture all aspects 
of security controls relevant to patient information, systems 
processing, or retention of patient information. The commenter 
recommended that we define ``cybersecurity'' to mean: (1) The 
prevention of damage to, protection of, and restoration of computers, 
electronic communications systems, electronic communications services, 
wire communication, and electronic communication, including information 
contained therein, to ensure its availability, integrity, 
authentication, confidentiality, and nonrepudiation; (2) the prevention 
of damage to, unauthorized use of, exploitation of, and--if needed--the 
restoration of electronic information and communications systems, and 
the information they contain, in order to strengthen the 
confidentiality, integrity and availability of these systems; or (3) 
the process of protecting information by preventing, detecting, and 
responding to attacks.
    Response: We decline to modify the definition of ``cybersecurity'' 
as suggested by the first commenter. We disagree with the commenter's 
characterization of the definition, and do not believe that the final 
definition of ``cybersecurity'' at Sec.  411.351 has the effect of 
limiting donations of cybersecurity technology and services to only 
those that prevent criminal misconduct. The definition of 
``cybersecurity'' adopted in this final rule is unrelated to the 
intent--criminal or otherwise--of an ``unauthorized user.'' We believe 
that the definition adopted in this final rule is broad enough to 
address the commenter's concerns about unauthorized users.
    We are also not adopting the definition suggested by the second 
commenter. The principles underlying the commenter's definition, which 
the commenter stated are derived from NIST and other Federal government 
sources, are already generally included in the definition of 
``cybersecurity.'' Moreover, we are concerned that some of the language 
suggested by the commenter would greatly expand the scope of the 
cybersecurity exception and the donation of such technology and 
services could pose a risk of program or patient abuse. For example, 
``restoration of computers, electronic communications systems, 
electronic communications services, wire communication, and electronic 
communication,'' could be lead parties to mistakenly believe that the 
cybersecurity exception applies to donations of technology and services 
that are not necessary and used predominantly to implement, maintain, 
or reestablish cybersecurity, such as donations of entire communication 
systems.
    Comment: Most commenters that commented on the proposed definition 
of ``technology'' generally agreed with using the NIST CSF as a basis 
for the definition. However, many of these commenters requested that we 
permit donations of certain cybersecurity hardware under the exception 
and delete the phrase ``other than hardware'' in the proposed 
definition of ``technology.'' In support, some commenters asserted that 
the lines between hardware, software, services, and other technology 
that is neither hardware, software, nor a service, are increasingly 
blurred, and noted that such technologies are often packaged together 
as a bundle. Other commenters suggested that hardware donations are a 
foundational requirement to operationalize cybersecurity best 
practices. These commenters asserted that including hardware within the

[[Page 77639]]

definition of ``technology'' would allow for more aggressive data 
security and excluding hardware from the definition is shortsighted and 
could limit the use of effective cybersecurity measures. A few 
commenters highlighted that certain cybersecurity software requires 
specific hardware and requested that we expand the scope of the 
exception to cover donations of such hardware. For example, a commenter 
noted that firewalls involve the use of both hardware and software, and 
suggested that many clinicians would not have the technical knowledge 
to configure the firewalls. This commenter recommended that we permit 
the donation of low-cost hardware, potentially up to a dollar threshold 
that could not be exceeded for the total donation.
    Other commenters that supported permitting the donation of hardware 
under the cybersecurity exception asserted that failing to extend the 
application of the exception to donations of multifunctional 
cybersecurity hardware (or software) would limit the utility of the 
exception because cybersecurity technology often is not standalone in 
nature. Some of these commenters provided examples of multifunctional 
hardware they deemed beneficial to cybersecurity hygiene, such as 
encrypted servers, encrypted drives, network appliances, locks on 
server closet doors, upgraded wiring, physical security systems, fire 
retardant or warning technology, and high security doors. Some of these 
commenters stated that any program integrity concerns with hardware 
donations are adequately addressed by the requirement that donated 
technology and services must be necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity. In contrast, a few 
commenters generally supported our proposal to exclude hardware from 
the definition of technology, citing program integrity concerns.
    Response: We are modifying the definition of ``technology'' to 
remove the phrase ``other than hardware.'' Thus, the cybersecurity 
exception at final Sec.  411.357(bb) is applicable to hardware that is 
necessary and used predominantly to implement, maintain, or reestablish 
cybersecurity. We agree with the commenters that our program integrity 
concerns regarding donations of valuable multifunctional hardware are 
adequately addressed by making the exception available only to donated 
technology and services are necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity, and we do not 
believe that a monetary cap is necessary. As explained in section 
II.E.2.a. above, donated technology, including hardware, may include 
other functionality or uses besides cybersecurity. However, the 
cybersecurity use must predominate and the core functionality of the 
hardware must be implementing, maintaining, or reestablishing 
cybersecurity. The hardware must also be necessary for cybersecurity.
    Certain of the examples offered by commenters, including locks on 
doors, upgraded wiring, physical security systems, fire retardant or 
warning technology, and high security doors do not qualify as 
``technology'' under Sec.  411.357(bb)(2) because they are physical 
infrastructure improvements, not software or other information 
technology. Therefore, the cybersecurity exception is not applicable to 
these items. The cybersecurity exception is applicable to hardware such 
as encrypted servers, encrypted drives, and network appliances, but 
only if the hardware is necessary and used predominantly to implement, 
maintain, or reestablish cybersecurity. If, for example, an encrypted 
server is used predominantly to host the computer infrastructure of a 
recipient, it would not satisfy the necessary and used predominantly 
requirement of Sec.  411.357(bb)(1), even if the encrypted server has 
ancillary cybersecurity uses and functionality.
    Comment: A number of commenters suggested that CMS expand the 
proposed cybersecurity exception to apply to single-function hardware 
technologies that have limited or no functionality outside of 
cybersecurity, such as computer privacy screens, two-factor 
authentication dongles and security tokens, facial recognition cameras 
for secure access, biometric authentication, secure identification card 
and device readers, intrusion detection systems, data backup systems, 
and data recovery systems. One commenter asserted that the sole purpose 
of most cybersecurity hardware is to maintain the security of patient 
data.
    Response: The final definition of ``technology'' does not preclude 
hardware and should address the commenters' concerns. We agree that 
certain hardware is limited to cybersecurity uses. Provided that all 
the requirements of the exception are satisfied, including the 
requirement that the donated hardware is necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity, the 
exception at Sec.  411.357(bb) will permit the donation of single-use 
or standalone cybersecurity hardware, including the types described by 
the commenters.
    Comment: We received several comments on our alternative proposal 
to permit more robust donations of cybersecurity hardware, provided 
that both the donor and the recipient obtain risk assessments which 
provide a reasonable basis to determine that the donated cybersecurity 
hardware is necessary. A number of commenters generally favored the 
proposal. Some of these commenters asserted that, because the donation 
is based on the results or recommendations of a risk assessment, there 
should be no cap or limit on the type or amount of hardware that may be 
donated and no requirement that a recipient contribute to the cost of 
donated hardware. Other commenters favored allowing robust donations of 
cybersecurity hardware, but opposed the requirement in the alternative 
proposal that both the donor and the recipient first obtain a risk 
assessment supporting the donation. One commenter stated that the 
alternative proposal could pose a risk of program abuse, while a 
different commenter found the alternative proposal to be too limiting, 
and suggested that hardware donations be permitted if the hardware is 
necessary and used predominantly to implement, maintain, or reestablish 
cybersecurity.
    Response: We are not adopting a policy that permits the donation of 
cybersecurity hardware only when the donor has a cybersecurity risk 
assessment that identifies the recipient as a risk to its 
cybersecurity, and the recipient has a cybersecurity risk assessment 
that provides a reasonable basis to determine that the donated 
cybersecurity hardware is needed to address a risk or threat identified 
by a risk assessment. We believe that our expansion of the definition 
of ``technology'' to include hardware, coupled with the requirement 
that any donated hardware is necessary and used predominantly to 
implement, maintain, or reestablish cybersecurity, provides sufficient 
flexibility for cybersecurity hardware donations while protecting 
against program or patient abuse. Although we are not finalizing this 
alternative proposal, parties remain free, and are encouraged, to 
perform risk assessments to determine donor and recipient vulnerability 
to cyberattacks and to assist in creating their own cybersecurity 
programs.
    Comment: One commenter explained that, typically, entities do not 
purchase the actual software that provides cybersecurity. Rather, 
entities purchase the right to use the software, which is accomplished 
through licensing, and

[[Page 77640]]

donate a license to use the software to recipients. In these 
circumstances, the software itself is not donated. The commenter also 
recommended that we include installment and repairs among the types of 
technology and services that may be donated under the exception.
    Response: We recognize that, in some instances, entities purchase 
the right to use cybersecurity software, which is accomplished through 
licensing, and donate that use or license rather than the software 
itself. The donation of a license to use cybersecurity software may be 
permissible under the final exception at Sec.  411.357(bb) in the same 
way that donating software would be permissible, if all the 
requirements of the exception are satisfied. We agree with the 
commenter that installment and repairs should be included among the 
technology and services to which the cybersecurity exception is 
applicable, and the final cybersecurity exception is applicable to such 
services.
c. Requirement for Donors (Sec.  411.357(bb)(1)(i)) \29\
---------------------------------------------------------------------------

    \29\ In the proposed rule, the requirement that 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 was 
designated as Sec.  411.357(bb)(1)(ii). However, this requirement is 
designated as Sec.  411.357(bb)(1)(i) in this final rule.
---------------------------------------------------------------------------

    In the proposed rule, we proposed a requirement that 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 (84 FR 
55833). It is our understanding that the purpose of donating 
cybersecurity technology and related services is to guard against 
threats that come from interconnected systems, and we 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 requirement would 
prohibit the donor from directly taking into account the volume or 
value of a physician's referrals or the other business generated by the 
physician when determining: (1) Whether to make a donation of 
cybersecurity technology or services; or (2) how much or the nature of 
the donated technology or services. We are including this requirement 
as proposed; however, it is designated in the final regulation at Sec.  
411.357(bb)(1)(i).
    Nothing in the requirements of the final cybersecurity exception is 
intended to require a donor to donate cybersecurity technology and 
related services to every physician that connects to its system. Donors 
are permitted to select recipients in a variety of ways, provided that 
neither a physician'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 the donor is a hospital, it might choose to limit 
donations to physicians 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.
    As discussed in the proposed rule, in contrast to the similar 
requirement in the EHR exception at Sec.  411.357(w)(6), the 
cybersecurity exception 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 (84 FR 55833). We solicited 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), and any 
other requirements or permitted conduct that we should enumerate in the 
cybersecurity exception (84 FR 55833). As explained below, we are not 
adopting deeming provisions for determining compliance with final Sec.  
411.357(bb)(1)(i).
    We did not propose to restrict the types of entities that may make 
cybersecurity donations under the cybersecurity exception (84 FR 
55833). Although receiving donated cybersecurity technology and related 
services would relieve a physician of a cost that he or she otherwise 
would incur, the program integrity risks associated with arrangements 
for the donation of technology and related services intended to promote 
cybersecurity are different than those associated with arrangements for 
the donation of other valuable technology, such as EHR items and 
services. However, we solicited comments on whether we should narrow 
the scope of entities that may provide remuneration under the 
cybersecurity exception as we have done in other exceptions, such as 
the EHR exception. As explained in section II.E.2.e. below, we are not 
limiting the types of entities that are permitted to make donations 
under final Sec.  411.357(bb).
    Based on the comments, we are finalizing the requirement that 
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, although it 
is designated in the final exception at Sec.  411.357(bb)(1)(i). Final 
Sec.  411.357(bb)(1)(i) is identical to proposed Sec.  
411.357(bb)(1)(ii). As noted above and explained more fully below in 
response to comments, we are not adopting deeming provisions that would 
allow parties to demonstrate compliance with final Sec.  
411.357(bb)(1)(i), and we are not restricting the types of entities 
that may make donations under the final cybersecurity exception at 
Sec.  411.357(bb).
    We received the following comment and our response follows.
    Comment: Commenters generally supported the requirement at final 
Sec.  411.357(bb)(1)(i) that neither the eligibility of a physician for 
cybersecurity 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. However, a number of these commenters 
opposed our proposal to establish a deeming provision, similar to the 
deeming provision in the EHR exception at Sec.  411.357(w)(6), under 
which certain selection criteria would be deemed to satisfy the 
requirement at final Sec.  411.357(bb)(1)(i). One commenter maintained 
that it would create a risk of program or patient abuse to permit a 
donor to choose recipients who will receive donations of cybersecurity 
through a deeming provision. In contrast, other commenters supported 
the establishment of a deeming provision to provide clarity and 
guidance with respect to how parties may determine the eligibility of a 
physician recipient for cybersecurity technology or services, or the 
nature and

[[Page 77641]]

amount of such services, without violating the physician self-referral 
law.
    Response: We are finalizing the requirement that 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, but are not 
including a list of selection criteria that, if utilized, would be 
deemed not to directly take into account the volume or value of 
referrals or other business generated between the parties. As we 
explained in the proposed rule, deeming provisions for selection 
criteria that pertain to a prohibition on taking into account the 
volume or value of referrals or other business generated between 
parties are sometimes interpreted as prescriptive requirements, 
especially in the context of a new exception that applies to emerging 
and rapidly evolving arrangements such as the cybersecurity exception 
(84 FR 55833). In this context, we are concerned that a deeming 
provision may cause the parties to an arrangement to forgo legitimate 
and acceptable selection criteria, thus limiting the scope and utility 
of the cybersecurity exception. Because we do not want to inhibit 
appropriate cybersecurity donations that are made using selection 
criteria that are not expressly deemed to be permissible under the 
cybersecurity exception, we are not finalizing any deeming provisions 
pertaining to the requirement at final Sec.  411.357(bb)(1)(i).
d. Requirement for Recipients (Sec.  411.357(bb)(1)(ii)) \30\
---------------------------------------------------------------------------

    \30\ In the proposed rule, the requirement that neither the 
physician, nor the physician's practice (including employees or 
staff members), makes the receipt of cybersecurity technology or 
services, or the amount or nature of the technology or services, a 
condition of doing business with the donor was designated at Sec.  
411.357(bb)(1)(iii). However, this requirement is designated as 
Sec.  411.357(bb)(1)(ii) in this final rule.
---------------------------------------------------------------------------

    In the proposed rule, we proposed to include in the cybersecurity 
exception a requirement that neither the physician, nor the physician's 
practice (including employees or staff members), makes the receipt of 
cybersecurity technology or services, or the amount or nature of the 
technology or services, a condition of doing business with the donor 
(84 FR 55833). This requirement mirrors a requirement in the EHR 
exception at Sec.  411.357(w)(5). At final Sec.  411.357(bb)(1)(ii), we 
are finalizing the requirement as proposed.
    We did not propose and, thus, are not including in the final 
cybersecurity exception a requirement that the physician recipient of 
cybersecurity technology or services must contribute to the cost of the 
technology or services. As explained earlier in this section II.E.2., 
with this 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 proposed to include only those requirements under the 
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 solo practitioners or physician 
practices in rural areas, to make the required contribution, which, in 
turn, risks the overall cybersecurity of the health care 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 ecosystem 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 final cybersecurity exception does not 
require a recipient to contribute to the cost of donated cybersecurity 
technology or related services, donors are free to structure donation 
arrangements under Sec.  411.357(bb) to require that recipients 
contribute to the cost of cybersecurity technology and related 
services. However, 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 donation could violate the requirement at Sec.  
411.357(bb)(1)(i).
    Based on the comments, we are finalizing the requirement that 
neither the physician, nor the physician's practice (including 
employees or staff members), makes the receipt of cybersecurity 
technology or services, or the amount or nature of the technology or 
services, a condition of doing business with the donor as proposed.
    We received the following comments and our responses follow.
    Comment: Several commenters supported the proposed requirement that 
neither the physician who receives the cybersecurity technology 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. 
One of these commenters requested that CMS align its provision on 
conditioning business on the receipt of cybersecurity technology or 
services with OIG's safe harbor condition at proposed 42 CFR 
1001.952(jj)(3), while another commenter requested that the requirement 
in the cybersecurity exception mirror the similar requirement in the 
EHR exception at Sec.  411.357(w)(5).
    Response: As proposed and finalized, the prohibition on making the 
receipt of cybersecurity technology or services a condition of doing 
business with the donor at final Sec.  411.357(bb)(1)(ii) is 
substantively identical to the OIG's safe harbor condition at proposed 
42 CFR 1001.952(jj)(3) and the similar requirement in the EHR exception 
at Sec.  411.357(w)(5). Variation in the wording of the regulations 
reflect differences in the underlying statutes, with respect to the 
anti-kickback safe harbor, and differences in the application of the 
EHR and cybersecurity exceptions, with respect to the similar provision 
in the EHR exception at Sec.  411.357(w)(5).
    Comment: Many commenters agreed that we should not require a 
recipient of cybersecurity technology and services to contribute to the 
overall cost of the technology and services. Commenters variously 
asserted that a contribution requirement in the context of 
cybersecurity may act as a barrier to donations of technology and 
services because calculations of the cost of technology and services 
may be imprecise, it may be administratively burdensome to calculate or 
track contributions, and contributing to the cost of cybersecurity 
technology and

[[Page 77642]]

services may be impossible for some physician recipients. In contrast, 
several commenters supported a contribution requirement, although one 
of these commenters suggested that a contribution requirement less than 
what is required under the EHR exception would be appropriate because, 
according to the commenter, a 15 percent contribution toward 
cybersecurity technology and services may be too high for some 
physicians. A few commenters that supported a contribution requirement 
suggested that small and rural providers, those in medically 
underserved areas, and federally qualified health centers should be 
exempt from any such requirement. A few other commenters suggested that 
entities should have the choice whether to require a contribution from 
recipients, with one of these commenters supporting a prohibition on 
determining the amount of the contribution from the physician recipient 
in any manner that takes into account the volume or value of the 
physician's referrals or the other business generated by the physician.
    Response: We did not propose and, thus, are not including a 
contribution requirement in the final cybersecurity exception at Sec.  
411.357(bb). For the reasons stated in the proposed rule (84 FR 55833 
through 55834), as well as those identified by commenters, we do not 
believe that it is necessary or advisable to require the physician 
recipient of cybersecurity technology or services to contribute to the 
cost of the technology or services. The exception, as finalized, 
includes sufficient safeguards against program or patient abuse, and it 
is not necessary to include a contribution requirement that might 
undermine our goal of facilitating improvement and maintenance of the 
cybersecurity of the health care ecosystem. As we stated in the 
proposed rule (84 FR 55834), donors are free to require recipients to 
contribute to the costs of donated cybersecurity technology and 
services; however, we caution that the determination of the amount of 
the required contribution may not take into account the volume or value 
of the physician recipient's referrals or other business generated 
between the parties.
e. Written Documentation (Sec.  411.357(bb)(1)(iii)) \31\
---------------------------------------------------------------------------

    \31\ In the proposed rule, the requirement that the arrangement 
is documented in writing was designated at Sec.  411.357(bb)(1)(iv). 
However, this requirement is designated as Sec.  411.357(bb)(1)(iii) 
in this final rule.
---------------------------------------------------------------------------

    We proposed to require that the arrangement for the provision of 
cybersecurity technology and related services is documented in writing 
(84 FR 55834). We stated that, 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 the written 
documentation evidencing the arrangement identifies the recipient of 
the donation and includes 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, the recipient's financial 
responsibility for some (or all) of the cost of the cybersecurity 
technology and related services that are provided by the donor (84 FR 
55834). We did not propose and, thus, we are not including a 
requirement in the final cybersecurity exception at Sec.  411.357(bb) 
that the parties sign the documentation that evidences the arrangement 
or that the parties document their arrangement in a formal 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 physician recipients. In the proposed rule (84 FR 55834), 
we solicited comments on whether we should specify in regulation which 
terms are required to be in writing. We also sought comment regarding 
whether we should include a signature requirement in the cybersecurity 
exception.
    Based on the comments, we are finalizing the writing requirement as 
proposed. It is designated at final Sec.  411.357(bb)(1)(iii). We are 
not including regulatory text that specifies which terms of the 
arrangement must be in writing. Rather, we believe that the appropriate 
standard, as described in the CY 2016 PFS, is that the writing 
requirement of the exception is satisfied if contemporaneous documents 
would permit a reasonable person to verify compliance with the 
exception at the time that a referral is made (80 FR 71315).
    We received the following comments and our responses follow.
    Comment: Most commenters supported a writing requirement that 
provides parties with flexibility in compiling the documentation 
necessary to satisfy the requirement. However, a few commenters 
supported the inclusion of a requirement to document the arrangement in 
a formal written agreement, noting that this would provide transparency 
with respect to the cybersecurity donation process, especially in the 
case of hardware donations. Another commenter opined that requiring a 
formal written agreement between the donor and the recipient would be a 
reasonable safeguard, as long as the requirements for the written 
agreement are limited in scope. The commenter asked CMS to require 
documentation only of the technology or services to be donated, 
commercial terms as necessary to satisfy the requirements of the 
cybersecurity exception, and warranties by both parties to use the 
technology in compliance with applicable laws and regulations. The 
commenter also suggested that, if CMS requires a formal written 
agreement between the parties, to facilitate compliance, CMS should 
make available on the CMS website a template agreement with standard 
terms. In contrast, one commenter requested that CMS not impose 
``burdensome'' writing requirements on the parties. The commenter 
asserted that, although donors have a vested interest in more robust 
documentation, for example, requiring recipients to acknowledge 
applicable security rules, CMS should not mandate the documentation of 
specific information in order for parties to avail themselves of the 
cybersecurity exception.
    Response: We believe that the writing requirement at final Sec.  
411.357(bb)(1)(iii) is reasonable in scope, and provides for adequate 
transparency to protect against program or patient abuse without 
imposing undue burden. In the proposed rule (84 FR 55834), we stated 
that written documentation of the arrangement should include 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, the 
recipient's financial responsibility for some (or all) of the cost of 
the cybersecurity technology and related services that are provided by 
the donor (84 FR 55834). We are not persuaded to specify which terms of 
a cybersecurity donation arrangement must be in writing, and we decline 
to provide a template cybersecurity donation agreement or standard 
cybersecurity donation terms, as suggested by the commenter. We remind

[[Page 77643]]

stakeholders that the relevant inquiry for determining compliance with 
the writing requirement at final Sec.  411.357(bb)(iii) is whether 
contemporaneous documents pertaining to the arrangement would permit a 
reasonable person to verify compliance with the cybersecurity exception 
at the time that a referral is made (80 FR 71315). We believe that 
providing parties with the flexibility to document their arrangements 
in any manner that meets this standard is preferable to detailed 
mandates that could result in noncompliance with the physician self-
referral law due to even a slight departure from the documentation 
requirement. Of course, parties are free to include additional terms in 
a written agreement related to a cybersecurity donation beyond those 
required under the exception at Sec.  411.357(bb).
    Comment: One commenter requested that CMS address the differences 
between the documentation and signature requirements in the 
cybersecurity exception and OIG's cybersecurity safe harbor. The 
commenter highlighted that the writing requirement in the exception 
requires that the arrangement is documented in writing but does not 
require a formal written agreement that is signed by the parties, 
whereas the corresponding requirement in the OIG's proposed 
cybersecurity safe harbor requires that the arrangement is set forth in 
a written agreement that is signed by the parties and describes the 
technology and services being provided and the amount of the 
recipient's contribution, if any (84 FR 55765). Another commenter 
suggested that a signed agreement should be a necessary requirement of 
the exception, as it would ensure that both the donor and recipient 
understand what is being donated and the terms of the donation. A 
different commenter asserted that it is rare that the need for 
cybersecurity is so pressing that there is not time for parties to 
prepare and sign an agreement, and supported the inclusion of a 
signature requirement in the cybersecurity exception.
    Response: We are not persuaded to add a requirement that the 
arrangement is set forth in a single written agreement that is signed 
by the parties. Although it is a best practice to reduce the key terms 
of an arrangement to a writing that is signed by the parties, we are 
concerned that a signature requirement, in particular, could delay an 
entity's ability to provide necessary and beneficial cybersecurity 
technology and services to a physician. The physician self-referral law 
is a strict liability statute, which requires all the requirements of 
an exception to be satisfied at the time a referral is made. The 
failure to fully satisfy even a single requirement of an exception 
triggers the physician self-referral law's referral and billing 
prohibitions where a financial relationship exists between a physician 
and an entity that furnishes designated health services. We are 
concerned that a detailed writing requirement or a signature 
requirement may result in inadvertent violations. We believe that our 
current standard for written documentation, which requires 
contemporaneous documents that would permit a reasonable person to 
verify compliance with the exception at the time a referral is made, 
provides sufficient transparency and facilitates compliance (80 FR 
71315). For the same reasons, we are not persuaded to include a 
signature requirement in the cybersecurity exception.
e. Miscellaneous Comments
    In addition to the comments discussed above, we received several 
comments unrelated to our specific proposals and our responses follow.
    Comment: One commenter generally supported the proposed 
cybersecurity exception, but suggested that CMS adopt the same 
prohibition on cost-shifting that was proposed in the cybersecurity 
safe harbor. The commenter stated that, although a hospital's own 
cybersecurity costs could be an administrative expense on its cost 
report, hospitals should not be permitted to include donations of 
cybersecurity technology or services to physicians as an administrative 
expense on the hospital's cost report.
    Response: We do not believe that a prohibition on cost-shifting is 
necessary in the cybersecurity exception. As explained above, we 
believe that cybersecurity donations are often self-protective in 
nature, and thus do not pose the same level of risk as donations of EHR 
items and services. There is no prohibition on cost-shifting in the EHR 
exception, and we do not believe that such a prohibition is necessary 
in the cybersecurity exception. We note also that Medicare payment 
rules and regulations that apply to claims for reimbursement address 
inappropriate cost-shifting by hospitals through other mechanisms. We 
believe that, as with the EHR exception, the requirements of the 
cybersecurity exception, coupled with other Medicare rules and 
regulations pertaining to cost reports, are sufficient to protect 
against abusive donations of cybersecurity technology and related 
services.
    Comment: One commenter worried that cybersecurity donations could 
be used as a gift or financial incentive and maintained that 
cybersecurity donations should be based on risk assessments of the 
donor's own software, systems, or networks. In addition, the commenter 
suggested that cybersecurity donations should be made available to all 
recipients with similar risk assessments and without regard to business 
relationships or affiliations. For example, the commenter stated that a 
donation would be appropriate if the level of connectivity between the 
donor and recipient created a vulnerability that could be targeted and 
exploited by malicious actors.
    Response: Although donors are permitted under the cybersecurity 
exception to 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, we decline to require donors to base cybersecurity 
donations on a risk assessment of either the donor or the recipient. We 
believe that this requirement would be impractical, and it may lead 
potential donors to not make otherwise beneficial cybersecurity 
donations. We also believe it is impracticable that donors would make 
donations available to all similar recipients with similar risk 
assessments, independent of the specific cybersecurity needs inherent 
in connecting to the specific systems with which the donor interacts.
    Comment: Several organizations representing individuals and 
entities in the laboratory industry recommended excluding laboratories 
from utilizing the cybersecurity exception to provide cybersecurity 
technology and services to physicians. One commenter opined that the 
concerns CMS discussed in the 2013 EHR final rule regarding the 
provision of EHR items and services by laboratory companies similarly 
apply to cybersecurity donations by these entities. According to 
another commenter, during the period when laboratories were permitted 
to donate EHR items and services under the exception at Sec.  
411.357(w), physicians implicitly or explicitly conditioned referrals 
on EHR donations, and EHR vendors encouraged physicians to request 
costlier EHR software and services from laboratories, putting 
laboratories in an untenable position. This commenter expressed concern 
that the same could happen with cybersecurity donations if laboratories 
are permitted to make donations under the cybersecurity exception, if 
finalized as proposed. The commenters stated that the proposed 
requirements of the exception, including both the

[[Page 77644]]

requirements at Sec.  411.357(bb)(1)(i) and Sec.  411.357(bb)(1)(ii), 
would not be sufficient to curb the risk of program or patient abuse.
    Response: Although we acknowledge the unique perspective and 
concerns of the commenters representing the laboratory industry, 
particularly in light of the laboratory industry's experience with the 
EHR exception, the final cybersecurity exception does not exclude any 
type of entity from utilizing the exception. All individuals and 
entities, including laboratories, play a role in protecting the health 
care ecosystem from cybersecurity threats. As described in section 
II.E.2.d., we are finalizing a requirement at Sec.  411.357(bb)(1)(ii) 
that prohibits a physician (and the physician's practice, including 
employees and staff members) from making the receipt of technology or 
services, or the amount or nature of the technology or services, a 
condition of doing business with the donor. This requirement is similar 
to the requirement in the EHR exception at Sec.  411.357(w)(5) and 
operates in the same manner. We believe that the requirements of the 
final cybersecurity exception are sufficient to ensure against program 
or patient abuse. Therefore, we are not categorically excluding 
laboratory companies from the cybersecurity exception.
    Comment: Several commenters requested that CMS permit cybersecurity 
donations to physicians from organizations that do not furnish 
designated health services, such as clinical data registries, 
manufacturers of medical products, and medical technology companies. 
The commenters stated that medical technology companies play a central 
role in the delivery of health care, and that such entities should be 
permitted to make donations that directly relate to the safe and 
effective use of the registry or the product the entity manufactures. 
Another commenter requested confirmation that donations made to 
physicians by organizations that do not furnish designated health 
services, such as technology firms, do not implicate the physician 
self-referral law, and that donations made by entities that do furnish 
designated health services to individuals other than physicians (or 
immediate family members of physicians) similarly do not implicate the 
physician self-referral law.
    Response: The physician self-referral law's referral and billing 
prohibitions apply when there is a financial relationship between a 
physician (or an immediate family member of a physician) and an entity 
that furnishes designated health services. Financial relationships 
include direct compensation arrangements between an entity that 
furnishes designated health services and a physician (or an immediate 
family member of a physician), as well as indirect compensation 
arrangements between such parties. Indirect compensation arrangements 
exist where, among other things, between an entity furnishing 
designated health services and a physician (or an immediate family 
member of a physician) there is an unbroken chain of any number (but 
not fewer than one) of persons or entities that have financial 
relationships between them. An organization that does not furnish 
designated services, such as a technology firm, or an individual who is 
not a physician may be a ``link'' in such an unbroken chain of 
financial relationships. If all the conditions of Sec.  411.354(c)(2), 
as revised in this final rule, exist, there would be an indirect 
compensation arrangement that implicates the physician self-referral 
law. If an organization that does not furnish designated health 
services donates cybersecurity technology or services to a physician 
(or an immediate family member of a physician), but the donation does 
not result in an indirect compensation arrangement between that 
physician (or immediate family member) and an entity that does furnish 
designated health services, the donation does not implicate the 
physician self-referral law. However, the provision of such 
remuneration may implicate the anti-kickback statute. Similarly, 
donations by an entity that furnishes designated health services 
directly to a person or organization that is not a physician (or the 
immediate family member of a physician), such as a nonprofit 
organization or free or charitable clinic, would not create a direct 
compensation arrangement that implicates the physician self-referral 
law. However, if the recipient of the cybersecurity technology or 
services has a financial relationship with a physician, there would 
exist an unbroken chain of financial relationships that must be 
analyzed to determine whether there exists an indirect compensation 
arrangement that implicates the physician self-referral law.

F. Nonsubstantive Changes and Out-of-Scope Comments

1. Nonsubstantive Changes
    We are making some nonsubstantive revisions to our regulation text 
for consistency with longstanding stated policy and to ensure 
conformity between the text of similar regulations (for example, 
changing ``can'' to ``may'' at Sec.  411.357(d)(1)(ii) for conformity 
between the exceptions for personal service arrangements and limited 
remuneration to a physician). We are also updating language to reflect 
the agency's current lexicon (for example, changing ``through'' to 
``under'' in paragraph (2) of the definition of ``designated health 
services'' at Sec.  411.351). Finally, we made revisions to improve the 
grammar and clarity of certain regulations (for example, changing ``not 
including any designated health services'' to ``does not include any 
designated health services'' in the exception for assistance to 
compensate a nonphysician practitioner at Sec.  411.357(x)(4)(ii)).
    From time to time, changes in the conventions for regulations 
published in the Code of Federal Regulations necessitate nonsubstantive 
revisions of existing regulations. In this final rule, we are providing 
the entire text of Sec. Sec.  411.351 through 411.357 to aid the 
regulated industry with compliance efforts. Because of this, we are 
taking the opportunity to update or include new citations to chapters, 
section, and paragraphs that are referenced in certain of our 
regulations in these sections. For example, we included precise 
paragraph references in Sec.  411.357(t). In addition, we are including 
headers for certain paragraphs within our regulations, for example, 
Sec.  411.354(d)(1) through (6).
2. Out-of-Scope Comments
    We received several comments that are outside the scope of this 
rulemaking, for example, comments requesting revisions to the exception 
for in-office ancillary services, suggesting policy changes related to 
physician-owned hospitals, and making recommendations for statutory 
changes to section 1877 of the Act. In addition, some of the commenters 
described their interpretations of various physician self-referral 
issues or asked questions about existing regulations that are not 
included in this rulemaking.
    We appreciate these commenters taking the time to present these 
issues; however, these comments are beyond the scope of this rulemaking 
and are not addressed in this final rule. The out-of-scope issues 
raised by these commenters may be addressed in future rulemaking. We 
express no view on these issues, and our silence should not be viewed 
as an affirmation of any commenter's interpretations or views.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-

[[Page 77645]]

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, 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3506(c)(2)(A)) requires 
that we solicited comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We solicited 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 finalizing 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 is 
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 definition of ``value-based enterprise'' at 
Sec.  411.351). The exception for value-based arrangements with 
meaningful downside financial risk to the physician at Sec.  
411.357(aa)(2) requires a description of the nature and extent of the 
physician's downside financial risk to be set forth in writing. The 
exception for value-based arrangements at Sec.  411.357(aa)(3) requires 
the arrangement to be set forth in writing and signed by the parties. 
All exceptions at Sec.  411.357(aa) 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 also 
added a new exception for cybersecurity technology and related services 
(Sec.  411.357(bb)), and arrangements under this new exception have to 
be documented in writing. Finally, we have streamlined the parties that 
must sign the writing in the exception for physician recruitment (Sec.  
411.357(e)). The burden associated with writing and signature 
requirements is the time and effort necessary to prepare written 
documents and obtain signatures of the parties. The burden associated 
with record retention requirements is the time and effort necessary to 
compile and store the records.
    While the writing, signature, and record retention requirements are 
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.
    We did not receive any public comments regarding our position that 
the burden associated with these requirements is a usual and customary 
business practice that is exempt from the PRA.

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

A. Statement of Need

    This final 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 global health system efficiencies, and lower costs (or slow 
their rate of growth). This final rule addresses this issue by 
establishing three new exceptions that protect certain arrangements for 
value-based activities between physicians and entities that furnish 
designated health services in a value-based enterprise. These 
exceptions provide enhanced flexibility for physicians and entities to 
innovate and work together while continuing to protect the integrity of 
the Medicare program.
    Commenters on the CMS RFI told us that they currently invest 
sizeable resources to comply with the physician self-referral law's 
referral and billing prohibitions and avoid substantial penalties 
related to noncompliance with this and related laws, including the 
Federal False Claims Act. Commenters on the proposed rule echoed the 
significant cost burden of complying with the physician self-referral 
law. The proposals finalized in this final rule that do not directly 
address value-based arrangements seek to balance program integrity 
concerns against the stated considerable burden faced by the regulated 
industry. These finalized provisions reassess our regulations to ensure 
that 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 guidance for 
physicians and health care providers and suppliers whose financial 
relationships are governed by the physician self-referral law. We 
believe that these reforms will significantly reduce compliance 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

1. Executive Orders and the Regulatory Flexibility Act
    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

[[Page 77646]]

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 an impact of at least three percent 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 certifies, that this final rule will not have a significant 
economic impact on a substantial number of small entities.
    We determined that this final rule does not have a significant 
impact on small businesses because it will likely reduce, not increase, 
regulatory burden. This final rule will not require existing compliant 
financial relationships to be restructured. Instead, it will provide 
important new flexibilities to enable parties to create new 
arrangements that advance the transition 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 will 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 from this rule. Overall, this final 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 final rule will 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 $156 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 final rule is a 
deregulatory action.
2. Expected Outcomes and Benefits
a. Value-Based Health Care Delivery and Payment
    A 2019 study of 70 participants--including 62 health plans, seven 
Medicaid FFS states, and Traditional Medicare--accounting for nearly 
226.5 million Americans, or 77 percent of the covered U.S. population, 
highlighted the continued move away from a FFS system that pays only on 
volume and towards value-based health care delivery and payment 
models.\32\ The study showed that, in calendar year 2018, 39.1 percent 
of health care dollars were traditional FFS or other legacy payments 
not linked to quality, 25.1 percent of health care dollars were FFS 
payment linked to quality and value (described as pay-for-performance 
or care coordination fees), 30.7 percent of health care dollars were a 
composite of shared savings, shared risk, and bundled payments in 
alternative payment models built on a FFS architecture, and 5.1 percent 
of health care dollars were population-based payments (that is, 
capitation, global budget, or percent of premium payments).\33\ 
Although the study showed that payors made the majority of 2018 
payments on a FFS basis (or in models built on a FFS architecture), the 
2018 payments represent a 4.6 percent decline in FFS payments not 
linked to quality from such payments in 2017 (from 41 percent in 2017 
to 39.1 percent in 2018), and a 34.2 percent increase in population-
based payments over such payments in 2017 (from 3.8 percent in 2017 to 
5.1 percent in 2018).\34\
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    \32\ APM Measurement: Progress of Alternative Payment Model; 
Health Care Payment Learning & Action Network, October 2019; see 
https://hcp-lan.org/apm-measurement-effort/ and http://hcp-lan.org/workproducts/apm-methodology-2019.pdf.
    \33\ Id.
    \34\ Id.
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    In sections I.B. and II.A.1. of this final rule, we described the 
current landscape of health care delivery and payment both within and 
outside the Medicare program. We explained that the application of the 
physician self-referral law to all financial relationships between 
entities and the physicians who refer to them (or the immediate family 
members of such physicians) has inhibited a more rapid advancement 
toward a health care system that pays for outcomes rather than 
procedures. Based on stakeholder responses to numerous CMS requests for 
information, including the CMS RFI that is part of the Department's 
Regulatory Sprint, we proposed regulatory revisions to address barriers 
to innovative care coordination and value-based health care delivery 
and payment (84 FR 55766). After considering the comments on the 
proposed rule, we are finalizing policies intended to facilitate the 
transition to value-based health care delivery and payment by 
permitting appropriate compensation arrangements

[[Page 77647]]

that further the goals of a value-based system without posing a risk of 
program or patient abuse. Specifically, as described in section II.A. 
of this final rule, we designed and are finalizing new exceptions for 
value-based arrangements at final Sec.  411.357(aa)--with safeguards 
intended to: (1) Protect against program or patient abuse that could 
lead to increased expenditures; and (2) maximize the potential of 
value-based care delivery and improved care coordination in reducing 
waste and program expenditures. The new exceptions are also applicable 
to those indirect compensation arrangements between an entity and a 
physician that involve a value-based arrangement to which the physician 
(or the physician organization in whose shoes the physician stands) is 
a direct party.
    Although existing exceptions utilized by parties to protect 
financial relationships that exist outside of value-based health care 
delivery and payment systems also include safeguards designed to 
protect against program or patient abuse, they do not promote the 
potential for improvements in quality and reductions in expenditures 
the way that that the new exceptions set forth in this final rule may. 
By making available the new exceptions for value-based arrangements 
established in this final rule, we expect to achieve significant 
progress in reducing program expenditures without sacrificing program 
integrity. However, we are unable to quantify with certainty the 
overall net costs, including net expenditures of the Medicare program, 
related to changes in industry behavior that we can reasonably expect 
following the effective date of this final rule. Even so, we believe 
that our final policies are reasonably likely to permit, if not 
encourage, behavior that will reduce waste in the U.S. health care 
system, including Medicare and other Federal health programs, and that 
these changes will result in lower costs for both patients and payors, 
and generate other benefits, such as improved quality of patient care 
and lower compliance costs for providers and suppliers.
(1) Expectation of Value-Based Arrangements
    As discussed in section II.A. of this final rule, compensation 
arrangements that qualify as value-based arrangements may take a 
variety of forms. Those that implicate the physician self-referral law 
will be directly or indirectly between an entity that furnishes 
designated health services and a physician who refers to that entity 
(or the immediate family member of a physician who refers to that 
entity). Although some compensation arrangements that qualify as value-
based arrangements may satisfy the requirements of a ``traditional'' 
exception to the physician self-referral law, most do not. These 
include arrangements that: (1) Involve the provision of free or reduced 
cost items and services; (2) tie compensation to the ordering or 
furnishing of designated health services; (3) tie compensation to the 
refraining from ordering, delaying the order of, or furnishing 
designated health services; or (4) involve the sharing of profits or 
losses such that compensation does not directly relate to the items or 
services actually provided by a physician. Based on our experience 
administering the Shared Savings Program and Innovation Center models, 
information provided by commenters on the CMS RFI and the proposed rule 
(including payors that supported the establishment of the exceptions at 
final Sec.  411.357(aa)), and information shared publicly by providers, 
suppliers, practitioners, health plans, and others, following the 
issuance of this final rule--and, specifically, once the exceptions at 
final Sec.  411.357(aa) for value-based arrangements are available--we 
reasonably expect parties to enter into arrangements such as the 
following:
    <bullet> Providing staff and other resources to physicians at below 
fair market value to help with patient education, pre-admission 
evaluations, and post-procedure follow-up and monitoring.
    <bullet> Shared savings and shared loss arrangements under which 
the entity and the physician share financial risk for achievement of 
the value-based purpose(s) of the value-based enterprise or the outcome 
measures against which the recipient of the remuneration is assessed.
    <bullet> Arrangements that enhance patient care by providing items 
at no cost to physicians. We note that an important piece of ensuring 
good outcomes and fewer complications is patient education. Hospitals 
are often better-positioned or willing to develop video or print 
materials to prepare surgical patients for what to expect pre- and 
post-surgery, but are not in direct contact with patients until the day 
of surgery. Under the new exceptions, hospitals could provide those 
materials at no charge to physicians for use in their practices, 
benefiting both hospitals and physicians, as well as surgical patients.
    <bullet> Providing free telehealth equipment to physicians for use 
while treating patients in their office locations. The technology could 
be utilized for consults with a donor hospital to avoid unnecessary 
ambulance transports, ER visits, and exposing the patient to greater 
risk when emergencies or complications occur in the physician office, 
or could be used by primary care physicians to obtain immediate input 
from specialists while a patient is present in the primary care 
physician's office.
    <bullet> Provision of data analytics services. A specialty 
physician practice (or other entity) may wish to provide free data 
analytic services to a primary care physician practice with which it 
works closely. The data analytics could, for example, identify practice 
patterns that deviate from evidence-based protocols or determine 
whether follow-up care recommended by the specialty physician practice 
is being sought by patients. In turn, the identification of deviant 
practice patterns and when follow up care is recommended could lead to 
better, more effective care for patients and reduced costs to Federal 
health care programs.
    We cannot, however, predict the form of all potential value-based 
arrangements or which entities and physicians will enter into value-
based arrangements and what form their specific arrangements will take. 
More specifically, based on comments submitted by stakeholders, our 
understanding of currently existing value-based arrangements and care 
coordination arrangements, and our assumption that there will be 
continued innovation, we expect significant heterogeneity in the 
arrangements for which the new exceptions at final Sec.  411.357(aa) 
will be utilized.
(2) Potential Outcomes and Benefits of Value-Based Arrangements
    As described above, we can reasonably predict that our final 
policies and the exceptions at final Sec.  411.357(aa) will result in 
changes in stakeholder behavior. Entities and physicians may increase 
their participation in beneficial nonabusive value-based arrangements, 
including care coordination arrangements, that implicate the physician 
self-referral law. In this regard, and with respect to the intended 
outcomes and benefits related to this final rule, we anticipate that 
the policies in this final rule may: (1) Remove barriers to robust 
participation in value-based health care delivery and payment systems, 
including those administered by CMS and non-Federal payors; (2) 
facilitate arrangements for patient care coordination among affiliated 
and unaffiliated health care providers, practitioners, and suppliers; 
(3) provide certainty for participants in the Shared Savings Program 
that wish to establish compensation arrangements outside of

[[Page 77648]]

the Shared Savings Program similar to those among providers and 
suppliers in Shared Savings Program ACOs; and (4) provide certainty for 
participants in Innovation Center models that wish to continue 
compensation arrangements established while participating in an 
Innovation Center model following the model's conclusion or establish 
similar arrangements outside of the model. Associated benefits that we 
anticipate will arise from these intended outcomes are: (1) Better care 
coordination for patients, including Medicare beneficiaries, resulting 
in the reduction in costs to payors and patients from poorly 
coordinated, duplicative care; (2) improved quality of care and 
outcomes for patients, including Medicare beneficiaries; (3) 
substantial reduction in compliance costs to providers and suppliers to 
which the physician self-referral law's prohibitions apply; and (4) 
reduction in administrative complexity and related waste from continued 
progress toward interoperability of data and electronic health records.
(3) Cost Impact of Value-Based Arrangements
A. General
    As noted above, we are unable to quantify with certainty the 
overall net costs, including net expenditures of the Medicare program, 
related to the changes in industry behavior that we can reasonably 
expect following the effective date of this final rule. However, based 
on the studies and reported experiences of payors, providers, 
suppliers, and patients that we discuss in this section IV.B. of this 
final rule, we believe that value-based arrangements such as those 
described in section IV.B.2.a.(1). of this final rule have great 
potential to reduce waste in the U.S. health care system, lower costs 
for both patients and payors, and generate other benefits such as 
improved quality of patient care and lower compliance costs for 
providers and suppliers.
    A recent review of literature from January 2012 to May 2019 
focusing on unnecessary spending, or waste, in the U.S. health care 
system (2019 Waste in U.S. Health Care Study) indicates that waste 
related to the failure of care coordination alone results in annual 
costs of $27 billion to $78 billion.\35\ Much of the research on waste 
and improvement reviewed in the 2019 Waste in U.S. Health Care Study 
was conducted in Medicare populations. The 2019 Waste in U.S. Health 
Care Study noted compelling empirical evidence that interventions, such 
as aligning payment models with value or supporting delivery reform to 
enhance care coordination, safety, and value, can produce meaningful 
savings and reduce waste by as much as half. The 2019 Waste in U.S. 
Health Care Study also identified waste from administrative complexity 
(resulting from fragmentation in the health care system) as the 
greatest contributor to waste in the U.S. health care system at an 
estimated $266 billion annually, and highlighted the opportunity to 
reduce waste in this category from enhanced payor collaboration with 
health care providers and clinicians in the form of value-based payment 
models. According to the 2019 Waste in U.S. Health Care Study, as 
value-based care continues to evolve, there is reason to believe that 
such interventions can be coordinated and scaled to produce better care 
at lower cost for all U.S. residents. Moreover, in value-based 
arrangements, improvements could reduce waste related to overtreatment 
and low-value care, a separate category of waste in the U.S. health 
care system. Other recently published peer-reviewed articles also 
suggest that value-based arrangements can reduce costs.\36\
---------------------------------------------------------------------------

    \35\ William H. Shrank, MD, MSHS, et al., Waste in the U.S. 
Health Care System, Estimated Costs and Potential for Savings, 
322(15) Journal of the American Medical Association 1501 (2019), 
available at https://jamanetwork.com/journals/jama/fullarticle/2752664.
    \36\ Brian W. Powers, et al., Impact of Complex Care Management 
on Spending and Utilization for High-Need, High-Cost Medicaid 
Patients, American Journal of Managed Care, 26(2), e57-e63 (Feb. 
2020), available at https://doi.org/10.37765/ajmc.2020.42402 (a 
study of a complex care management program implemented in Tennessee 
for high-need, high-cost Medicaid patients, which found that the 
program reduced total medical expenditures by 37 percent and 
inpatient utilization by 59 percent); and Shreya Kangovi, et al., 
Evidence-Based Community Health Worker Program Addresses Unmet 
Social Needs and Generates Positive Return on Investment, Health 
Affairs, 39(2), 207-13 (Feb. 2020), available at https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2019.00981 (a study 
that found that every dollar invested in the Individualized 
Management for Patient-Centered Targets (IMPaCT) intervention, which 
is ``a standardized community health worker intervention that 
addresses socioeconomic and behavioral barriers to health in low-
income populations,'' yielded a return of $2.47 from the perspective 
of a Medicaid payer. This return was realized within a single fiscal 
year).
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    A case study targeted at determining the specific factors that 
reduce Medicare payments and lead to hospital savings in bundled 
payment models for lower extremity joint replacement surgeries (which 
provide a lump sum payment to be shared among providers for an episode 
of care instead of payment for every service performed) in one Texas 
health system found that, between July 2008 and June 2015, the system's 
five hospitals were able to reduce total Medicare spending per episode 
of care by $5,577, or 20.8 percent, in cases without complications, and 
by $5,321, or 13.8 percent, in cases with complications.\37\ The 
hospitals also recognized $6.1 million in internal cost savings, along 
with slight decreases in emergency room visits and readmission rates, 
and a decrease in cases with a prolonged length-of-stay admission. Over 
half of the internal cost savings were attributable to reduced implant 
costs.\38\ We note that the product standardization incentive programs 
that contribute to such internal cost savings involve compensation 
arrangements between hospitals and physicians which, depending on their 
structure, may not satisfy the requirements of any current exceptions 
to the physician self-referral law, but to which the new exceptions for 
value-based arrangements apply. Relatedly, in 2018, a large health plan 
announced that it was expanding a bundled payment program for spinal 
surgeries and hip/knee replacements to new markets, after finding 
savings of $18,000 per procedure,\39\ and a health network reported 
over $10 million in savings in 2017 with more anticipated savings in 
2018.\40\
---------------------------------------------------------------------------

    \37\ Amol Navathe, et al., Cost of Joint Replacement Using 
Bundled Payment Models, JAMA Intern Med. 2017;177(2):214-222. 
doi:10.1001/jamainternmed.2016.8263, available at https://jamanetwork.com/journals/jamainternalmedicine/article-abstract/2594805.
    \38\ See Vera Gruessner, 3 Ways Bundled Payment Models Brought 
Hospital Cost Savings Down, Health Payer Intelligence (Jan. 2017), 
available at https://healthpayerintelligence.com/news/3-ways-bundled-payment-models-brought-hospital-cost-savings.
    \39\ See David Muhlestein, et al., Recent Progress in the Value 
Journey: Growth of ACOs and Value-Based Payment Models in 2018, 
Health Affairs (Aug. 2018) available at https://www.healthaffairs.org/do/10.1377/hblog20180810.481968/full/.
    \40\ See Shane Wolverton, Providers Partner with Payers for 
Bundled Payments, Becker's Hospital Review (May 2018), available at 
https://www.beckershospitalreview.com/payer-issues/providers-partner-with-payers-for-bundled-payments.html.
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B. Medicare Expenditures
    We cannot predict with certainty how many and which parties will 
avail themselves of the new and revised exceptions or the changes in 
provider and supplier behaviors that could result. Influence on 
provider and supplier behavior could either reduce or increase overall 
program spending, although the literature described in this section 
IV.B.2. of this final rule indicates great potential for waste 
reduction and cost savings across the U.S. health care system, 
including the Medicare program. We note that any short-term increase in 
expenditures could result

[[Page 77649]]

from appropriate utilization of services as patients seek and accept 
medically indicated care that they may have forgone in the absence of 
care coordination efforts and value-based arrangements for which 
exceptions were previously unavailable, and that appropriate 
utilization could prevent greater expenditures and other negative 
results to life over the longer term. Because of this uncertainty, we 
cannot quantify any impact on Medicare expenditures. We are confident 
that the regulations established or revised in this final rule include 
sufficient and appropriate safeguards to protect against program or 
patient abuse, including inappropriate utilization due to a physician's 
financial self-interest. We believe that our final policies fall 
squarely within the Secretary's authority under section 1877(b)(4) of 
the Act to establish exceptions for financial relationships that do not 
pose a risk of program or patient abuse and, therefore, anticipate no 
increased spending due to inappropriate utilization. We will continue 
to assess the impact of our final policies on program expenditures. As 
noted in more detail later in this RIA, our view of the beneficial 
anticipated effects that will result from the policies in this final 
rule remains largely unchanged from the proposed rule.
    As noted above, we are not able to provide quantitative estimates 
of overall savings to or expenditures of the Medicare program that will 
result from this final rule. However, with respect to parties currently 
participating in the Shared Savings Program and Innovation Center 
models, we have determined that this final rule would not significantly 
alter the conditions upon which such providers and suppliers operate. 
Although we do not know which new value-based models or programs will 
be implemented in the future, such programs and models will be 
associated with an estimated impact at the time they are implemented. 
Thus, we have determined that the policies set forth in this final rule 
will have no impact with regard to Medicare expenditures under the 
Shared Savings Program and Innovation Center models.
C. Commercial Sector and Other Federal Payors
    A recent survey of over 100 commercial payors showed that, in 2018, 
``pure FFS'' payment--where each medical service is billed and paid for 
separately--accounts for only 37.2 percent of commercial payor 
reimbursement, and is expected to drop to 26 percent by 2021.\41\ 
According to the payors surveyed, payors that adopted value-based 
health care delivery and payment models reduced health care costs by an 
average of 5.6 percent, improved provider collaboration, and created 
more impactful member engagement. Although we cannot make any 
quantitative estimates regarding cost savings or expenditures that may 
result from this final rule, we are aware of the success of certain 
innovative value-based arrangements that resulted in cost savings for 
third-party payors, improvements in quality of care, or both. The 
reported success of some of these programs exemplifies the promising 
nature of value-based health care delivery and payment.
---------------------------------------------------------------------------

    \41\ Finding the Value in Value-Based Care: The State of Value-
Based Care in 2018; a Signature Research Report commissioned by 
Change Healthcare (June 2018); see also, Thomas Beaton, Value-Based 
Payment Adoption Drives 5.6% Reduction in Care Costs, Health Payer 
Intelligence (June 2018) available at https://healthpayerintelligence.com/news/value-based-payment-adoption-drives-5.6-reduction-in-care-costs.
---------------------------------------------------------------------------

    There are numerous reported examples of successful value-based 
health care delivery and payment programs developed and implemented by 
commercial health plans. For example, one health plan recently reported 
that it saved $1 billion through avoided costs in 3 years of its recent 
primary care pay-for-value program that offers primary care practices 
rewards for their performance on quality, cost, and utilization 
measures, while also improving outcomes for its members.\42\ According 
to this health plan, members treated by a primary care provider in the 
program had 11 percent fewer emergency room visits in 2017 than members 
treated by a primary care physician not in the program. The health plan 
also stated that members with a primary care physician in the program 
experienced 16 percent fewer inpatient admissions in 2017 compared to 
members seeing a primary care physician not in the program, potentially 
saving the health plan $224 million in inpatient care costs.\43\
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    \42\ See Press Release, Highmark, Inc., Highmark saves more than 
$1 billion in avoided cost with True Performance program (Oct. 5, 
2020), available at https://www.highmark.com/newsroom/press-releases.html#!release/highmark-saves-more-than-1-billion-in-avoided-cost-with-true-performance-program.
    \43\ See Press Release, Highmark, Inc., Highmark's True 
Performance Program Avoided Health Care Costs by More Than $260 
Million in 2017 (June 26, 2018), available at https://www.highmark.com/newsroom/press-releases.html#!release/highmarks-true-performance-program-avoided-health-care-costs-by-more-than-260-million-in-2017.
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    A collaboration between a physician-led ACO and a health plan in 
North Carolina similarly reduced costs while improving quality of 
care.\44\ Specifically, a June 2020 study concluded that the 47 primary 
care practices that participated in the collaboration: (1) Reduced the 
total cost of care by 4.7 percent for commercial patients; (2) reduced 
the total cost of care by 6.1 percent for Medicare Advantage patients; 
and (3) improved their Medicare star ratings, on average, from 3 to 4.5 
stars. Another study, in 2020, by a different health plan analyzed the 
plan's Medicare Advantage enrollees and network primary care physician 
practices. This health plan determined that primary care physicians 
paid under global capitation improved certain patient outcomes related 
to preventive care and chronic conditions, such as higher screening 
rates for colorectal and breast cancer, higher rates of medication 
review, and higher controlled blood sugar levels.\45\
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    \44\ See Press Release, Blue Cross and Blue Shield of North 
Carolina, Primary Care ACOs from Blue Cross NC and Aledade Show 
Significant Savings and Quality Improvements (July 20, 2020), 
available at https://mediacenter.bcbsnc.com/news/primary-care-acos-from-blue-cross-nc-and-aledade-show-significant-savings-and-quality-improvements.
    \45\ See Press Release, UnitedHealth Group, Physicians Provide 
Higher Quality Care Under Set Monthly Payments Instead of Being Paid 
Per Service, UnitedHealth Group Study Shows (Aug. 11, 2020), 
available at https://www.unitedhealthgroup.com/newsroom/2020/uhg-study-shows-higher-quality-care-under-set-monthly-payments-403552.html.
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    There are also studies that suggest that improved care coordination 
may decrease costs and enhance health outcomes. One randomized, 
controlled trial evaluated the cost[hyphen]effectiveness of a 
home[hyphen]based care coordination program that targeted older adults 
with problems self[hyphen]managing their chronic illnesses.\46\ Study 
participants in the test group received care coordination services from 
a nurse. They also received a pill organizer. The results of this study 
showed that, for those beneficiaries who participated in the study for 
more than 3 months, total Medicare costs were $491 lower per month than 
in the control group. Another study conducted by the Centers for 
Disease Control demonstrated that certain interventions, such as team-
based or coordinated care, increase patient medication adherence 
rates.\47\

[[Page 77650]]

Specifically, in a 2015 study, patients assigned to team-based care--
including pharmacist-led medication reconciliation and tailoring, 
pharmacist-led patient education, collaborative care between pharmacist 
and primary care provider or cardiologist, and two types of voice 
messaging--were significantly more adherent with their medication 
regimen 12 months after hospital discharge (89 percent) compared with 
patients not receiving team-based care (74 percent).
---------------------------------------------------------------------------

    \46\ Karen Dorman Marek et al., Cost analysis of a home-based 
nurse care coordination program, J. Am. Geriatr. Soc. 
2014;62(12):2369-2376.
    \47\ Andrea B. Neiman, et al., CDC Grand Rounds: Improving 
Medication Adherence for Chronic Disease Management -- Innovations 
and Opportunities, 66 Weekly 45 (Nov. 17, 2017), available at 
https://www.cdc.gov/mmwr/volumes/66/wr/mm6645a2.htm.
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D. Conclusion
    We believe that the experience of the payors and organizations 
described in this section IV.B.2. of this final rule highlight the 
potential for eliminating a significant amount of unnecessary 
expenditures (waste) in the U.S. health care system, including in the 
Medicare program. As noted earlier, the 2019 Waste in U.S. Health Care 
Study indicates annual costs of $27 billion to $78 billion from the 
failure of care coordination alone.\48\ This study identified $266 
billion in annual costs from administrative complexity in the 
furnishing of care and compliance with laws and regulations. We cannot 
predict with absolute certainty whether value-based arrangements that 
parties enter into as a result of our final policies will reduce these 
annual costs, but we believe that it is likely that innovative value-
based arrangements and payment for value-based health care delivery 
will continue to achieve the results described above in this section 
IV.B.2. We are also unable to provide quantitative estimates of the 
impact on costs that such arrangements will have. However, we believe 
there is great potential for reducing the expense of waste in the U.S. 
health care system through improved care coordination and reduced 
administrative complexity.
---------------------------------------------------------------------------

    \48\ William H. Shrank, MD, MSHS, et al., Waste in the U.S. 
Health Care System, Estimated Costs and Potential for Savings.
---------------------------------------------------------------------------

b. Clarifying Revisions and New Exceptions for Nonabusive Financial 
Relationships
(1) Key Terminology, the Application and Scope of the Physician Self-
Referral Law, and New Exception for Limited Remuneration to a Physician
A. Summary of the Final Regulations
    In addition to the final regulations discussed in subsections 2.a. 
and 2.b.(2). of this section IV.B., this final rule revises numerous 
current regulations and establishes new regulations, including a new 
exception at final Sec.  411.357(z) for limited remuneration to a 
physician, intended to clarify the scope of the prohibitions of the 
physician self-referral law and simplify compliance with the exceptions 
to the law's referral and billing prohibitions. To this end, this final 
rule: (1) Establishes a definition of the term ``commercially 
reasonable'' at Sec.  411.351; (2) establishes special rules at Sec.  
411.354(d)(5) and (6) that identify the universe of compensation 
formulas that are considered to be determined in a manner that takes 
into account the volume or value of a physician's referrals or the 
other business generated by a physician; (3) revises the definition of 
``fair market value'' at Sec.  411.351; (4) clarifies CMS policy 
regarding the permissible methodologies for distributing profits from 
designated health services within a group practice; (5) clarifies CMS 
policy regarding compensation formulas that will be deemed not to 
directly take into account the referrals of a physician in a group 
practice; (6) recognizes the independent obligation to comply with the 
anti-kickback statute and governmental billing and claims submission 
rules by removing from most exceptions to the physician self-referral 
law the requirements that the financial relationship between the entity 
and the physician (or immediate family member of the physician) does 
not violate the anti-kickback statute and does not violate any Federal 
or state law or regulation governing billing or claims submission; (7) 
revises the definition of ``designated health services'' at Sec.  
411.351 to, in effect, remove inpatient hospital services ordered after 
a patient's admission to the hospital when such services are ordered by 
a physician who is not the physician who made the referral for the 
inpatient admission; (8) revises the definition of ``physician'' at 
Sec.  411.351 to limit the physician referrals to which the law's 
prohibitions apply to only those physicians who qualify as a 
``physician'' under section 1861(r) of the Act; (9) revises the 
definition of ``remuneration'' at Sec.  411.351 to clarify that the 
provision of certain items, devices, and supplies from an entity to a 
referring physician does not establish a compensation arrangement when 
those items, devices, or supplies are, in fact, used solely by the 
physician for the purpose(s) established in the statute and regulation; 
(10) revises the definition of ``transaction'' and establishes a new 
definition of ``isolated financial transaction'' at Sec.  411.351 to 
clarify CMS policy regarding the types of compensation arrangements to 
which the exception at Sec.  411.357(f) is applicable; (11) alleviates 
confusion reported by stakeholders regarding the period of disallowance 
for referrals and billing following a violation of the physician self-
referral law; (12) permits parties to reconcile payment discrepancies 
in compensation arrangements without running afoul of the physician 
self-referral law; (13) removes certain interests held by a physician 
from qualifying as an ownership or investment interest that implicates 
the physician self-referral law; (14) clarifies when compensation is 
considered to be ``set in advance'' for purposes of satisfying the 
requirements of the exceptions to the physician self-referral law; (15) 
revises CMS policy regarding modifications to the financial terms of a 
compensation arrangement to eliminate specific timeframe limitations 
for such modifications; (16) clarifies CMS policy regarding the 
circumstances under which an entity may direct a physician's referrals 
to a particular provider, practitioner, or supplier; (17) expressly 
prohibits an entity from conditioning the existence of a compensation 
arrangement or the amount of a physician's compensation on the number 
or value of the physician's referrals to a particular provider, 
practitioner, or supplier; (18) clarifies that required signatures may 
be electronic or in any other form that is valid under applicable 
Federal or state law; (19) allows parties 90 consecutive calendar days 
to obtain documentation necessary to satisfy the writing requirement of 
an applicable exception; (20) clarifies the requirement for exclusive 
use of office space or equipment under the exceptions at Sec.  
411.357(a) and (b); (21) clarifies the circumstances under which a 
physician practice must sign the documentation of a recruitment 
arrangement between a hospital and a physician; (22) clarifies and 
expands the application of the exception at Sec.  411.357(i) for 
payments by a physician (or immediate family member of a physician) to 
an entity; (23) expands the application of the exception at Sec.  
411.357(l) to fair market value payments for the rental of office 
space, even where the duration of the arrangement is less than 1 year; 
(24) makes permanent the EHR exception; (25) clarifies the scope of the 
EHR exception to permit donations of cybersecurity software and 
services that are necessary and used predominantly to create, maintain, 
transmit, receive, or protect electronic health records; (26) allows 
for flexible scheduling of physician contribution payments for 
electronic health records items and services following the initial 
donation of

[[Page 77651]]

such items and services; (27) permits donations of replacement 
electronic health records items and services, even if the physician 
already possesses equivalent items or services; (28) clarifies timing 
issues related to arrangements between a physician and NPP where the 
physician receives assistance from a hospital to compensate the NPP; 
(29) updates and eliminates out-of-date references to bolster clarity 
of the scope and application of the physician self-referral 
regulations; (30) establishes a new exception for limited remuneration 
to a physician that does not require contemporaneous documentation of 
the terms of the arrangement or that the compensation is set in advance 
of the provision of the physician's services; and (31) modifies other 
exceptions that apply to arrangements for the personal services of 
physicians to ensure applicability on a going-forward basis following 
the commencement of an arrangement that satisfies the requirements of 
the new exception for limited remuneration to a physician.
B. Expectation of Industry Behavior
    Following the effective date of our final policies, we anticipate a 
reduction in disclosures to the SRDP of potential or actual violations 
of the physician self-referral law because stakeholders will have a 
clearer understanding of the scope and application of the physician 
self-referral law, as well as CMS' interpretation of the law's 
provisions. We anticipate that entities will continue to provide 
electronic health records items and services to physicians with the 
same scope and frequency as the industry has observed since the 
issuance of the EHR exception in 2006. We also anticipate that parties 
that made submissions to the SRDP that have not yet been settled may 
withdraw all or portions of their disclosures, similar to what occurred 
following clarifications of physician self-referral policies in the CY 
2016 PFS final rule. Although we expect that entities will utilize the 
new exception at Sec.  411.357(z) for limited remuneration to a 
physician, as explained in section II.E.1. of this final rule, we 
anticipate that the exception's greatest utility will come during 
retrospective review of compliance with the physician self-referral 
law. As we noted in section III.A. of this final rule, we believe that, 
for normal business operations purposes, entities document their 
financial arrangements with physicians and others in order to identify 
and be able to enforce the legal obligations of the parties. Thus, we 
believe that the exception will be utilized more often by parties that 
did not fully document an arrangement in writing or set compensation in 
advance than by parties that affirmatively choose not to document their 
arrangement in writing or set physician compensation in advance when 
developing a new arrangement for physician services. Finally, we 
anticipate that some physician practices will revise their compensation 
methodologies with respect to the distribution of profits from 
designated health services furnished by the group in order to ensure 
compliance with the clarifying regulations at Sec.  411.352(i) that 
become effective January 1, 2022 and continued qualification as a 
``group practice'' under the regulations at Sec.  411.352.
C. Potential Outcomes, Benefits, and Costs of Final Policies Related to 
Key Terminology, the Application and Scope of the Physician Self-
Referral Law, and New Exception for Limited Remuneration to a Physician
    According to commenters, one of the most significant benefits of 
this final rule is the establishing of clear boundaries for parties in 
setting the financial terms of compensation arrangements that do not 
qualify as value-based arrangements. We are unable to quantify with 
certainty the impact of our clarifications, expanded flexibilities, and 
the new exception at final Sec.  411.357(z) on costs to the regulated 
industry; however, we believe that most entities that have financial 
relationships with physicians to which the physician self-referral law 
applies will see some level of reduced expenditures.
    Many of the entities whose financial relationships with physicians 
are subject to the requirements of the physician self-referral law are 
hospitals and physician groups. An October 2017 study of 190 hospitals 
in 31 states across the United States revealed that an average 
community hospital (defined as 161 beds) annually dedicates 2.3 full-
time equivalent employees to, and spends almost $350,000 on, compliance 
with Federal fraud and abuse laws, defined in the study as including 
the physician self-referral law, the anti-kickback statute, and laws 
and protocols requiring returning overpayments.\49\ This study affirms 
commenter statements included in a 2015 Senate Finance Committee report 
that noted the high cost and difficulty of complying with the physician 
self-referral law.\50\ We expect that the clarifications and regulatory 
revisions of this final rule will significantly reduce the costs to the 
regulated industry. (See section IV.C. of this final rule for further 
discussion of this study and the anticipated effects of this final rule 
on the burden identified in the study.)
---------------------------------------------------------------------------

    \49\ American Hospital Association, Regulatory Overload: 
Assessing the Regulatory Burden on Health Systems, Hospitals and 
Post-Acute Care Providers (October 2017), available at https://www.aha.org/sites/default/files/regulatory-overload-report.pdf.
    \50\ Senate Finance Committee Majority Staff Report, Why Stark, 
Why Now? Suggestions to Improve the Stark Law to Encourage Innovated 
Payment Models (2015), available at https://www.finance.senate.gov/imo/media/doc/Stark%20White%20Paper,%20SFC%20Majority%20Staff.pdf.
---------------------------------------------------------------------------

    CMS publishes aggregate SRDP settlement data on its website at 
https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/Self-Referral-Disclosure-Protocol-Settlements. To date, we have 
received over 1200 disclosures to the SRDP. As of December 31, 2019, we 
have settled 335 disclosures by collecting an aggregate of $31.8 
million from disclosing parties. Although we cannot estimate the number 
of compensation arrangements included in the pending disclosures that 
would be affected by the clarifications in this final rule, it is our 
observation that a substantial portion of the conduct already settled 
through the SRDP involved the failure of a compensation arrangement to 
satisfy the writing or signature requirements of an applicable 
exception, with many of those failures lasting for only a short period 
of time. Many disclosures involved the disclosing party's incorrect 
interpretation or misapplication of the physician self-referral law or 
CMS policy. Therefore, we believe that the clarifications in this final 
rule will reduce the perceived need for disclosure to the SRDP and 
allow parties to avoid the costs--including costs of compliance 
professionals, attorneys, market valuation experts, and accountants--of 
preparing and submitting a disclosure to the SRDP. As noted above, we 
also expect that some entities may withdraw a portion of or their 
entire SRDP disclosures following the issuance of this final rule. 
However, we are unable to quantify the avoidance of costs to the 
industry related to refraining from or withdrawing disclosures. We note 
that recoveries from SRDP settlements may also diminish, but this does 
not represent a cost to the Medicare program or trust fund. Where there 
is no violation of the physician self-referral law's referral and 
billing prohibitions, there is no refund due to the government under 
section 1877(g) of the Act for Medicare payments made to the entity.

[[Page 77652]]

    Finally, we believe that the clarifications and revisions to the 
EHR exception, and the permanency of the exception, will facilitate the 
continued adoption and use of electronic health records, especially in 
small physician practices, by making permanent the exception for the 
donation of such items and services.
(2) New Exception for Cybersecurity Items and Services
    The average breached health care organization faces $8 million 
dollars in costs as a result of the breach, or $400 per patient record 
involved.\51\ One hospital reported spending $10 million to recover 
from a cyberattack, instead of paying a $30,000 ransom demanded by 
hackers,\52\ while another hospital paid a $55,000 ransom to hackers, 
despite having backup copies of the affected files.\53\ A cyberattack 
on a hospital in Germany is the suspected cause of the death of at 
least one patient.\54\ A September 2020 cyberattack on a large health 
care system in the United States affected nearly 400 facilities, 
causing hospitals to divert ambulances during the initial stages of the 
attack.\55\ In addition, staff reported that some lab test results were 
delayed. The system responded by suspending user access to its 
information technology applications related to operations across the 
United States, requiring the use of back-up processes, including paper 
medical record charting and labeling medications by hand, for nearly 
three weeks.
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    \51\ See Health Sector Cybersecurity Coordination Center, A Cost 
Analysis of Healthcare Sector Data Breaches (Apr. 4, 2019), 
available at https://www.hhs.gov/sites/default/files/cost-analysis-of-healthcare-sector-data-breaches.pdf.
    \52\ See Naveen Goud, ECMC Spends $10 Million to Recover from a 
Cyberattack, Cybersecurity Insiders, available at https://www.cybersecurity-insiders.com/ecmc-spends-10-million-to-recover-from-a-cyber-attack/.
    \53\ See Samm Quinn, Hospital pays $55,000 Ransom; No Patient 
Data Stolen, Greenfield Daily Reporter (Jan. 15, 2018), available at 
http://www.greenfieldreporter.com/2018/01/16/01162018dr_hancock_health_pays_ransom/.
    \54\ See Patrick Howell O'Neill, A patient has Died After 
Ransomware Hackers Hit a German Hospital, MIT Technology Review 
(Sept. 18, 2020), available at https://www.technologyreview.com/2020/09/18/1008582/a-patient-has-died-after-ransomware-hackers-hit-a-german-hospital/.
    \55\ See Jeff Lagasse, Universal Health Services Hit with 
Cyberattack that Shuts Down IT Systems, Healthcare Finance (Sept. 
2020), available at https://www.healthcarefinancenews.com/news/universal-health-services-hit-cyberattack-shuts-down-it-systems-1; 
Jessica Davis, UHS Health System Confirms all US Sites Affected by 
Ransomware Attack, Health IT Security (Oct. 2020), available at 
https://healthitsecurity.com/news/uhs-health-system-confirms-all-us-sites-affected-by-ransomware-attack; Jessica Davis, 3 Weeks After 
Ransomware Attack, All 400 UHS Systems Back Online, Health IT 
Security (Oct. 2020), available at https://healthitsecurity.com/news/3-weeks-after-ransomware-attack-all-400-uhs-systems-back-online; and Press Release, Universal Health Services, Statement from 
Universal Health Services (Oct. 29, 2020), available at https://www.uhsinc.com/statement-from-universal-health-services/.
---------------------------------------------------------------------------

    According to the Health Sector Cybersecurity Coordination Center 
(HC3), health care organizations should consider implementing strong 
risk management practices to help prevent data breaches and minimize 
any disruptions or loss if a breach occurs.\56\ HC3 highlights that 
adequate prevention and preparation for data breaches will protect 
patients, minimize direct and indirect costs, and allow for more 
efficient operations of a health care organization.\57\ Separately, the 
HCIC Task Force's 2017 report, among other things, highlighted its 
review of many concerns related to potential constraints imposed by the 
physician self-referral law and the Federal anti-kickback Statute. The 
report encouraged the Congress to evaluate an amendment to these laws 
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.\58\ The HCIC Task 
Force noted that the existing regulatory exception to the physician 
self-referral law (Sec.  411.357(w)) and the safe harbor to the Federal 
anti-kickback statute (42 CFR 1001.952(y)) applicable to certain 
donations of EHR items and services could serve as a perfect template 
for an analogous cybersecurity provision.\59\ In 2018, the American 
Medical Association surveyed over 1,300 physicians in a cybersecurity-
related survey. Approximately 83 percent of the participants reported 
having experienced some sort of cybersecurity attack.\60\ The study 
also highlighted that 50 percent of the surveyed physicians wished they 
could receive donations of security-related hardware and software from 
other providers, and recommended that we develop an exception to permit 
it.
---------------------------------------------------------------------------

    \56\ See Health Sector Cybersecurity Coordination Center, A Cost 
Analysis of Healthcare Sector Data Breaches.
    \57\ Id.
    \58\ See HCIC Task Force Report, available at https://
www.phe.gov/Preparedness/planning/CyberTF/Documents/report2017.pdf.
    \59\ Id.
    \60\ See American Medical Association, Tackling Cyber Threats in 
Healthcare, available at https://www.ama-assn.org/sites/ama-assn.org/files/corp/media-browser/public/government/advocacy/medical-cybersecurity-findings.pdf and https://www.ama-assn.org/sites/ama-assn.org/files/corp/media-browser/public/government/advocacy/infographic-medical-cybersecurity.pdf.
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    As described in section II.E.2 of this final rule, we received 
overwhelming support from across the health care industry in response 
to our proposal to establish the new exception for cybersecurity items 
and services, and we anticipate significant expansion of cybersecurity 
efforts through donations following the effective date of this final 
rule, similar to the expanded adoption of EHR items and services 
reported by stakeholders following the establishment of the EHR 
exception in 2006. Support for the new cybersecurity exception came 
from many well-resourced organizations that are potential future donors 
of cybersecurity technology, such as health plans and large health 
systems, as well as from likely recipients of donations and trade 
groups representing practitioners. (We note that not all of the 
potential donors and recipients are entities and physicians to which 
the physician self-referral law applies.) Because of the cost of 
cybersecurity attacks to organizations that wish to donate or receive 
cybersecurity technology and services, and the general support among 
donors and recipients for the new cybersecurity exception, we 
anticipate significant investment in improvements to the cybersecurity 
hygiene of the health care industry. An organization's cybersecurity 
posture is only as strong as its weakest link, including weaknesses of 
downstream providers, suppliers, and practitioners that wish to receive 
donations; thus, donors are incented to protect themselves by donating 
cybersecurity technology and services that improves their 
cybersecurity.
    We expect that the flexibilities afforded by the cybersecurity 
exception will facilitate the enhancement of protection against the 
corruption of or access to health records and other information 
essential to the safe and effective delivery of health care, as well as 
reduce the impacts of cybersecurity attacks, including the improper 
disclosure of PHI. This could ultimately reduce overall costs 
associated with cybersecurity attacks, including ransom payments, costs 
to patients whose PHI is improperly disclosed, and costs to providers 
and suppliers to reestablish cybersecurity. However, there are a 
variety of factors integral to determining the extent of the impact of 
the cybersecurity exception on the cybersecurity hygiene of the health 
care industry that remain too speculative to support a quantitative 
estimate of the impact of this final rule. For example, we cannot 
predict with certainty: (1) How many entities or physicians will

[[Page 77653]]

donate cybersecurity technology or services for which the parties may 
seek protection under the cybersecurity exception; (2) how such 
donations will improve the cybersecurity hygiene of recipients, donors, 
and the health care ecosystem as a whole; or (3) external factors--such 
as other policies promoting cybersecurity within the health care 
industry, how hackers will proliferate and develop new hacking 
strategies, or how cyberattack recovery costs and ransom costs will 
change--that could enable or hinder improved cybersecurity hygiene and 
potentially result in increased or decreased costs associated with 
cyberattacks. Thus, we cannot predict the specific quantitative impact 
of the flexibility afforded by the new cybersecurity exception on the 
costs or benefits to the Medicare program, or other Federal health care 
programs, beneficiaries, or the health care industry as a whole. 
Nonetheless, we expect that the flexibility to donate cybersecurity 
technology and services will benefit the health care ecosystem as a 
whole, improve cybersecurity across the industry, and reduce costs 
associated with cyberattacks (by reducing successful cyberattacks, and 
consequently, ransom fees and recovery costs).
3. Comment and Response
    We sought comment on the economic impact of this final 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.
    We received the following comment and our response follows.
    Comment: One commenter requested that we provide detailed estimates 
of changes in Medicare program spending that CMS expects to result from 
the proposed new exceptions and other regulatory changes. The commenter 
asserted that certain successful value-based programs produce limited 
savings and many value-based programs produce no savings or even 
increase spending.
    Response: We are unable to provide the detailed estimates requested 
by the commenter. It is impossible for CMS to provide quantitative 
estimates of savings to or expenditures of the Medicare program that 
will result from the establishment of the new exceptions at Sec.  
411.357(z), (aa), or (bb), or from clarification of key terms integral 
to the physician self-referral law and other regulatory revisions. 
However, we emphasize that we engaged in the Regulatory Sprint to 
facilitate the transition to value-based health care delivery and 
payment and realize the potential cost savings that come from improved 
quality and care coordination. Although we cannot estimate the precise 
dollar amount of impact, as described throughout this section IV.B.2. 
of this final rule, the potential for reduced program expenditures is 
significant, and the policies set forth in this final rule are intended 
to maximize this potential.

C. Anticipated Effects

    This final rule will affect entities that furnish designated health 
services payable by Medicare and the physicians with whom they have 
financial relationships. The following items or services are designated 
health services: (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 entities and physicians 
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 final 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 
2,265 single or multispecialty clinics or group practices, 3,159 
clinical laboratories (billing independently), 2,016 outpatient 
physical therapy/speech pathology providers, 2,739 independent 
diagnostic testing facilities, 11,317 home health agencies, 6,072 
inpatient hospitals, 4,402 rural health clinics, 172 comprehensive 
outpatient rehabilitation facilities, 8,836 federally qualified health 
centers, and 9,403 medical supply companies enrolled in Medicare in 
2018.\61\ In addition, we estimate that 400 physician practices 
unassociated with single or multispecialty clinics or group practices 
will independently review this final rule. We requested public comment 
on the entities affected by the rule.
---------------------------------------------------------------------------

    \61\ CMS Program Statistics, https://www.cms.gov/research-statistics-data-systems/cms-program-statistics/2018-medicare-providers.
---------------------------------------------------------------------------

    We anticipate that directly affected entities will review this 
final rule 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 will be eligible to use the 
final rule will review the rule. In the proposed rule, we estimated 
that reviewing the final rule would require an average of 3 hours of 
time each from the equivalent of a compliance officer and a lawyer (84 
FR 55837). The final rule responds to numerous comments received on the 
proposals discussed in the proposed rule, and includes significantly 
more information than the proposed rule. Although we did not receive 
any comments on our proposed estimate of three hours, in light of the 
increase in length from the proposed rule to the final rule, we have 
adjusted our estimate for the time required to review the final rule. 
We estimate that reviewing the final rule will require an average of 6 
hours of time each from the equivalent of a compliance officer and a 
lawyer, and note that parties may review only the portions of the final 
rule that are applicable to their specific circumstances and needs. For 
example, parties that do not wish to participate in value-based health 
care and delivery at this time may not review sections I.B. and II.A. 
of this final rule.
    To estimate the costs associated with this review, we use a 2019 
wage rate of $35.03 for compliance officers and $69.86 for lawyers from 
the Bureau of Labor Statistics,\62\ and we double those wages to 
account for overhead and benefits. As a result, we estimate total 
regulatory review costs of $64 million in the first year following 
publication of the final rule. We sought public comment on these 
assumptions.
---------------------------------------------------------------------------

    \62\ U.S. Department of Labor, Bureau of Labor Statistics, May 
2019 National Occupational Employment and Wage Estimates United 
States, https://www.bls.gov/oes/current/oes_nat.htm.
---------------------------------------------------------------------------

    In developing this final rule, we took great care to ensure that 
the safeguards against program and patient abuse in our new exceptions 
impose the minimum burden possible while providing robust protection 
against improper utilization 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

[[Page 77654]]

enterprise and how the VBE participants intend to achieve its value-
based purpose(s), so our requirement does not impose any additional 
burden beyond what we anticipate parties would ordinarily develop. 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 of tax-exempt status. Therefore, we do not believe the 
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 so that arrangements can be enforced. For example, we believe 
that an entity would ordinarily ensure that the details of a shared 
loss repayment agreement are documented in writing to ensure that the 
arrangement can be enforced under state law. Similarly, we believe that 
entities working together to achieve a purpose would routinely monitor 
their operations to confirm that their plans are working as intended. 
We sought comments on these assumptions.
    The new exceptions for arrangements intended to facilitate the 
transition to value-based health care delivery and payment have 
numerous potential benefits that will reduce costs and improve quality, 
not only for Medicare and its beneficiaries, but for patients and the 
health care system in general. For example, the final exceptions 
provide important new flexibility for physicians and entities to work 
together to improve patient care and reduce costs. This increased 
flexibility will provide new opportunities for the private sector to 
develop and implement cost-saving, quality-improving programs that 
previously may have been 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 will also increase participation in 
Innovation Center models because, unlike the fraud and abuse waivers 
that have been issued for certain Innovation Models, the exceptions 
will not expire and are not narrowly designed to apply solely to one 
specific model, allowing parties to enter into value-based arrangements 
of their own design and to continue such arrangements beyond expiration 
of fraud and abuse waivers. We also believe that applying the new 
exceptions will 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 intended to facilitate the transition to 
value-based health care delivery and payment will 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 sought 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 final 
rule will 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 proposed rule 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 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 will 
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 will continue to protect 
against program and patient abuse. We anticipate that our changes to 
the definitions of ``designated health services,'' ``physician,'' and 
``remuneration'' and the changes to the ownership and investment 
interest provisions in Sec.  411.354(b) will reduce compliance burden 
by appropriately applying the physician self-referral law's 
prohibitions and providing protection for nonabusive financial 
relationships. Our changes for the exceptions for fair market value 
payments by a physician and fair market value compensation will make 
these exceptions available to protect financial arrangements that must 
currently meet more complicated and burdensome requirements of other 
exceptions. We anticipate that this added flexibility will provide 
substantial burden reduction through reduced compliance costs.
    We have also finalized numerous other changes that, while 
relatively minor in scope, are intended to collectively reduce burden. 
For example, the new special rules on the set in advance requirement 
clarifies the requirements for modifying compensation terms during the 
course of an arrangement and correct a common misperception among 
stakeholders that parties may only modify the compensation terms of an 
arrangement once during the course of a year. We anticipate that our 
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 will 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 sought public comment on these 
impacts.
    As we stated in the proposed rule, the American Hospital 
Association estimated compliance costs faced by hospitals.\63\ It 
estimated $350,000 \64\ in annual costs for an average hospital to 
comply with fraud and abuse regulations, which include the physician 
self-referral law. 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 CMS RFI comments, compliance with the 
physician self-referral regulations comprises a substantial fraction of 
these costs. We anticipate that clarifications provided in this final 
rule may substantially reduce the complexity of compliance for affected 
entities. 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. We note that hospitals 
represent a fraction of entities affected by this final rule, and 
burden is likely to decline substantially for other categories of 
entities affected by this rule. We sought public comment on the

[[Page 77655]]

extent to which this rule will reduce compliance burden for hospitals 
and entities other than hospitals.
---------------------------------------------------------------------------

    \63\ https://www.aha.org/sites/default/files/regulatory-overload-report.pdf.
    \64\ Note that the figure is adjusted for inflation between 2017 
and 2018.
---------------------------------------------------------------------------

    Our final modifications to the EHR exception are modest and clarify 
that the exception applies to certain cybersecurity technology that is 
included as part of an electronic health records arrangement, make the 
exception permanent, and clarify that contribution requirements 
collected from physicians for updates to previously donated technology 
need only be collected at reasonable intervals. The EHR exception will 
continue to be available to physicians and entities other than 
laboratories. We expect that the same entities that currently use the 
EHR exception will continue to use the exception. We anticipate that 
our final policies will result in an incremental reduction in 
compliance burden.
    In section II.E. of this final rule, we discuss new exceptions for 
limited remuneration to a physician and the provision of cybersecurity 
technology and related services. We anticipate that the new exception 
for limited remuneration to a physician will ease compliance burden 
because it allows 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 that this new exception 
will also provide additional flexibility where these arrangements are 
not covered by an existing exception. We anticipate that the 
cybersecurity exception will be widely used by physicians, group 
practices, and hospitals. We believe that this exception will 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 sought public comment on these 
impacts.
    We received the following comments and our responses follow.
    Comment: The vast majority of commenters supported our proposals, 
noting generally that the proposed provisions will facilitate 
compliance with the physician self-referral law and achieve the reduced 
burden CMS anticipates, although no commenters provided data or other 
detail that would allow us to quantify the anticipated effects.
    Response: We appreciate commenters' feedback confirming our 
assessment that this final rule will ease compliance with the physician 
self-referral law and reduce burden on hospitals and other entities.
    Comment: A few commenters asserted that the establishment of the 
accountable body or person and the development of the governing 
document would require the expenditure of significant resources, 
including legal expenses, and questioned whether adding this burden was 
necessary.
    Response: As discussed in detail in section II.A.2.a. of this final 
rule, we continue to believe that a value-based enterprise would 
ordinarily develop a governing document and that this final rule will 
not result in additional burden in that regard. In addition, we have 
provided additional guidance about these requirements, including that 
we are not dictating the format or content of the governing document or 
the structure or composition of the accountable body. Each value-based 
enterprise has the flexibility to develop and implement the necessary 
infrastructure to effectively oversee its financial and operational 
activities commensurate with the size and structure of the value-based 
enterprise.
    Comment: One commenter expressed concern that the revised 
definition of ``remuneration'' would increase the burden on parties to 
monitor the use of items, devices, or services to ensure that 
physicians are in fact using the items, devices, or services for one or 
more of the permitted purposes under the statute.
    Response: As we mentioned in section II.D.2.d. of this final rule, 
we believe that it would be impossible for an entity to monitor how a 
physician ``in fact'' uses a multi-use item, device, or supply whose 
primary purpose is not one or more of the permitted purposes to ensure 
that the physician in fact uses the item, device, or supply exclusively 
for one or more of the permitted purposes. However, we believe that the 
final definition of ``remuneration'' will not increase the burden of 
monitoring, because the provision of multi-use items, devices, or 
supplies whose primary purpose is not one or more of the permitted 
purposes will not be carved out of the definition of ``remuneration.''
    Comment: Many commenters maintained that the proposed amendment to 
clarify the definition of ``transaction'' at Sec.  411.351 would reduce 
flexibility and increase the burden of compliance.
    Response: We discussed this policy in section II.D.2.e. of this 
final rule and explained that the revision simply clarifies an existing 
policy that the exception for isolated transactions is not available to 
protect a single payment for multiple or repeated services. This 
longstanding policy is based on our interpretation of the statute and 
our mandate under sections 1877(b)(4) and 1877(e)(6)(B) of the Act to 
permit only those financial relationships that do not pose a risk of 
program or patient abuse. We do not believe that clarifying existing 
policy will result in additional burden, particularly in light of new 
flexibilities included in this final rule.

D. Alternatives Considered

    This final rule contains a range of policies. The preceding 
preamble presents rationale for our policies and, where relevant, 
alternatives that were 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 health 
care delivery and payment system is urgently needed due to 
unsustainable costs inherent in the current volume-based system. We 
believe this final rule addresses the critical need for additional 
flexibility that is necessary to advance the transition to value-based 
health 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 the transition to 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 impede the development and 
adoption of innovative approaches to delivering health care, 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 and value-based arrangement, as 
defined at final Sec.  411.351.
    We considered including provisions in the 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

[[Page 77656]]

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 value-based definitions will operate in 
tandem with the requirements included in the exceptions and be 
sufficient to protect against program and patient abuse. We also 
considered whether to exclude laboratories and DMEPOS suppliers from 
the definition of ``VBE participant.'' We stated in the proposed rule 
that it was 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. As discussed in 
Section II.A.2.a. of this final rule, we have not excluded any entities 
from the final definition of ``VBE participant.''
    Through our own experience administering the physician self-
referral regulations and our thorough analysis of comments, we 
recognize the urgent and compelling 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 took 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, and 
declined to adopt that approach. 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 eliminate the requirement 
that a physician must pay 15 percent of the cost of donated electronic 
health records items and service, but are concerned that doing so would 
pose a risk of program or patient abuse. We sought comments on these 
regulatory alternatives. As discussed in section II.D.11.e. of this 
final rule, the EHR exception maintains the 15 percent contribution 
requirement.
    We received no comments specific to the alternatives considered 
section of the proposed rule.

E. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), we have prepared an 
accounting statement. The following table provides estimated annualized 
costs through 2029.

                                                    Accounting Statement--Estimated Annualized Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Primary                                                      Discount rate
                        Category                             estimate      Low estimate    High estimate    Year dollar      (percent)    Period covered
--------------------------------------------------------------------------------------------------------------------------------------------------------
Costs
    Annualized Monetized ($millions/year)...............             4.3             0.0             0.0            2018              7%       2020-2029
                                                                     3.6             0.0             0.0            2018               3       2020-2029
Annualized Quantified...................................             0.0             0.0             0.0                               7
                                                                     0.0             0.0             0.0                               3
    Qualitative
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

    DISCLAIMER:  Based on the tight time constraints and the need to 
expedite the clearance process to ensure timely publication, OSORA 
will continue to work with CM to ensure that regulations text is in 
compliance with the Office of the Federal Register standards and 
guidance.

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 amends 42 CFR part 411 as set forth below:

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

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

    Authority:  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. Subpart J is amended by revising Sec. Sec.  411.350 through 411.357 
to read as follows:
Sec.
* * * * *
411.350 Scope of subpart.
411.351 Definitions.
411.352 Group practice.
411.353 Prohibition on certain referrals by physicians and 
limitations on billing.
411.354 Financial relationship, compensation, and ownership or 
investment interest.
411.355 General exceptions to the referral prohibition related to 
both ownership/investment and compensation.
411.356 Exceptions to the referral prohibition related to ownership 
or investment interests.
411.357 Exceptions to the referral prohibition related to 
compensation arrangements.


Sec.  411.350   Scope of subpart.

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

[[Page 77657]]

ownership, investment, or compensation arrangements in the form, in the 
manner, and at the times specified by CMS.
    (d) This subpart does not alter an individual's or entity's 
obligations under--
    (1) The rules regarding reassignment of claims (Sec.  424.80 of 
this chapter);
    (2) The rules regarding purchased diagnostic tests (Sec.  414.50 of 
this chapter);
    (3) The rules regarding payment for services and supplies incident 
to a physician's professional services (Sec.  410.26 of this chapter); 
or
    (4) Any other applicable Medicare laws, rules, or regulations.


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:
    Centralized building means all or part of a building, including, 
for purposes of this subpart only, a mobile vehicle, van, or trailer 
that is owned or leased on a full-time basis (that is, 24 hours per 
day, 7 days per week, for a term of not less than 6 months) by a group 
practice and that is used exclusively by the group practice. Space in a 
building or a mobile vehicle, van, or trailer that is shared by more 
than one group practice, by a group practice and one or more solo 
practitioners, or by a group practice and another provider or supplier 
(for example, a diagnostic imaging facility) is not a centralized 
building for purposes of this subpart. This provision does not preclude 
a group practice from providing services to other providers or 
suppliers (for example, purchased diagnostic tests) in the group 
practice's centralized building. A group practice may have more than 
one centralized building.
    Clinical laboratory services means the biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings, including procedures to 
determine, measure, or otherwise describe the presence or absence of 
various substances or organisms in the body, as specifically identified 
by the List of CPT/HCPCS Codes. All services so identified on the List 
of CPT/HCPCS Codes are clinical laboratory services for purposes of 
this subpart. Any service not specifically identified as a clinical 
laboratory service on the List of CPT/HCPCS Codes is not a clinical 
laboratory service for purposes of this subpart.
    Commercially reasonable means that the particular arrangement 
furthers a legitimate business purpose of the parties to the 
arrangement and is sensible, considering the characteristics of the 
parties, including their size, type, scope, and specialty. An 
arrangement may be commercially reasonable even if it does not result 
in profit for one or more of the parties.
    Consultation means a professional service furnished to a patient by 
a physician if the following conditions are satisfied:
    (1) The physician's opinion or advice regarding evaluation or 
management or both of a specific medical problem is requested by 
another physician.
    (2) The request and need for the consultation are documented in the 
patient's medical record.
    (3) After the consultation is provided, the physician prepares a 
written report of his or her findings, which is provided to the 
physician who requested the consultation.
    (4) With respect to radiation therapy services provided by a 
radiation oncologist, a course of radiation treatments over a period of 
time will be considered to be pursuant to a consultation, provided that 
the radiation oncologist communicates with the referring physician on a 
regular basis about the patient's course of treatment and progress.
    Cybersecurity means the process of protecting information by 
preventing, detecting, and responding to cyberattacks.
    Designated health services (DHS) means any of the following 
services (other than those provided as emergency physician services 
furnished outside of the U.S.), as they are defined in this section:
    (1)(i) Clinical laboratory services.
    (ii) Physical therapy, occupational therapy, and outpatient speech-
language pathology services.
    (iii) Radiology and certain other imaging services.
    (iv) Radiation therapy services and supplies.
    (v) Durable medical equipment and supplies.
    (vi) Parenteral and enteral nutrients, equipment, and supplies.
    (vii) Prosthetics, orthotics, and prosthetic devices and supplies.
    (viii) Home health services.
    (ix) Outpatient prescription drugs.
    (x) Inpatient and outpatient hospital services.
    (2) Except as otherwise noted in this subpart, the term 
``designated health services'' or DHS means only DHS payable, in whole 
or in part, by Medicare. DHS do not include services that are paid 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 (1)(x) of this 
definition are themselves payable under 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 increase the amount of Medicare's payment to the 
hospital under any of the following prospective payment systems (PPS):
    (i) Acute Care Hospital Inpatient (IPPS);
    (ii) Inpatient Rehabilitation Facility (IRF PPS);
    (iii) Inpatient Psychiatric Facility (IPF PPS);
    or (iv) Long-Term Care Hospital (LTCH PPS).
    Does not violate the anti-kickback statute, as used in this subpart 
only, means that the particular arrangement--
    (1)(i) Meets a safe harbor under the anti-kickback statute, as set 
forth at Sec.  1001.952 of this title, ``Exceptions'';
    (ii) Has been specifically approved by the OIG in a favorable 
advisory opinion issued to a party to the particular arrangement (for 
example, the entity furnishing DHS) with respect to the particular 
arrangement (and not a similar arrangement), provided that the 
arrangement is conducted in accordance with the facts certified by the 
requesting party and the opinion is otherwise issued in accordance with 
part 1008 of this title, ``Advisory Opinions by the OIG''; or
    (iii) Does not violate the anti-kickback provisions in section 
1128B(b) of the Act.
    (2) For purposes of this definition, a favorable advisory opinion 
means an opinion in which the OIG opines that--
    (i) The party's specific arrangement does not implicate the anti-
kickback statute, does not constitute prohibited remuneration, or fits 
in a safe harbor under Sec.  1001.952 of this title; or
    (ii) The party will not be subject to any OIG sanctions arising 
under the anti-kickback statute (for example, under sections 
1128A(a)(7) and 1128(b)(7) of the Act) in connection with the party's 
specific arrangement.
    Downstream contractor means a ``first tier contractor'' as defined 
at Sec.  1001.952(t)(2)(iii) of this title or a

[[Page 77658]]

``downstream contractor'' as defined at Sec.  1001.952(t)(2)(i) of this 
title.
    Durable medical equipment (DME) and supplies has the meaning given 
in section 1861(n) of the Act and Sec.  414.202 of this chapter.
    Electronic health record means a repository of consumer health 
status information in computer processable form used for clinical 
diagnosis and treatment for a broad array of clinical conditions.
    Employee means any individual who, under the common law rules that 
apply in determining the employer-employee relationship (as applied for 
purposes of section 3121(d)(2) of the Internal Revenue Code of 1986), 
is considered to be employed by, or an employee of, an entity. 
(Application of these common law rules is discussed in 20 CFR 404.1007 
and 26 CFR 31.3121(d)-1(c).)
    Entity means--
    (1) A physician's sole practice or a practice of multiple 
physicians or any other person, sole proprietorship, public or private 
agency or trust, corporation, partnership, limited liability company, 
foundation, nonprofit corporation, or unincorporated association that 
furnishes DHS. An entity does not include the referring physician 
himself or herself, but does include his or her medical practice. A 
person or entity is considered to be furnishing DHS if it--
    (i) Is the person or entity that has performed services that are 
billed as DHS; or
    (ii) Is the person or entity that has presented a claim to Medicare 
for the DHS, including the person or entity to which the right to 
payment for the DHS has been reassigned in accordance with Sec.  
424.80(b)(1) (employer) or (b)(2) (payment under a contractual 
arrangement) of this chapter (other than a health care delivery system 
that is a health plan (as defined at Sec.  1001.952(l) of this title), 
and other than any managed care organization (MCO), provider-sponsored 
organization (PSO), or independent practice association (IPA) with 
which a health plan contracts for services provided to plan enrollees).
    (2) A health plan, MCO, PSO, or IPA that employs a supplier or 
operates a facility that could accept reassignment from a supplier 
under Sec.  424.80(b)(1) and (b)(2) of this chapter, with respect to 
any DHS provided by that supplier.
    (3) For purposes of this subpart, ``entity'' does not include a 
physician's practice when it bills Medicare for the technical component 
or professional component of a diagnostic test for which the anti-
markup provision is applicable in accordance with Sec.  414.50 of this 
chapter and Pub. 100-04, Medicare Claims Processing Manual, Chapter 1, 
Section 30.2.9.
    Fair market value means--
    (1) General. The value in an arm's-length transaction, 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 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 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) Assets. With respect to the purchase of an asset, the price 
that an asset would bring on the date of acquisition of the asset as 
the result of bona fide bargaining between a well-informed buyer and 
seller that are not otherwise in a position to generate business for 
each other.
    (2) Compensation. With respect to compensation for services, the 
compensation that would be paid at the time the parties enter into the 
service arrangement as the result of bona fide bargaining between well-
informed parties that are not otherwise in a position to generate 
business for each other.
    (3) Rental of equipment or office space. With respect to the rental 
of equipment or the rental of office space, the price that rental 
property would bring at the time the parties enter into the rental 
arrangement as the result of bona fide bargaining between a well-
informed lessor and lessee that are not otherwise in a position to 
generate business for each other.
    Home health services means the services described in section 
1861(m) of the Act and part 409, subpart E of this chapter.
    Hospital means any entity that qualifies as a ``hospital'' under 
section 1861(e) of the Act, as a ``psychiatric hospital'' under section 
1861(f) of the Act, or as a ``critical access hospital'' under section 
1861(mm)(1) of the Act, and refers to any separate legally organized 
operating entity plus any subsidiary, related entity, or other entities 
that perform services for the hospital's patients and for which the 
hospital bills. However, a ``hospital'' does not include entities that 
perform services for hospital patients ``under arrangements'' with the 
hospital.
    HPSA means, for purposes of this subpart, an area designated as a 
health professional shortage area under section 332(a)(1)(A) of the 
Public Health Service Act for primary medical care professionals (in 
accordance with the criteria specified in part 5 of this title).
    Immediate family member or member of a physician's immediate family 
means husband or wife; birth or adoptive parent, child, or sibling; 
stepparent, stepchild, stepbrother, or stepsister; father-in-law, 
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or 
grandchild.
    ``Incident to'' services or services ``incident to'' means those 
services and supplies that meet the requirements of section 
1861(s)(2)(A) of the Act, Sec.  410.26 of this chapter, and Pub. 100-
02, Medicare Benefit Policy Manual, Chapter 15, Sections 60, 60.1, 
60.2, 60.3, and 60.4.
    Inpatient hospital services means those services defined in section 
1861(b) of the Act and Sec.  409.10(a) and (b) of this chapter and 
include inpatient psychiatric hospital services listed in section 
1861(c) of the Act and inpatient critical access hospital services, as 
defined in section 1861(mm)(2) of the Act. ``Inpatient hospital 
services'' do not include emergency inpatient services provided by a 
hospital located outside of the U.S. and covered under the authority in 
section 1814(f)(2) of the Act and part 424, subpart H of this chapter, 
or emergency inpatient services provided by a nonparticipating hospital 
within the U.S., as authorized by section 1814(d) of the Act and 
described in part 424, subpart G of this chapter. ``Inpatient hospital 
services'' also do not include dialysis furnished by a hospital that is 
not certified to provide end-stage renal dialysis (ESRD) services under 
subpart U of part 405 of this chapter. ``Inpatient hospital services'' 
include services that are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``Inpatient 
hospital services'' do not include professional services performed by 
physicians, physician assistants, nurse practitioners, clinical nurse 
specialists, certified nurse midwives, and certified registered nurse 
anesthetists and qualified psychologists if Medicare reimburses the 
services independently and not as part of the

[[Page 77659]]

inpatient hospital service (even if they are billed by a hospital under 
an assignment or reassignment).
    Interoperable means--
    (1) Able to securely exchange data with and use data from other 
health information technology; and
    (2) Allows for complete access, exchange, and use of all 
electronically accessible health information for authorized use under 
applicable State or Federal law.
    Isolated financial transaction--(1) Isolated financial transaction 
means a one-time transaction involving a single payment between two or 
more persons or a one-time 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, single instance of forgiveness of an amount 
owed in settlement of a bona fide dispute, or similar one-time 
transaction, but does not include a single payment for multiple or 
repeated services (such as payment for services previously provided but 
not yet compensated).
    Laboratory means an entity furnishing biological, microbiological, 
serological, chemical, immunohematological, hematological, biophysical, 
cytological, pathological, or other examination of materials derived 
from the human body for the purpose of providing information for the 
diagnosis, prevention, or treatment of any disease or impairment of, or 
the assessment of the health of, human beings. These examinations also 
include procedures to determine, measure, or otherwise describe the 
presence or absence of various substances or organisms in the body. 
Entities only collecting or preparing specimens (or both) or only 
serving as a mailing service and not performing testing are not 
considered laboratories.
    List of CPT/HCPCS Codes means the list of CPT and HCPCS codes that 
identifies those items and services that are DHS under section 1877 of 
the Act or that may qualify for certain exceptions under section 1877 
of the Act. It is updated annually, as published in the Federal 
Register, and is posted on the CMS website at http://www.cms.hhs.gov/PhysicianSelfReferral/11__List__of__Codes.asp#TopOfPage.
    Locum tenens physician (or substitute physician) means a physician 
who substitutes in exigent circumstances for another physician, in 
accordance with section 1842(b)(6)(D) of the Act and Pub. 100-04, 
Medicare Claims Processing Manual, Chapter 1, Section 30.2.11.
    Member of the group or member of a group practice means, for 
purposes of this subpart, a direct or indirect physician owner of a 
group practice (including a physician whose interest is held by his or 
her individual professional corporation or by another entity), a 
physician employee of the group practice (including a physician 
employed by his or her individual professional corporation that has an 
equity interest in the group practice), a locum tenens physician (as 
defined in this section), or an on-call physician while the physician 
is providing on-call services for members of the group practice. A 
physician is a member of the group during the time he or she furnishes 
``patient care services'' to the group as defined in this section. An 
independent contractor or a leased employee is not a member of the 
group (unless the leased employee meets the definition of an 
``employee'' under this section).
    Outpatient hospital services means the therapeutic, diagnostic, and 
partial hospitalization services listed under sections 1861(s)(2)(B) 
and (s)(2)(C) of the Act; outpatient services furnished by a 
psychiatric hospital, as defined in section 1861(f) of the Act; and 
outpatient critical access hospital services, as defined in section 
1861(mm)(3) of the Act. ``Outpatient hospital services'' do not include 
emergency services furnished by nonparticipating hospitals and covered 
under the conditions described in section 1835(b) of the Act and 
subpart G of part 424 of this chapter. ``Outpatient hospital services'' 
include services that are furnished either by the hospital directly or 
under arrangements made by the hospital with others. ``Outpatient 
hospital services'' do not include professional services performed by 
physicians, physician assistants, nurse practitioners, clinical nurse 
specialists, certified nurse midwives, certified registered nurse 
anesthetists, and qualified psychologists if Medicare reimburses the 
services independently and not as part of the outpatient hospital 
service (even if they are billed by a hospital under an assignment or 
reassignment).
    Outpatient prescription drugs means all drugs covered by Medicare 
Part B or D, except for those drugs that are ``covered ancillary 
services,'' as defined at Sec.  416.164(b) of this chapter, for which 
separate payment is made to an ambulatory surgical center.
    Parenteral and enteral nutrients, equipment, and supplies means the 
following services (including all HCPCS level 2 codes for these 
services):
    (1) Parenteral nutrients, equipment, and supplies, meaning those 
items and supplies needed to provide nutriment to a patient with 
permanent, severe pathology of the alimentary tract that does not allow 
absorption of sufficient nutrients to maintain strength commensurate 
with the patient's general condition, as described in Pub. 100-03, 
Medicare National Coverage Determinations Manual, Chapter 1, Section 
180.2, as amended or replaced from time to time; and
    (2) Enteral nutrients, equipment, and supplies, meaning items and 
supplies needed to provide enteral nutrition to a patient with a 
functioning gastrointestinal tract who, due to pathology to or 
nonfunction of the structures that normally permit food to reach the 
digestive tract, cannot maintain weight and strength commensurate with 
his or her general condition, as described in Pub. 100-03, Medicare 
National Coverage Determinations Manual, Chapter 1, Section 180.2.
    Patient care services means any task(s) performed by a physician in 
the group practice that address the medical needs of specific patients 
or patients in general, regardless of whether they involve direct 
patient encounters or generally benefit a particular practice. Patient 
care services can include, for example, the services of physicians who 
do not directly treat patients, such as time spent by a physician 
consulting with other physicians or reviewing laboratory tests, or time 
spent training staff members, arranging for equipment, or performing 
administrative or management tasks.
    Physical therapy, occupational therapy, and outpatient speech-
language pathology services means those particular services so 
identified on the List of CPT/HCPCS Codes. All services so identified 
on the List of CPT/HCPCS Codes are physical therapy, occupational 
therapy, and outpatient speech-language pathology services for purposes 
of this subpart. Any service not specifically identified as physical 
therapy, occupational therapy or outpatient speech-language pathology 
on the List of CPT/HCPCS Codes is not a physical therapy, occupational

[[Page 77660]]

therapy, or outpatient speech-language pathology service for purposes 
of this subpart. The list of codes identifying physical therapy, 
occupational therapy, and outpatient speech-language pathology services 
for purposes of this regulation includes the following:
    (1) Physical therapy services, meaning those outpatient physical 
therapy services described in section 1861(p) of the Act that are 
covered under Medicare Part A or Part B, regardless of who provides 
them, if the services include--
    (i) Assessments, function tests, and measurements of strength, 
balance, endurance, range of motion, and activities of daily living;
    (ii) Therapeutic exercises, massage, and use of physical medicine 
modalities, assistive devices, and adaptive equipment; or
    (iii) Establishment of a maintenance therapy program for an 
individual whose restoration potential has been reached; however, 
maintenance therapy itself is not covered as part of these services.
    (2) Occupational therapy services, meaning those services described 
in section 1861(g) of the Act that are covered under Medicare Part A or 
Part B, regardless of who provides them, if the services include--
    (i) Teaching of compensatory techniques to permit an individual 
with a physical or cognitive impairment or limitation to engage in 
daily activities;
    (ii) Evaluation of an individual's level of independent 
functioning;
    (iii) Selection and teaching of task-oriented therapeutic 
activities to restore sensory-integrative function; or
    (iv) Assessment of an individual's vocational potential, except 
when the assessment is related solely to vocational rehabilitation.
    (3) Outpatient speech-language pathology services, meaning those 
services as described in section 1861(ll)(2) of the Act that are for 
the diagnosis and treatment of speech, language, and cognitive 
disorders that include swallowing and other oral-motor dysfunctions.
    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.
    Physician in the group practice means a member of the group 
practice, as well as an independent contractor physician during the 
time the independent contractor is furnishing patient care services (as 
defined in this section) for the group practice under a contractual 
arrangement directly with the group practice to provide services to the 
group practice's patients in the group practice's facilities. The 
contract must contain the same restrictions on compensation that apply 
to members of the group practice under Sec.  411.352(g) (or the 
contract must satisfy the requirements of the personal service 
arrangements exception in Sec.  411.357(d)), and the independent 
contractor's arrangement with the group practice must comply with the 
reassignment rules in Sec.  424.80(b)(2) of this chapter (see also Pub. 
L. 100-04, Medicare Claims Processing Manual, Chapter 1, Section 
30.2.7, as amended or replaced from time to time). Referrals from an 
independent contractor who is a physician in the group practice are 
subject to the prohibition on referrals in Sec.  411.353(a), and the 
group practice is subject to the limitation on billing for those 
referrals in Sec.  411.353(b).
    Physician incentive plan means any compensation arrangement between 
an entity (or downstream contractor) and a physician or physician group 
that may directly or indirectly have the effect of reducing or limiting 
services furnished with respect to individuals enrolled with the 
entity.
    Physician organization means a physician, a physician practice, or 
a group practice that complies with the requirements of Sec.  411.352.
    Plan of care means the establishment by a physician of a course of 
diagnosis or treatment (or both) for a particular patient, including 
the ordering of services.
    Professional courtesy means the provision of free or discounted 
health care items or services to a physician or his or her immediate 
family members or office staff.
    Prosthetics, Orthotics, and Prosthetic Devices and Supplies means 
the following services (including all HCPCS level 2 codes for these 
items and services that are covered by Medicare):
    (1) Orthotics, meaning leg, arm, back, and neck braces, as listed 
in section 1861(s)(9) of the Act.
    (2) Prosthetics, meaning artificial legs, arms, and eyes, as 
described in section 1861(s)(9) of the Act.
    (3) Prosthetic devices, meaning devices (other than a dental 
device) listed in section 1861(s)(8) of the Act that replace all or 
part of an internal body organ, including colostomy bags, and one pair 
of conventional eyeglasses or contact lenses furnished subsequent to 
each cataract surgery with insertion of an intraocular lens.
    (4) Prosthetic supplies, meaning supplies that are necessary for 
the effective use of a prosthetic device (including supplies directly 
related to colostomy care).
    Radiation therapy services and supplies means those particular 
services and supplies, including (effective January 1, 2007) 
therapeutic nuclear medicine services and supplies, so identified on 
the List of CPT/HCPCS Codes. All services and supplies so identified on 
the List of CPT/HCPCS Codes are radiation therapy services and supplies 
for purposes of this subpart. Any service or supply not specifically 
identified as radiation therapy services or supplies on the List of 
CPT/HCPCS Codes is not a radiation therapy service or supply for 
purposes of this subpart. The list of codes identifying radiation 
therapy services and supplies is based on section 1861(s)(4) of the Act 
and Sec.  410.35 of this chapter.
    Radiology and certain other imaging services means those particular 
services so identified on the List of CPT/HCPCS Codes. All services 
identified on the List of CPT/HCPCS Codes are radiology and certain 
other imaging services for purposes of this subpart. Any service not 
specifically identified as radiology and certain other imaging services 
on the List of CPT/HCPCS Codes is not a radiology or certain other 
imaging service for purposes of this subpart. The list of codes 
identifying radiology and certain other imaging services includes the 
professional and technical components of any diagnostic test or 
procedure using x-rays, ultrasound, computerized axial tomography, 
magnetic resonance imaging, nuclear medicine (effective January 1, 
2007), or other imaging services. All codes identified as radiology and 
certain other imaging services are covered under section 1861(s)(3) of 
the Act and Sec. Sec.  410.32 and 410.34 of this chapter, but do not 
include--
    (1) X-ray, fluoroscopy, or ultrasound procedures that require the 
insertion of a needle, catheter, tube, or probe through the skin or 
into a body orifice;
    (2) Radiology or certain other imaging services that are integral 
to the performance of a medical procedure that is not identified on the 
list of CPT/HCPCS codes as a radiology or certain other imaging service 
and is performed--
    (i) Immediately prior to or during the medical procedure; or
    (ii) Immediately following the medical procedure when necessary to 
confirm placement of an item placed during the medical procedure.
    (3) Radiology and certain other imaging services that are ``covered 
ancillary services,'' as defined at Sec.  416.164(b), for which 
separate payment is made to an ASC.
    Referral--
    (1) Means either of the following:

[[Page 77661]]

    (i) Except as provided in paragraph (2) of this definition, the 
request by a physician for, or ordering of, or the certifying or 
recertifying of the need for, any designated health service for which 
payment may be made under Medicare Part B, including a request for a 
consultation with another physician and any test or procedure ordered 
by or to be performed by (or under the supervision of) that other 
physician, but not including any designated health service personally 
performed or provided by the referring physician. A designated health 
service is not personally performed or provided by the referring 
physician if it is performed or provided by any other person, 
including, but not limited to, the referring physician's employees, 
independent contractors, or group practice members.
    (ii) Except as provided in paragraph (2) of this definition, a 
request by a physician that includes the provision of any designated 
health service for which payment may be made under Medicare, the 
establishment of a plan of care by a physician that includes the 
provision of such a designated health service, or the certifying or 
recertifying of the need for such a designated health service, but not 
including any designated health service personally performed or 
provided by the referring physician. A designated health service is not 
personally performed or provided by the referring physician if it is 
performed or provided by any other person including, but not limited 
to, the referring physician's employees, independent contractors, or 
group practice members.
    (2) Does not include a request by a pathologist for clinical 
diagnostic laboratory tests and pathological examination services, by a 
radiologist for diagnostic radiology services, and by a radiation 
oncologist for radiation therapy or ancillary services necessary for, 
and integral to, the provision of radiation therapy, if--
    (i) The request results from a consultation initiated by another 
physician (whether the request for a consultation was made to a 
particular physician or to an entity with which the physician is 
affiliated); and
    (ii) The tests or services are furnished by or under the 
supervision of the pathologist, radiologist, or radiation oncologist, 
or under the supervision of a pathologist, radiologist, or radiation 
oncologist, respectively, in the same group practice as the 
pathologist, radiologist, or radiation oncologist.
    (3) Can be in any form, including, but not limited to, written, 
oral, or electronic.
    (4) A referral is not an item or service for purposes of section 
1877 of the Act and this subpart.
    Referring physician means a physician who makes a referral as 
defined in this section or who directs another person or entity to make 
a referral or who controls referrals made by another person or entity. 
A referring physician and the professional corporation of which he or 
she is a sole owner are the same for purposes of this subpart.
    Remuneration means any payment or other benefit made directly or 
indirectly, overtly or covertly, in cash or in kind, except that the 
following are not considered remuneration for purposes of this section:
    (1) The forgiveness of amounts owed for inaccurate tests or 
procedures, mistakenly performed tests or procedures, or the correction 
of minor billing errors.
    (2) The furnishing of items, devices, or supplies that are, in 
fact, used solely for one or more of the following purposes:
    (i) Collecting specimens for the entity furnishing the items, 
devices or supplies;
    (ii) Transporting specimens for the entity furnishing the items, 
devices or supplies;
    (iii) Processing specimens for the entity furnishing the items, 
devices or supplies;
    (iv) Storing specimens for the entity furnishing the items, devices 
or supplies;
    (v) Ordering tests or procedures for the entity furnishing the 
items, devices or supplies; or
    (vi) Communicating the results of tests or procedures for the 
entity furnishing the items, devices or supplies.
    (3) A payment made by an insurer or a self-insured plan (or a 
subcontractor of the insurer or self-insured plan) to a physician to 
satisfy a claim, submitted on a fee-for-service basis, for the 
furnishing of health services by that physician to an individual who is 
covered by a policy with the insurer or by the self-insured plan, if--
    (i) The health services are not furnished, and the payment is not 
made, under a contract or other arrangement between the insurer or the 
self-insured plan (or a subcontractor of the insurer or self-insured 
plan) and the physician;
    (ii) The payment is made to the physician on behalf of the covered 
individual and would otherwise be made directly to the individual; and
    (iii) The amount of the payment is set in advance, does not exceed 
fair market value, and is not determined in any manner that takes into 
account the volume or value of referrals.
    Rural area means an area that is not an urban area as defined at 
Sec.  412.62(f)(1)(ii) of this chapter.
    Same building means a structure with, or combination of structures 
that share, a single street address as assigned by the U.S. Postal 
Service, excluding all exterior spaces (for example, lawns, courtyards, 
driveways, parking lots) and interior loading docks or parking garages. 
For purposes of this section, the ``same building'' does not include a 
mobile vehicle, van, or trailer.
    Specialty hospital means:
    (1) A subsection (d) hospital (as defined in section 1886(d)(1)(B) 
of the Act) that is primarily or exclusively engaged in the care and 
treatment of one of the following:
    (i) Patients with a cardiac condition;
    (ii) Patients with an orthopedic condition;
    (iii) Patients receiving a surgical procedure; or
    (iv) Any other specialized category of services that the Secretary 
designates as inconsistent with the purpose of permitting physician 
ownership and investment interests in a hospital.
    (2) A ``specialty hospital'' does not include any hospital--
    (i) Determined by the Secretary to be in operation before or under 
development as of November 18, 2003;
    (ii) For which the number of physician investors at any time on or 
after such date is no greater than the number of such investors as of 
such date;
    (iii) For which the type of categories described above is no 
different at any time on or after such date than the type of such 
categories as of such date;
    (iv) For which any increase in the number of beds occurs only in 
the facilities on the main campus of the hospital and does not exceed 
50 percent of the number of beds in the hospital as of November 18, 
2003, or 5 beds, whichever is greater; and
    (v) That meets such other requirements as the Secretary may 
specify.
    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 of two or more persons or entities 
doing business.
    Value-based activity means any of the following activities, 
provided that the

[[Page 77662]]

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.
    Value-based arrangement means an arrangement for the provision of 
at least one value-based activity for a target patient population to 
which the only parties are--
    (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 the 
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 any of the following:
    (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 a person or entity that engages in at least 
one value-based activity as part of a value-based enterprise.


Sec.  411.352   Group practice.

    For purposes of this subpart, a group practice is a physician 
practice that meets the following conditions:
    (a) Single legal entity. The group practice must consist of a 
single legal entity operating primarily for the purpose of being a 
physician group practice in any organizational form recognized by the 
State in which the group practice achieves its legal status, including, 
but not limited to, a partnership, professional corporation, limited 
liability company, foundation, nonprofit corporation, faculty practice 
plan, or similar association. The single legal entity may be organized 
by any party or parties, including, but not limited to, physicians, 
health care facilities, or other persons or entities (including, but 
not limited to, physicians individually incorporated as professional 
corporations). The single legal entity may be organized or owned (in 
whole or in part) by another medical practice, provided that the other 
medical practice is not an operating physician practice (and regardless 
of whether the medical practice meets the conditions for a group 
practice under this section). For purposes of this subpart, a single 
legal entity does not include informal affiliations of physicians 
formed substantially to share profits from referrals, or separate group 
practices under common ownership or control through a physician 
practice management company, hospital, health system, or other entity 
or organization. A group practice that is otherwise a single legal 
entity may itself own subsidiary entities. A group practice operating 
in more than one State will be considered to be a single legal entity 
notwithstanding that it is composed of multiple legal entities, 
provided that--
    (1) The States in which the group practice is operating are 
contiguous (although each State need not be contiguous to every other 
State);
    (2) The legal entities are absolutely identical as to ownership, 
governance, and operation; and
    (3) Organization of the group practice into multiple entities is 
necessary to comply with jurisdictional licensing laws of the States in 
which the group practice operates.
    (b) Physicians. The group practice must have at least two 
physicians who are members of the group (whether employees or direct or 
indirect owners), as defined at Sec.  411.351.
    (c) Range of care. Each physician who is a member of the group, as 
defined at Sec.  411.351, must furnish substantially the full range of 
patient care services that the physician routinely furnishes, including 
medical care, consultation, diagnosis, and treatment, through the joint 
use of shared office space, facilities, equipment, and personnel.
    (d) Services furnished by group practice members. (1) Except as 
otherwise provided in paragraphs (d)(3) through (6) of this section, 
substantially all of the patient care services of the physicians who 
are members of the group (that is, at least 75 percent of the total 
patient care services of the group practice members) must be furnished 
through the group and billed under a billing number assigned to the 
group, and the amounts received must be treated as receipts of the 
group. Patient care services must be measured by one of the following:
    (i) The total time each member spends on patient care services 
documented by any reasonable means (including, but not limited to, time 
cards, appointment schedules, or personal diaries). (For example, if a 
physician practices 40 hours a week and spends 30 hours a week on 
patient care services for a group practice, the physician has spent 75 
percent of his or her time providing patient care services for the 
group.)
    (ii) Any alternative measure that is reasonable, fixed in advance 
of the performance of the services being measured, uniformly applied 
over time, verifiable, and documented.
    (2) The data used to calculate compliance with this substantially 
all test and related supportive documentation must be made available to 
the Secretary upon request.
    (3) The substantially all test set forth in paragraph (d)(1) of 
this section does not apply to any group practice that is located 
solely in a HPSA, as defined at Sec.  411.351.
    (4) For a group practice located outside of a HPSA (as defined at 
Sec.  411.351), any time spent by a group practice member providing 
services in a HPSA should not be used to calculate whether the group 
practice has met the substantially all test, regardless of whether the 
member's time in the HPSA is spent in a group practice, clinic, or 
office setting.
    (5) During the start up period (not to exceed 12 months) that 
begins on the date of the initial formation of a new group practice, a 
group practice must make a reasonable, good faith effort to ensure that 
the group practice complies with the substantially all test requirement 
set forth in paragraph (d)(1) of this section as soon as practicable, 
but no later than 12 months from the date of the initial formation of 
the group practice. This paragraph (d)(5) does not apply when an 
existing group practice admits a new member or reorganizes.
    (6)(i) If the addition to an existing group practice of a new 
member who would be considered to have relocated his or her medical 
practice under Sec.  411.357(e)(2) would result in the existing group 
practice not meeting the substantially all test set forth in paragraph 
(d)(1) of this section, the group practice will have 12 months 
following the addition of the new member to come back into full 
compliance, provided that--
    (A) For the 12-month period the group practice is fully compliant 
with the substantially all test if the new member

[[Page 77663]]

is not counted as a member of the group for purposes of Sec.  411.352; 
and
    (B) The new member's employment with, or ownership interest in, the 
group practice is documented in writing no later than the beginning of 
his or her new employment, ownership, or investment.
    (ii) This paragraph (d)(6) does not apply when an existing group 
practice reorganizes or admits a new member who is not relocating his 
or her medical practice.
    (e) Distribution of expenses and income. The overhead expenses of, 
and income from, the practice must be distributed according to methods 
that are determined before the receipt of payment for the services 
giving rise to the overhead expense or producing the income. Nothing in 
this section prevents a group practice from adjusting its compensation 
methodology prospectively, subject to restrictions on the distribution 
of revenue from DHS under paragraph (i) of this section.
    (f) Unified business. (1) The group practice must be a unified 
business having at least the following features:
    (i) Centralized decision-making by a body representative of the 
group practice that maintains effective control over the group's assets 
and liabilities (including, but not limited to, budgets, compensation, 
and salaries); and
    (ii) Consolidated billing, accounting, and financial reporting.
    (2) Location and specialty-based compensation practices are 
permitted with respect to revenues derived from services that are not 
DHS and may be permitted with respect to revenues derived from DHS 
under paragraph (i) of this section.
    (g) Volume or value of referrals. No physician who is a member of 
the group practice directly or indirectly receives compensation based 
on the volume or value of his or her referrals, except as provided in 
paragraph (i) of this section.
    (h) Physician-patient encounters. Members of the group must 
personally conduct no less than 75 percent of the physician-patient 
encounters of the group practice.
    (i) Special rule for productivity bonuses and profit shares. (1) A 
physician in the group practice may be paid a share of overall profits 
of the group, provided that the share is not determined in any manner 
that is directly related to the volume or value of referrals of DHS by 
the physician. A physician in the group practice may be paid a 
productivity bonus based on services that he or she has personally 
performed, or services ``incident to'' such personally performed 
services, or both, provided that the bonus is not determined in any 
manner that is directly related to the volume or value of referrals of 
DHS by the physician (except that the bonus may directly relate to the 
volume or value of DHS referrals by the physician if the referrals are 
for services ``incident to'' the physician's personally performed 
services).
    (2) Overall profits means the group's entire profits derived from 
DHS payable by Medicare or Medicaid or the profits derived from DHS 
payable by Medicare or Medicaid of any component of the group practice 
that consists of at least five physicians. Overall profits should be 
divided in a reasonable and verifiable manner that is not directly 
related to the volume or value of the physician's referrals of DHS. The 
share of overall profits will be deemed not to relate directly to the 
volume or value of referrals if one of the following conditions is met:
    (i) The group's profits are divided per capita (for example, per 
member of the group or per physician in the group).
    (ii) Revenues derived from DHS are distributed based on the 
distribution of the group practice's revenues attributed to services 
that are not DHS payable by any Federal health care program or private 
payer.
    (iii) Revenues derived from DHS constitute less than 5 percent of 
the group practice's total revenues, and the allocated portion of those 
revenues to each physician in the group practice constitutes 5 percent 
or less of his or her total compensation from the group.
    (3) A productivity bonus must be calculated in a reasonable and 
verifiable manner that is not directly related to the volume or value 
of the physician's referrals of DHS. A productivity bonus will be 
deemed not to relate directly to the volume or value of referrals of 
DHS if one of the following conditions is met:
    (i) The bonus is based on the physician's total patient encounters 
or relative value units (RVUs). (The methodology for establishing RVUs 
is set forth in Sec.  414.22 of this chapter.)
    (ii) The bonus is based on the allocation of the physician's 
compensation attributable to services that are not DHS payable by any 
Federal health care program or private payer.
    (iii) Revenues derived from DHS are less than 5 percent of the 
group practice's total revenues, and the allocated portion of those 
revenues to each physician in the group practice constitutes 5 percent 
or less of his or her total compensation from the group practice.
    (4) Supporting documentation verifying the method used to calculate 
the profit share or productivity bonus under paragraphs (i)(2) and (3) 
of this section, and the resulting amount of compensation, must be made 
available to the Secretary upon request.


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

    (a) Prohibition on referrals. Except as provided in this subpart, a 
physician who has a direct or indirect financial relationship with an 
entity, or who has an immediate family member who has a direct or 
indirect financial relationship with the entity, may not make a 
referral to that entity for the furnishing of DHS for which payment 
otherwise may be made under Medicare. A physician's prohibited 
financial relationship with an entity that furnishes DHS is not imputed 
to his or her group practice or its members or its staff. However, a 
referral made by a physician's group practice, its members, or its 
staff may be imputed to the physician if the physician directs the 
group practice, its members, or its staff to make the referral or if 
the physician controls referrals made by his or her group practice, its 
members, or its staff.
    (b) Limitations on billing. An entity that furnishes DHS pursuant 
to a referral that is prohibited by paragraph (a) of this section may 
not present or cause to be presented a claim or bill to the Medicare 
program or to any individual, third party payer, or other entity for 
the DHS performed pursuant to the prohibited referral.
    (c) Denial of payment for services furnished under a prohibited 
referral. (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.
    (2) When payment for a designated health service is denied on the 
basis that the service was furnished pursuant to a prohibited referral, 
and such payment denial is appealed--
    (i) The ultimate burden of proof (burden of persuasion) at each 
level of appeal is on the entity submitting the claim for payment to 
establish that the service was not furnished pursuant to a prohibited 
referral (and not on CMS or its contractors to establish that the 
service was furnished pursuant to a prohibited referral); and
    (ii) The burden of production on each issue at each level of appeal 
is initially on the claimant, but may shift to CMS or its contractors 
during the course of the appellate proceeding, depending on the 
evidence presented by the claimant.
    (d) Refunds. An entity that collects payment for a designated 
health service that was performed pursuant to a prohibited referral 
must refund all

[[Page 77664]]

collected amounts on a timely basis, as defined at Sec.  1003.101 of 
this title.
    (e) Exception for certain entities. Payment may be made to an 
entity that submits a claim for a designated health service if--
    (1) The entity did not have actual knowledge of, and did not act in 
reckless disregard or deliberate ignorance of, the identity of the 
physician who made the referral of the designated health service to the 
entity; and
    (2) The claim otherwise complies with all applicable Federal and 
State laws, rules, and regulations.
    (f) Exception for certain arrangements involving temporary 
noncompliance. (1) Except as provided in paragraphs (f)(2) through (4) 
of this section, an entity may submit a claim or bill and payment may 
be made to an entity that submits a claim or bill for a designated 
health service if--
    (i) The financial relationship between the entity and the referring 
physician fully complied with an applicable exception under Sec.  
411.355, 411.356, or 411.357 for at least 180 consecutive calendar days 
immediately preceding the date on which the financial relationship 
became noncompliant with the exception; and
    (ii) The financial relationship has fallen out of compliance with 
the exception for reasons beyond the control of the entity, and the 
entity promptly takes steps to rectify the noncompliance.
    (2) Paragraph (f)(1) of this section applies only to DHS furnished 
during the period of time it takes the entity to rectify the 
noncompliance, which must not exceed 90 consecutive calendar days 
following the date on which the financial relationship became 
noncompliant with an exception.
    (3) Paragraph (f)(1) may be used by an entity only once every 3 
years with respect to the same referring physician.
    (4) Paragraph (f)(1) does not apply if the exception with which the 
financial relationship previously complied was Sec.  411.357(k) or (m).
    (g) [Reserved]
    (h) Special rule for reconciling compensation. An entity may submit 
a claim or bill and payment may be made to an entity that submits a 
claim or bill for a designated health service if--
    (1) No later than 90 consecutive calendar days following the 
expiration or termination of a compensation arrangement, the entity and 
the physician (or immediate family member of a physician) that are 
parties to the compensation arrangement reconcile all discrepancies in 
payments under the arrangement such that, following the reconciliation, 
the entire amount of remuneration for items or services has been paid 
as required under the terms and conditions of the arrangement; and
    (2) Except for the discrepancies in payments described in paragraph 
(h)(1) of this section, the compensation arrangement fully complies 
with an applicable exception in this subpart.


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

    (a) Financial relationships--(1) Financial relationship means--
    (i) A direct or indirect ownership or investment interest (as 
defined in paragraph (b) of this section) in any entity that furnishes 
DHS; or
    (ii) A direct or indirect compensation arrangement (as defined in 
paragraph (c) of this section) with an entity that furnishes DHS.
    (2) Types of financial relationships. (i) A direct financial 
relationship exists if remuneration passes between the referring 
physician (or a member of his or her immediate family) and the entity 
furnishing DHS without any intervening persons or entities between the 
entity furnishing DHS and the referring physician (or a member of his 
or her immediate family).
    (ii) An indirect financial relationship exists under the conditions 
described in paragraphs (b)(5) and (c)(2) of this section.
    (b) Ownership or investment interest. An ownership or investment 
interest in the entity may be through equity, debt, or other means, and 
includes an interest in an entity that holds an ownership or investment 
interest in any entity that furnishes DHS.
    (1) An ownership or investment interest includes, but is not 
limited to, stock, stock options other than those described in 
paragraph (b)(3)(ii) of this section, partnership shares, limited 
liability company memberships, as well as loans, bonds, or other 
financial instruments that are secured with an entity's property or 
revenue or a portion of that property or revenue.
    (2) An ownership or investment interest in a subsidiary company is 
neither an ownership or investment interest in the parent company, nor 
in any other subsidiary of the parent, unless the subsidiary company 
itself has an ownership or investment interest in the parent or such 
other subsidiaries. It may, however, be part of an indirect financial 
relationship.
    (3) Ownership and investment interests do not include, among other 
things--
    (i) An interest in an entity that arises from a retirement plan 
offered by that entity to the physician (or a member of his or her 
immediate family) through the physician's (or immediate family 
member's) employment with that entity;
    (ii) Stock options and convertible securities received as 
compensation until the stock options are exercised or the convertible 
securities are converted to equity (before this time the stock options 
or convertible securities are compensation arrangements as defined in 
paragraph (c) of this section);
    (iii) An unsecured loan subordinated to a credit facility (which is 
a compensation arrangement as defined in paragraph (c) of this 
section);
    (iv) An ``under arrangements'' contract between a hospital and an 
entity owned by one or more physicians (or a group of physicians) 
providing DHS ``under arrangements'' with the hospital (such a contract 
is a compensation arrangement as defined in paragraph (c) of this 
section);
    (v) A security interest held by a physician in equipment sold by 
the physician to a hospital and financed through a loan from the 
physician to the hospital (such an interest is a compensation 
arrangement as defined in paragraph (c) of this section);
    (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).
    (4) An ownership or investment interest that meets an exception set 
forth in Sec.  411.355 or Sec.  411.356 need not also meet an exception 
for compensation arrangements set forth in Sec.  411.357 with respect 
to profit distributions, dividends, or interest payments on secured 
obligations.
    (5)(i) An indirect ownership or investment interest exists if--
    (A) Between the referring physician (or immediate family member) 
and the entity furnishing DHS there exists an unbroken chain of any 
number (but no fewer than one) of persons or entities having ownership 
or investment interests; and
    (B) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) has some ownership or 
investment interest (through any number of intermediary ownership or 
investment interests) in the entity furnishing the DHS.

[[Page 77665]]

    (ii) An indirect ownership or investment interest exists even 
though the entity furnishing DHS does not know, or acts in reckless 
disregard or deliberate ignorance of, the precise composition of the 
unbroken chain or the specific terms of the ownership or investment 
interests that form the links in the chain.
    (iii) Notwithstanding anything in this paragraph (b)(5), common 
ownership or investment in an entity does not, in and of itself, 
establish an indirect ownership or investment interest by one common 
owner or investor in another common owner or investor.
    (iv) An indirect ownership or investment interest requires an 
unbroken chain of ownership interests between the referring physician 
and the entity furnishing DHS such that the referring physician has an 
indirect ownership or investment interest in the entity furnishing DHS.
    (c) Compensation arrangement. A compensation arrangement is any 
arrangement involving remuneration, direct or indirect, between a 
physician (or a member of a physician's immediate family) and an 
entity. An ``under arrangements'' contract between a hospital and an 
entity providing DHS ``under arrangements'' to the hospital creates a 
compensation arrangement for purposes of these regulations. A 
compensation arrangement does not include the portion of any business 
arrangement that consists solely of the remuneration described in 
section 1877(h)(1)(C) of the Act and in paragraphs (1) through (3) of 
the definition of the term ``remuneration'' at Sec.  411.351. (However, 
any other portion of the arrangement may still constitute a 
compensation arrangement.)
    (1)(i) A direct compensation arrangement exists if remuneration 
passes between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS without any intervening 
persons or entities.
    (ii) Except as provided in paragraph (c)(3)(ii)(C) of this section, 
a physician is deemed to ``stand in the shoes'' of his or her physician 
organization and have a direct compensation arrangement with an entity 
furnishing DHS if--
    (A) The only intervening entity between the physician and the 
entity furnishing DHS is his or her physician organization; and
    (B) The physician has an ownership or investment interest in the 
physician organization.
    (iii) A physician (other than a physician described in paragraph 
(c)(1)(ii)(B) of this section) is permitted to ``stand in the shoes'' 
of his or her physician organization and have a direct compensation 
arrangement with an entity furnishing DHS if the only intervening 
entity between the physician and the entity furnishing DHS is his or 
her physician organization.
    (2) An indirect compensation arrangement exists if all of the 
conditions of paragraphs (c)(2)(i) through (iii) of this section exist:
    (i) Between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS there exists an 
unbroken chain of any number (but not fewer than one) of persons or 
entities that have financial relationships (as defined in paragraph (a) 
of this section) between them (that is, each link in the chain has 
either an ownership or investment interest or a compensation 
arrangement with the preceding link).
    (ii)(A) The referring physician (or immediate family member) 
receives aggregate compensation from the person or entity in the chain 
with which the physician (or immediate family member) has a direct 
financial relationship that varies with the volume or value of 
referrals or other business generated by the referring physician for 
the entity furnishing the DHS and the individual unit of compensation 
received by the physician (or immediate family member)--
    (1) Is not fair market value for items or services actually 
provided;
    (2) Includes the physician's referrals to the entity furnishing DHS 
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
    (3) Includes other business generated by the physician for the 
entity furnishing DHS 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.
    (B) For purposes of applying paragraph (c)(2)(ii)(A) of this 
section, 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.
    (C) If the financial relationship between the physician (or 
immediate family member) and the person or entity in the chain with 
which the referring physician (or immediate family member) has a direct 
financial relationship is an ownership or investment interest, the 
determination whether the aggregate compensation varies with 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)).
    (iii) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) receives aggregate 
compensation that varies with the volume or value of referrals or other 
business generated by the referring physician for the entity furnishing 
the DHS.
    (iv)(A) For purposes of paragraph (c)(2)(i) of this section, except 
as provided in paragraph (c)(3)(ii)(C) of this section, a physician is 
deemed to ``stand in the shoes'' of his or her physician organization 
if the physician has an ownership or investment interest in the 
physician organization.
    (B) For purposes of paragraph (c)(2)(i) of this section, a 
physician (other than a physician described in paragraph (c)(2)(iv)(A) 
of this section) is permitted to ``stand in the shoes'' of his or her 
physician organization.
    (3)(i) For purposes of paragraphs (c)(1)(ii) and (c)(2)(iv) of this 
section, a physician who ``stands in the shoes'' of his or her 
physician organization is deemed to have the same compensation 
arrangements (with the same parties and on the same terms) as the 
physician organization. When applying the exceptions in Sec. Sec.  
411.355 and 411.357 to arrangements in which a physician stands in the 
shoes of his or her physician organization, the ``parties to the 
arrangements'' are considered to be--
    (A) With respect to a signature requirement, the physician 
organization and any physician who ``stands in the shoes'' of the 
physician organization as required under paragraph (c)(1)(ii) or 
(c)(2)(iv)(A) of this section; and
    (B) With respect to all other requirements of the exception, 
including the relevant referrals and other business generated between 
the parties, the entity furnishing DHS and the physician organization 
(including

[[Page 77666]]

all members, employees, and independent contractor physicians).
    (ii) The provisions of paragraphs (c)(1)(ii) and (c)(2)(iv)(A) of 
this section--
    (A) Need not apply during the original term or current renewal term 
of an arrangement that satisfied the requirements of Sec.  411.357(p) 
as of September 5, 2007 (see 42 CFR parts 400-413, revised as of 
October 1, 2007);
    (B) Do not apply to an arrangement that satisfies the requirements 
of Sec.  411.355(e); and
    (C) Do not apply to a physician whose ownership or investment 
interest is titular only. A titular ownership or investment interest is 
an 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.
    (iii) An arrangement structured to comply with an exception in 
Sec.  411.357 (other than Sec.  411.357(p)), but which would otherwise 
qualify as an indirect compensation arrangement under this paragraph as 
of August 19, 2008, need not be restructured to satisfy the 
requirements of Sec.  411.357(p) until the expiration of the original 
term or current renewal term of the arrangement.
    (4)(i) Exceptions applicable to indirect compensation 
arrangements--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 
a MCO or IPA and a referring physician. Only the exceptions at 
Sec. Sec.  411.355, 411.357(n), and 411.357(p) are applicable in the 
case of an indirect compensation arrangement in which the entity 
furnishing DHS described in paragraph (c)(2)(i) of this section is a 
MCO or IPA.
    (iii) 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 at Sec.  411.351) to which the physician (or the physician 
organization in whose shoes the physician stands under this paragraph) 
is a direct party--
    (A) Only the exceptions at Sec. Sec.  411.355, 411.357(p), and 
411.357(aa) are applicable to the indirect compensation arrangement if 
the entity furnishing DHS is not a MCO or IPA; and
    (B) Only the exceptions at Sec. Sec.  411.355, 411.357(n), 
411.357(p), and 411.357(aa) are applicable to the indirect compensation 
arrangement if the entity furnishing DHS is a MCO or IPA.
    (d) Special rules on compensation. The following special rules 
apply only to compensation under section 1877 of the Act and subpart J 
of this part:
    (1) Set in advance. (i) Compensation is deemed to be ``set in 
advance'' if the aggregate compensation, a time-based or per-unit of 
service-based (whether per-use or per-service) amount, or a specific 
formula for calculating the compensation is set out in writing before 
the furnishing of the items, services, office space, or equipment for 
which the compensation is to be paid. The formula for determining the 
compensation must be set forth in sufficient detail so that it can be 
objectively verified.
    (ii) Notwithstanding paragraph (d)(1)(i) of this section, 
compensation (or a formula for determining the compensation) may be 
modified at any time during the course of a compensation arrangement 
and satisfy the requirement that it is ``set in advance'' if all of the 
following conditions are met:
    (A) All requirements of an applicable exception in Sec. Sec.  
411.355 through 411.357 are met on the effective date of the modified 
compensation (or the formula for determining the modified 
compensation).
    (B) The modified compensation (or the formula for determining the 
modified compensation) is determined before the furnishing of the 
items, services, office space, or equipment for which the modified 
compensation is to be paid.
    (C) Before the furnishing of the items, services, office space, or 
equipment for which the modified compensation is to be paid, the 
formula for the modified compensation is set forth in writing in 
sufficient detail so that it can be objectively verified. Paragraph 
(e)(4) of this section does not apply for purposes of this paragraph 
(d)(1)(ii)(C).
    (2) Unit-based compensation and the volume or value standard. 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 of designated health services. This paragraph (d)(2) does not 
apply for purposes of paragraphs (d)(5)(i) and (6)(i) of this section.
    (3) Unit-based compensation and the other business generated 
standard. 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 and services actually provided and does not vary during the 
course of the compensation arrangement in any manner that takes into 
account referrals or other business generated by the referring 
physician, including private pay health care business (except for 
services personally performed by the referring physician, which are not 
considered ``other business generated'' by the referring physician). 
This paragraph (d)(3) does not apply for purposes of paragraphs 
(d)(5)(ii) and (d)(6)(ii) of this section.
    (4) Directed referral requirement. 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 satisfies the 
requirements of an applicable exception at Sec.  411.355 or Sec.  
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

[[Page 77667]]

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.
    (vi) Regardless of whether the physician's compensation takes into 
account the volume or value of referrals by the physician as set forth 
at paragraph (d)(5)(i) of this section, neither the existence of the 
compensation arrangement nor the amount of the compensation is 
contingent on the number or value of the physician's referrals to the 
particular provider, practitioner, or supplier. The requirement to make 
referrals to a particular provider, practitioner, or supplier may 
require that the physician refer an established percentage or ratio of 
the physician's referrals to a particular provider, practitioner, or 
supplier.
    (5) Compensation to a physician. (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 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.
    (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 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.
    (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) does not apply for purposes of applying 
the special rules in paragraphs (d)(2) and (3) of this section or the 
exceptions at Sec.  411.357(m), (s), (u), (v), (w), and (bb).
    (6) Compensation from a physician. (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 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 number or value of the 
physician's referrals to the entity.
    (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 
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.
    (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) does not apply for purposes of applying 
the special rules in paragraphs (d)(2) and (3) of this section or the 
exceptions at Sec.  411.357(m), (s), (u), (v), (w), and (bb).
    (e) Special rule on compensation arrangements--(1) Application. 
This paragraph (e) applies only to compensation arrangements as defined 
in section 1877 of the Act and this subpart.
    (2) Writing requirement. In the case of any requirement in this 
subpart for a compensation arrangement to be in writing, such 
requirement may be satisfied by a collection of documents, including 
contemporaneous documents evidencing the course of conduct between the 
parties.
    (3) Signature requirement. In the case of any signature requirement 
in this subpart, such requirement may be satisfied by an electronic or 
other signature that is valid under applicable Federal or State law.
    (4) 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 
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 (that is, the date on which 
the writing(s) or signature(s) were required under the applicable 
exception but the parties had not yet obtained them).


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

    The prohibition on referrals set forth in Sec.  411.353 does not 
apply to the following types of services:
    (a) Physician services. (1) Physician services as defined at Sec.  
410.20(a) of this chapter that are furnished--
    (i) Personally by another physician who is a member of the 
referring physician's group practice or is a physician in the same 
group practice (as defined at Sec.  411.351) as the referring 
physician; or
    (ii) Under the supervision of another physician who is a member of 
the referring physician's group practice or is a physician in the same 
group practice (as defined at Sec.  411.351) as the referring 
physician, provided that the supervision complies with all other 
applicable Medicare payment and coverage rules for the physician 
services.
    (2) For purposes of this paragraph (a), ``physician services'' 
include only those ``incident to'' services (as defined at Sec.  
411.351) that are physician services under Sec.  410.20(a) of this 
chapter.
    (b) In-office ancillary services. Services (including certain items 
of durable medical equipment (DME), as defined in paragraph (b)(4) of 
this section, and infusion pumps that are DME (including external 
ambulatory infusion pumps), but excluding all other DME and parenteral 
and enteral nutrients, equipment, and supplies (such as infusion pumps 
used for PEN)), that meet the following conditions:
    (1) Individual who furnishes the service. They are furnished 
personally by one of the following individuals:
    (i) The referring physician.
    (ii) A physician who is a member of the same group practice as the 
referring physician.
    (iii) An individual who is supervised by the referring physician 
or, if the referring physician is in a group practice, by another 
physician in the group practice, provided that the supervision complies 
with all other applicable Medicare payment and coverage rules for the 
services.

[[Page 77668]]

    (2) Location where service is furnished. They are furnished in one 
of the following locations:
    (i) The same building (as defined at Sec.  411.351), but not 
necessarily in the same space or part of the building, in which all of 
the conditions of paragraph (b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C) 
of this section are satisfied:
    (A)(1) The referring physician or his or her group practice (if 
any) has an office that is normally open to the physician's or group's 
patients for medical services at least 35 hours per week; and
    (2) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 30 hours per week. The 30 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (B)(1) The patient receiving the DHS usually receives physician 
services from the referring physician or members of the referring 
physician's group practice (if any);
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician regularly practices medicine and 
furnishes physician services to patients at least 6 hours per week. The 
6 hours must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS; or
    (C)(1) The referring physician is present and orders the DHS during 
a patient visit on the premises as set forth in paragraph 
(b)(2)(i)(C)(2) of this section or the referring physician or a member 
of the referring physician's group practice (if any) is present while 
the DHS is furnished during occupancy of the premises as set forth in 
paragraph (b)(2)(i)(C)(2) of this section;
    (2) The referring physician or the referring physician's group 
practice owns or rents an office that is normally open to the 
physician's or group's patients for medical services at least 8 hours 
per week; and
    (3) The referring physician or one or more members of the referring 
physician's group practice regularly practices medicine and furnishes 
physician services to patients at least 6 hours per week. The 6 hours 
must include some physician services that are unrelated to the 
furnishing of DHS payable by Medicare, any other Federal health care 
payer, or a private payer, even though the physician services may lead 
to the ordering of DHS.
    (ii) A centralized building (as defined at Sec.  411.351) that is 
used by the group practice for the provision of some or all of the 
group practice's clinical laboratory services.
    (iii) A centralized building (as defined at Sec.  411.351) that is 
used by the group practice for the provision of some or all of the 
group practice's DHS (other than clinical laboratory services).
    (3) Billing of the service. They are billed by one of the 
following:
    (i) The physician performing or supervising the service.
    (ii) The group practice of which the performing or supervising 
physician is a member under a billing number assigned to the group 
practice.
    (iii) The group practice if the supervising physician is a 
``physician in the group practice'' (as defined at Sec.  411.351) under 
a billing number assigned to the group practice.
    (iv) An entity that is wholly owned by the performing or 
supervising physician or by that physician's group practice under the 
entity's own billing number or under a billing number assigned to the 
physician or group practice.
    (v) An independent third party billing company acting as an agent 
of the physician, group practice, or entity specified in paragraphs 
(b)(3)(i) through (iv) of this section under a billing number assigned 
to the physician, group practice, or entity, provided that the billing 
arrangement meets the requirements of Sec.  424.80(b)(5) of this 
chapter. For purposes of this paragraph (b)(3), a group practice may 
have, and bill under, more than one Medicare billing number, subject to 
any applicable Medicare program restrictions.
    (4) Durable Medical Equipment. For purposes of this paragraph (b), 
DME covered by the in-office ancillary services exception means canes, 
crutches, walkers and folding manual wheelchairs, and blood glucose 
monitors, that meet the following conditions:
    (i) The item is one that a patient requires for the purpose of 
ambulating, a patient uses in order to depart from the physician's 
office, or is a blood glucose monitor (including one starter set of 
test strips and lancets, consisting of no more than 100 of each). A 
blood glucose monitor may be furnished only by a physician or employee 
of a physician or group practice that also furnishes outpatient 
diabetes self-management training to the patient.
    (ii) The item is furnished in a building that meets the ``same 
building'' requirements in the in-office ancillary services exception 
as part of the treatment for the specific condition for which the 
patient-physician encounter occurred.
    (iii) The item is furnished personally by the physician who ordered 
the DME, by another physician in the group practice, or by an employee 
of the physician or the group practice.
    (iv) A physician or group practice that furnishes the DME meets all 
DME supplier standards set forth in Sec.  424.57(c) of this chapter.
    (v) [Reserved]
    (vi) All other requirements of the in-office ancillary services 
exception in this paragraph (b) are met.
    (5) Furnishing a service. A designated health service is 
``furnished'' for purposes of this paragraph (b) in the location where 
the service is actually performed upon a patient or where an item is 
dispensed to a patient in a manner that is sufficient to meet the 
applicable Medicare payment and coverage rules.
    (6) Special rule for home care physicians. In the case of a 
referring physician whose principal medical practice consists of 
treating patients in their private homes, the ``same building'' 
requirements of paragraph (b)(2)(i) of this section are met if the 
referring physician (or a qualified person accompanying the physician, 
such as a nurse or technician) provides the DHS contemporaneously with 
a physician service that is not a designated health service provided by 
the referring physician to the patient in the patient's private home. 
For purposes of paragraph (b)(5) of this section only, a private home 
does not include a nursing, long-term care, or other facility or 
institution, except that a patient may have a private home in an 
assisted living or independent living facility.
    (7) Disclosure requirement for certain imaging services. (i) With 
respect to magnetic resonance imaging, computed tomography, and 
positron emission tomography services identified as ``radiology and 
certain other imaging services'' on the List of CPT/HCPCS Codes, the 
referring physician must provide written notice to the patient at the 
time of the referral that the patient may receive the same services 
from a person other than one described in paragraph (b)(1) of this 
section. Except as set forth in paragraph (b)(7)(ii) of this section, 
the written notice must include a list of at least 5 other suppliers 
(as defined at Sec.  400.202 of this chapter) that

[[Page 77669]]

provide the services for which the individual is being referred and 
which are located within a 25-mile radius of the referring physician's 
office location at the time of the referral. The notice should be 
written in a manner sufficient to be reasonably understood by all 
patients and should include for each supplier on the list, at a 
minimum, the supplier's name, address, and telephone number.
    (ii) If there are fewer than 5 other suppliers located within a 25-
mile radius of the physician's office location at the time of the 
referral, the physician must list all of the other suppliers of the 
imaging service that are present within a 25-mile radius of the 
referring physician's office location. Provision of the written list of 
alternate suppliers will not be required if no other suppliers provide 
the services for which the individual is being referred within the 25-
mile radius.
    (c) Services furnished by an organization (or its contractors or 
subcontractors) to enrollees. Services furnished by an organization (or 
its contractors or subcontractors) to enrollees of one of the following 
prepaid health plans (not including services provided to enrollees in 
any other plan or line of business offered or administered by the same 
organization):
    (1) An HMO or a CMP in accordance with a contract with CMS under 
section 1876 of the Act and part 417, subparts J through M of this 
chapter.
    (2) A health care prepayment plan in accordance with an agreement 
with CMS under section 1833(a)(1)(A) of the Act and part 417, subpart U 
of this chapter.
    (3) An organization that is receiving payments on a prepaid basis 
for Medicare enrollees through a demonstration project under section 
402(a) of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or 
under section 222(a) of the Social Security Amendments of 1972 (42 
U.S.C. 1395b-1 note).
    (4) A qualified HMO (within the meaning of section 1310(d) of the 
Public Health Service Act).
    (5) A coordinated care plan (within the meaning of section 
1851(a)(2)(A) of the Act) offered by a Medicare Advantage organization 
in accordance with a contract with CMS under section 1857 of the Act 
and part 422 of this chapter.
    (6) A MCO contracting with a State under section 1903(m) of the 
Act.
    (7) A prepaid inpatient health plan (PIHP) or prepaid ambulance 
health plan (PAHP) contracting with a State under part 438 of this 
chapter.
    (8) A health insuring organization (HIO) contracting with a State 
under part 438, subpart D of this chapter.
    (9) An entity operating under a demonstration project under 
sections 1115(a), 1915(a), 1915(b), or 1932(a) of the Act.
    (d) [Reserved]
    (e) Academic medical centers. (1) Services provided by an academic 
medical center if all of the following conditions are met:
    (i) The referring physician--
    (A) Is a bona fide employee of a component of the academic medical 
center on a full-time or substantial part-time basis. (A ``component'' 
of an academic medical center means an affiliated medical school, 
faculty practice plan, hospital, teaching facility, institution of 
higher education, departmental professional corporation, or nonprofit 
support organization whose primary purpose is supporting the teaching 
mission of the academic medical center.) The components need not be 
separate legal entities;
    (B) Is licensed to practice medicine in the State(s) in which he or 
she practices medicine;
    (C) Has a bona fide faculty appointment at the affiliated medical 
school or at one or more of the educational programs at the accredited 
academic hospital (as defined at Sec.  411.355(e)(3)); and
    (D) Provides either substantial academic services or substantial 
clinical teaching services (or a combination of academic services and 
clinical teaching services) for which the faculty member receives 
compensation as part of his or her employment relationship with the 
academic medical center. Parties should use a reasonable and consistent 
method for calculating a physician's academic services and clinical 
teaching services. A physician will be deemed to meet this requirement 
if he or she spends at least 20 percent of his or her professional time 
or 8 hours per week providing academic services or clinical teaching 
services (or a combination of academic services or clinical teaching 
services). A physician who does not spend at least 20 percent of his or 
her professional time or 8 hours per week providing academic services 
or clinical teaching services (or a combination of academic services or 
clinical teaching services) is not precluded from qualifying under this 
paragraph (e)(1)(i)(D).
    (ii) The compensation paid to the referring physician must meet all 
of the following conditions:
    (A) The total compensation paid by each academic medical center 
component to the referring physician is set in advance.
    (B) In the aggregate, the compensation paid by all academic medical 
center components to the referring physician does not exceed fair 
market value for the services provided.
    (C) The total compensation paid by each academic medical center 
component is not determined in 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 conditions of 
Sec.  411.354(d)(4).
    (iii) The academic medical center must meet all of the following 
conditions:
    (A) All transfers of money between components of the academic 
medical center must directly or indirectly support the missions of 
teaching, indigent care, research, or community service.
    (B) The relationship of the components of the academic medical 
center must be set forth in one or more written agreements or other 
written documents that have been adopted by the governing body of each 
component. If the academic medical center is one legal entity, this 
requirement will be satisfied if transfers of funds between components 
of the academic medical center are reflected in the routine financial 
reports covering the components.
    (C) All money paid to a referring physician for research must be 
used solely to support bona fide research or teaching and must be 
consistent with the terms and conditions of the grant.
    (2) The ``academic medical center'' for purposes of this section 
consists of--
    (i) An accredited medical school (including a university, when 
appropriate) or an accredited academic hospital (as defined at 
paragraph (e)(3) of this section);
    (ii) One or more faculty practice plans affiliated with the medical 
school, the affiliated hospital(s), or the accredited academic 
hospital; and
    (iii) One or more affiliated hospitals in which a majority of the 
physicians on the medical staff consists of physicians who are faculty 
members and a majority of all hospital admissions is made by physicians 
who are faculty members. The hospital for purposes of this paragraph 
(e)(2)(iii) may be the same hospital that satisfies the requirement of 
paragraph (e)(2)(i) of this section. For purposes of this paragraph 
(e)(2)(iii), a faculty member is a physician who is

[[Page 77670]]

either on the faculty of the affiliated medical school or on the 
faculty of one or more of the educational programs at the accredited 
academic hospital. In meeting this paragraph (e)(2)(iii), faculty from 
any affiliated medical school or accredited academic hospital education 
program may be aggregated, and residents and non-physician 
professionals need not be counted. Any faculty member may be counted, 
including courtesy and volunteer faculty. For purposes of determining 
whether the majority of physicians on the medical staff consists of 
faculty members, the affiliated hospital must include or exclude all 
individual physicians with the same class of privileges at the 
affiliated hospital (for example, physicians holding courtesy 
privileges).
    (3) An accredited academic hospital for purposes of this section 
means a hospital or a health system that sponsors four or more approved 
medical education programs.
    (f) Implants furnished by an ASC. Implants furnished by an ASC, 
including, but not limited to, cochlear implants, intraocular lenses, 
and other implanted prosthetics, implanted prosthetic devices, and 
implanted DME that meet the following conditions:
    (1) The implant is implanted by the referring physician or a member 
of the referring physician's group practice in an ASC that is certified 
by Medicare under part 416 of this chapter and with which the referring 
physician has a financial relationship.
    (2) The implant is implanted in the patient during a surgical 
procedure paid by Medicare to the ASC as an ASC procedure under Sec.  
416.65 of this chapter.
    (3) [Reserved]
    (4) [Reserved]
    (5) The exception set forth in this paragraph (f) does not apply to 
any financial relationships between the referring physician and any 
entity other than the ASC in which the implant is furnished to, and 
implanted in, the patient.
    (g) EPO and other dialysis-related drugs. EPO and other dialysis-
related drugs that meet the following conditions:
    (1) The EPO and other dialysis-related drugs are furnished in or by 
an ESRD facility. For purposes of this paragraph (g)(1), ``EPO and 
other dialysis-related drugs'' means certain outpatient prescription 
drugs that are required for the efficacy of dialysis and identified as 
eligible for this exception on the List of CPT/HCPCS Codes; and 
``furnished'' means that the EPO or dialysis-related drugs are 
administered to a patient in the ESRD facility or, in the case of EPO 
or Aranesp (or equivalent drug identified on the List of CPT/HCPCS 
Codes) only, are dispensed by the ESRD facility for use at home.
    (2) [Reserved]
    (3) [Reserved]
    (4) The exception set forth in this paragraph (g) does not apply to 
any financial relationship between the referring physician and any 
entity other than the ESRD facility that furnishes the EPO and other 
dialysis-related drugs to the patient.
    (h) Preventive screening tests, immunizations, and vaccines. 
Preventive screening tests, immunizations, and vaccines that meet the 
following conditions:
    (1) The preventive screening tests, immunizations, and vaccines are 
subject to CMS-mandated frequency limits.
    (2) [Reserved]
    (3) [Reserved]
    (4) The preventive screening tests, immunizations, and vaccines 
must be covered by Medicare and must be listed as eligible for this 
exception on the List of CPT/HCPCS Codes.
    (i) Eyeglasses and contact lenses following cataract surgery. 
Eyeglasses and contact lenses that are covered by Medicare when 
furnished to patients following cataract surgery that meet the 
following conditions:
    (1) The eyeglasses or contact lenses are provided in accordance 
with the coverage and payment provisions set forth in Sec. Sec.  
410.36(a)(2)(ii) and 414.228 of this chapter, respectively.
    (2) [Reserved]
    (j) Intra-family rural referrals. (1) Services provided pursuant to 
a referral from a referring physician to his or her immediate family 
member or to an entity furnishing DHS with which the immediate family 
member has a financial relationship, if all of the following conditions 
are met:
    (i) The patient who is referred resides in a rural area as defined 
at Sec.  411.351 of this subpart;
    (ii) Except as provided in paragraph (j)(1)(iii) of this section, 
in light of the patient's condition, no other person or entity is 
available to furnish the services in a timely manner within 25 miles of 
or 45 minutes transportation time from the patient's residence;
    (iii) In the case of services furnished to patients where they 
reside (for example, home health services or DME), no other person or 
entity is available to furnish the services in a timely manner in light 
of the patient's condition; and
    (2) The referring physician or the immediate family member must 
make reasonable inquiries as to the availability of other persons or 
entities to furnish the DHS. However, neither the referring physician 
nor the immediate family member has any obligation to inquire as to the 
availability of persons or entities located farther than 25 miles of or 
45 minutes transportation time from (whichever test the referring 
physician utilized for purposes of paragraph (j)(1)(ii)) the patient's 
residence.


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

    For purposes of Sec.  411.353, the following ownership or 
investment interests do not constitute a financial relationship:
    (a) Publicly traded securities. Ownership of investment securities 
(including shares or bonds, debentures, notes, or other debt 
instruments) that at the time the DHS referral was made could be 
purchased on the open market and that meet the requirements of 
paragraphs (a)(1) and (2) of this section.
    (1) They are either--
    (i) Listed for trading on the New York Stock Exchange, the American 
Stock Exchange, or any regional exchange in which quotations are 
published on a daily basis, or foreign securities listed on a 
recognized foreign, national, or regional exchange in which quotations 
are published on a daily basis;
    (ii) Traded under an automated interdealer quotation system 
operated by the National Association of Securities Dealers; or
    (iii) Listed for trading on an electronic stock market or over-the-
counter quotation system in which quotations are published on a daily 
basis and trades are standardized and publicly transparent.
    (2) They are in a corporation that had stockholder equity exceeding 
$75 million at the end of the corporation's most recent fiscal year or 
on average during the previous 3 fiscal years. ``Stockholder equity'' 
is the difference in value between a corporation's total assets and 
total liabilities.
    (b) Mutual funds. Ownership of shares in a regulated investment 
company as defined in section 851(a) of the Internal Revenue Code of 
1986, if the company had, at the end of its most recent fiscal year, or 
on average during the previous 3 fiscal years, total assets exceeding 
$75 million.
    (c) Specific providers. Ownership or investment interest in the 
following entities, for purposes of the services specified:
    (1) A rural provider, in the case of DHS furnished in a rural area 
(as defined at Sec.  411.351 of this part) by the provider. A ``rural 
provider'' is an entity

[[Page 77671]]

that furnishes substantially all (not less than 75 percent) of the DHS 
that it furnishes to residents of a rural area and, for the 18-month 
period beginning on December 8, 2003 (or such other period as Congress 
may specify), is not a specialty hospital, and in the case where the 
entity is a hospital, the hospital meets the requirements of Sec.  
411.362 no later than September 23, 2011.
    (2) A hospital that is located in Puerto Rico, in the case of DHS 
furnished by such a hospital.
    (3) A hospital that is located outside of Puerto Rico, in the case 
of DHS furnished by such a hospital, if--
    (i) The referring physician is authorized to perform services at 
the hospital;
    (ii) Effective for the 18-month period beginning on December 8, 
2003 (or such other period as Congress may specify), the hospital is 
not a specialty hospital;
    (iii) The ownership or investment interest is in the entire 
hospital and not merely in a distinct part or department of the 
hospital; and
    (iv) The hospital meets the requirements described in Sec.  411.362 
not later than September 23, 2011.


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

    For purposes of Sec.  411.353, the following compensation 
arrangements do not constitute a financial relationship:
    (a) Rental of office space. Payments for the use of office space 
made by a lessee to a lessor if the arrangement meets the following 
requirements:
    (1) The lease arrangement is set out in writing, is signed by the 
parties, and specifies the premises it covers.
    (2) The duration of the lease arrangement is at least 1 year. To 
meet this requirement, if the lease arrangement is terminated with or 
without cause, the parties may not enter into a new lease arrangement 
for the same space during the first year of the original lease 
arrangement.
    (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.
    (4) The rental charges over the term of the lease arrangement are 
set in advance and are consistent with fair market value.
    (5) The rental charges over the term of the lease arrangement are 
not determined--
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
    (ii) 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
    (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.
    (6) The lease arrangement would be commercially reasonable even if 
no referrals were made between the lessee and the lessor.
    (7) If the lease arrangement expires after a term of at least 1 
year, a holdover lease arrangement immediately following the expiration 
of the lease arrangement satisfies the requirements of paragraph (a) of 
this section if the following conditions are met:
    (i) The lease arrangement met the conditions of paragraphs (a)(1) 
through (6) of this section when the arrangement expired;
    (ii) The holdover lease arrangement is on the same terms and 
conditions as the immediately preceding arrangement; and
    (iii) The holdover lease arrangement continues to satisfy the 
conditions of paragraphs (a)(1) through (6) of this section.
    (b) Rental of equipment. Payments made by a lessee to a lessor for 
the use of equipment under the following conditions:
    (1) The lease arrangement is set out in writing, is signed by the 
parties, and specifies the equipment it covers.
    (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 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.
    (3) The duration of the lease arrangement is at least 1 year. To 
meet this requirement, if the lease arrangement is terminated with or 
without cause, the parties may not enter into a new lease arrangement 
for the same equipment during the first year of the original lease 
arrangement.
    (4) The rental charges over the term of the lease arrangement are 
set in advance, are consistent with fair market value, and are not 
determined--
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
    (ii) Using a formula based on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable 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.
    (5) The lease arrangement would be commercially reasonable even if 
no referrals were made between the parties.
    (6) If the lease arrangement expires after a term of at least 1 
year, a holdover lease arrangement immediately following the expiration 
of the lease arrangement satisfies the requirements of this paragraph 
(b) if the following conditions are met:
    (i) The lease arrangement met the conditions of paragraphs (b)(1) 
through (5) of this section when the arrangement expired;
    (ii) The holdover lease arrangement is on the same terms and 
conditions as the immediately preceding lease arrangement; and
    (iii) The holdover lease arrangement continues to satisfy the 
conditions of paragraphs (b)(1) through (5) of this section.
    (c) Bona fide employment relationships. Any amount paid by an 
employer to a physician (or immediate family member) who has a bona 
fide employment relationship with the employer for the provision of 
services if the following conditions are met:
    (1) The employment is for identifiable services.
    (2) The amount of the remuneration under the employment is--

[[Page 77672]]

    (i) Consistent with the fair market value of the services; and
    (ii) Except as provided in paragraph (c)(4) of this section, is not 
determined in any manner that takes into account the volume or value of 
referrals by the referring physician.
    (3) The remuneration is provided under an arrangement that would be 
commercially reasonable even if no referrals were made to the employer.
    (4) Paragraph (c)(2)(ii) of this section does not prohibit payment 
of remuneration in the form of a productivity bonus based on services 
performed personally by the physician (or immediate family member of 
the physician).
    (5) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the conditions of Sec.  
411.354(d)(4).
    (d) Personal service arrangements--(1) General. Remuneration from 
an entity under an arrangement or multiple arrangements to a physician 
or his or her immediate family member, or to a group practice, 
including remuneration for specific physician services furnished to a 
nonprofit blood center, if the following conditions are met:
    (i) Each arrangement is set out in writing, is signed by the 
parties, and specifies the services covered by the arrangement.
    (ii) Except for services provided under an arrangement that 
satisfies all of the conditions of paragraph (z) of this section, the 
arrangement(s) covers all of the services to be furnished by the 
physician (or an immediate family member of the physician) to the 
entity. This requirement is met if all separate arrangements between 
the entity and the physician and the entity and any family members 
incorporate each other by reference or if they cross-reference a master 
list of contracts that is maintained and updated centrally and is 
available for review by the Secretary upon request. The master list 
must be maintained in a manner that preserves the historical record of 
contracts. A physician or family member may ``furnish'' services 
through employees whom they have hired for the purpose of performing 
the services; through a wholly-owned entity; or through locum tenens 
physicians (as defined at Sec.  411.351, except that the regular 
physician need not be a member of a group practice).
    (iii) The aggregate services covered by the arrangement do not 
exceed those that are reasonable and necessary for the legitimate 
business purposes of the arrangement(s).
    (iv) The duration of each arrangement is at least 1 year. To meet 
this requirement, if an arrangement is terminated with or without 
cause, the parties may not enter into the same or substantially the 
same arrangement during the first year of the original arrangement.
    (v) The compensation to be paid over the term of each arrangement 
is set in advance, does not exceed fair market value, and, except in 
the case of a physician incentive plan (as defined at Sec.  411.351), 
is not determined in any manner that takes into account the volume or 
value of referrals or other business generated between the parties.
    (vi) The services to be furnished under each arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates any Federal or State law.
    (vii) If the arrangement expires after a term of at least 1 year, a 
holdover arrangement immediately following the expiration of the 
arrangement satisfies the requirements of paragraph (d) of this section 
if the following conditions are met:
    (A) The arrangement met the conditions of paragraphs (d)(1)(i) 
through (vi) of this section when the arrangement expired;
    (B) The holdover arrangement is on the same terms and conditions as 
the immediately preceding arrangement; and
    (C) The holdover arrangement continues to satisfy the conditions of 
paragraphs (d)(1)(i) through (vi) of this section.
    (viii) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the conditions 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:
    (i) No specific payment is made directly or indirectly under the 
plan to a physician or a physician group as an inducement to reduce or 
limit medically necessary services furnished with respect to a specific 
individual enrolled with the entity.
    (ii) Upon request of the Secretary, the entity provides the 
Secretary with access to information regarding the plan (including any 
downstream contractor plans), in order to permit the Secretary to 
determine whether the plan is in compliance with paragraph (d)(2) of 
this section.
    (iii) In the case of a plan that places a physician or a physician 
group at substantial financial risk as defined at Sec.  422.208, the 
entity or any downstream contractor (or both) complies with the 
requirements concerning physician incentive plans set forth in 
Sec. Sec.  422.208 and 422.210 of this chapter.
    (iv) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the conditions of Sec.  
411.354(d)(4).
    (e) Physician recruitment. (1) Remuneration provided by a hospital 
to recruit a physician that is paid directly to the physician and that 
is intended to induce the physician to relocate his or her medical 
practice to the geographic area served by the hospital in order to 
become a member of the hospital's medical staff, if all of the 
following conditions are met:
    (i) The arrangement is set out in writing and signed by both 
parties;
    (ii) The arrangement is not conditioned on the physician's referral 
of patients to the hospital;
    (iii) The 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
    (iv) The physician is allowed to establish staff privileges at any 
other hospital(s) and to refer business to any other entities (except 
as referrals may be restricted under an employment or services 
arrangement that complies with Sec.  411.354(d)(4)).
    (2)(i) Geographic area served by the hospital--defined. The 
``geographic area served by the hospital'' is the area composed of the 
lowest number of contiguous zip codes from which the hospital draws at 
least 75 percent of its inpatients. The geographic area served by the 
hospital may include one or more zip codes from which the hospital 
draws no inpatients, provided that such zip codes are entirely 
surrounded by zip codes in the geographic area described above from 
which the hospital draws at least 75 percent of its inpatients.
    (ii) Noncontiguous zip codes. With respect to a hospital that draws 
fewer than 75 percent of its inpatients from all of the contiguous zip 
codes from which it draws inpatients, the ``geographic area served by 
the hospital'' will be deemed to be the area composed of all of the

[[Page 77673]]

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

[[Page 77674]]

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

[[Page 77675]]

member) or group of physicians to the entity, or by the entity to the 
physician (or an immediate family member) or a group of physicians, if 
the arrangement meets the following conditions:
    (1) The arrangement is in writing, signed by the parties, and 
covers only identifiable items, services, office space, or equipment. 
The writing specifies--
    (i) The items, services, office space, or equipment covered under 
the arrangement;
    (ii) The compensation that will be provided under the arrangement; 
and
    (iii) The timeframe for the arrangement.
    (2) An arrangement may be for any period of time and contain a 
termination clause. 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. Other than 
an arrangement that satisfies all of the conditions of paragraph (z) of 
this section, the parties may not enter into more than one arrangement 
for the same items, services, office space, or equipment during the 
course of a year.
    (3) 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 would be commercially reasonable even if no 
referrals were made between the parties.
    (5) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act).
    (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 or more of the group's physicians' referrals to a 
particular provider, practitioner, or supplier.
    (m) Medical staff incidental benefits. Compensation in the form of 
items or services (not including cash or cash equivalents) from a 
hospital to a member of its medical staff when the item or service is 
used on the hospital's campus, if all of the following conditions are 
met:
    (1) The compensation is offered to all members of the medical staff 
practicing in the same specialty (but not necessarily accepted by every 
member to whom it is offered) and is not offered in any manner that 
takes into account the volume or value of referrals or other business 
generated between the parties.
    (2) Except with respect to identification of medical staff on a 
hospital website or in hospital advertising, the compensation is 
provided only during periods when the medical staff members are making 
rounds or are engaged in other services or activities that benefit the 
hospital or its patients.
    (3) The compensation is provided by the hospital and used by the 
medical staff members only on the hospital's campus. Compensation, 
including, but not limited to, internet access, pagers, or two-way 
radios, used away from the campus only to access hospital medical 
records or information or to access patients or personnel who are on 
the hospital campus, as well as the identification of the medical staff 
on a hospital website or in hospital advertising, meets the ``on 
campus'' requirement of this paragraph (m).
    (4) The compensation is reasonably related to the provision of, or 
designed to facilitate directly or indirectly the delivery of, medical 
services at the hospital.
    (5) The compensation is of low value (that is, less than $25) with 
respect to each occurrence of the benefit (for example, each meal given 
to a physician while he or she is serving patients who are hospitalized 
must be of low value). The $25 limit in this paragraph (m)(5) is 
adjusted each calendar year to the nearest whole dollar by the increase 
in the Consumer Price Index--Urban All Items (CPI-I) for the 12 month 
period ending the preceding September 30. CMS displays after September 
30 each year both the increase in the CPI-I for the 12 month period and 
the new limits on the physician self-referral website at http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
    (6) The compensation is not determined in any manner that takes 
into account the volume or value of referrals or other business 
generated between the parties.
    (7) [Reserved]
    (8) Other facilities and health care clinics (including, but not 
limited to, federally qualified health centers) that have bona fide 
medical staffs may provide compensation under this paragraph (m) on the 
same terms and conditions applied to hospitals under this paragraph 
(m).
    (n) Risk-sharing arrangements. Compensation paid directly or 
indirectly by a MCO or an IPA to a physician pursuant to a risk-sharing 
arrangement (including, but not limited to, withholds, bonuses, and 
risk pools) for services provided by the physician 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.
    (o) Compliance training. Compliance training provided by an entity 
to a physician (or to the physician's immediate family member or office 
staff) who practices in the entity's local community or service area, 
provided that the training is held in the local community or service 
area. For purposes of this paragraph (o), ``compliance training'' means 
training regarding the basic elements of a compliance program (for 
example, establishing policies and procedures, training of staff, 
internal monitoring, or reporting); specific training regarding the 
requirements of Federal and State health care programs (for example, 
billing, coding, reasonable and necessary services, documentation, or 
unlawful referral arrangements); or training regarding other Federal, 
State, or local laws, regulations, or rules governing the conduct of 
the party for whom the training is provided. For purposes of this 
paragraph, ``compliance training'' includes programs that offer 
continuing medical education credit, provided that compliance training 
is the primary purpose of the program.
    (p) Indirect compensation arrangements. Indirect compensation 
arrangements, as defined at Sec.  411.354(c)(2), if all of the 
following conditions are satisfied:
    (1)(i) The compensation received by the referring physician (or 
immediate family member) described in Sec.  411.354(c)(2)(ii) is fair 
market value for services and items actually provided and not 
determined in any manner that takes into account the volume or value of 
referrals or other business generated

[[Page 77676]]

by the referring physician for the entity furnishing DHS.
    (ii) Compensation for the rental of office space or equipment may 
not be 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.
    (2) The compensation arrangement described in Sec.  
411.354(c)(2)(ii) is set out in writing, signed by the parties, and 
specifies the services covered by the arrangement, except in the case 
of a bona fide employment relationship between an employer and an 
employee, in which case the arrangement need not be set out in writing, 
but must be for identifiable services and be commercially reasonable 
even if no referrals are made to the employer.
    (3) [Reserved]
    (4) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the compensation arrangement described in Sec.  
411.354(c)(2)(ii) satisfies the conditions of Sec.  411.354(d)(4).
    (q) Referral services. Remuneration that meets all of the 
conditions set forth in Sec.  1001.952(f) of this title.
    (r) Obstetrical malpractice insurance subsidies. Remuneration that 
meets all of the conditions of paragraph (r)(1) or (2) of this section.
    (1) Remuneration that meets all of the conditions set forth in 
Sec.  1001.952(o) of this title.
    (2) A payment from a hospital, federally qualified health center, 
or rural health clinic that is used to pay for some or all of the costs 
of malpractice insurance premiums for a physician who engages in 
obstetrical practice as a routine part of his or her medical practice, 
if all of the following conditions are met:
    (i)(A) The physician's medical practice is located in a rural area, 
a primary care HPSA, or an area with demonstrated need for the 
physician's obstetrical services as determined by the Secretary in an 
advisory opinion issued in accordance with section 1877(g)(6) of the 
Act; or
    (B) At least 75 percent of the physician's obstetrical patients 
reside in a medically underserved area or are members of a medically 
underserved population.
    (ii) The arrangement is set out in writing, is signed by the 
physician and the hospital, federally qualified health center, or rural 
health clinic providing the payment, and specifies the payment to be 
made by the hospital, federally qualified health center, or rural 
health clinic and the terms under which the payment is to be provided.
    (iii) The arrangement is not conditioned on the physician's 
referral of patients to the hospital, federally qualified health 
center, or rural health clinic providing the payment.
    (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 any other business generated between the parties.
    (v) The physician is allowed to establish staff privileges at any 
hospital(s), federally qualified health center(s), or rural health 
clinic(s) and to refer business to any other entities (except as 
referrals may be restricted under an employment arrangement or services 
arrangement that complies with Sec.  411.354(d)(4)).
    (vi) The payment is made to a person or organization (other than 
the physician) that is providing malpractice insurance (including a 
self-funded organization).
    (vii) The physician treats obstetrical patients who receive medical 
benefits or assistance under any Federal health care program in a 
nondiscriminatory manner.
    (viii) The insurance is a bona fide malpractice insurance policy or 
program, and the premium, if any, is calculated based on a bona fide 
assessment of the liability risk covered under the insurance.
    (ix)(A) For each coverage period (not to exceed 1 year), at least 
75 percent of the physician's obstetrical patients treated under the 
coverage of the obstetrical malpractice insurance during the prior 
period (not to exceed 1 year)--
    (1) Resided in a rural area, HPSA, medically underserved area, or 
an area with a demonstrated need for the physician's obstetrical 
services as determined by the Secretary in an advisory opinion issued 
in accordance with section 1877(g)(6) of the Act; or
    (2) Were part of a medically underserved population.
    (B) For the initial coverage period (not to exceed 1 year), the 
requirements of paragraph (r)(2)(ix)(A) of this section will be 
satisfied if the physician certifies that he or she has a reasonable 
expectation that at least 75 percent of the physician's obstetrical 
patients treated under the coverage of the malpractice insurance will--
    (1) Reside in a rural area, HPSA, medically underserved area, or an 
area with a demonstrated need for the physician's obstetrical services 
as determined by the Secretary in an advisory opinion issued in 
accordance with section 1877(g)(6) of the Act; or
    (2) Be part of a medically underserved population.
    (3) For purposes of paragraph (r)(2) of this section, costs of 
malpractice insurance premiums means:
    (i) For physicians who engage in obstetrical practice on a full-
time basis, any costs attributable to malpractice insurance; or
    (ii) For physicians who engage in obstetrical practice on a part-
time or sporadic basis, the costs attributable exclusively to the 
obstetrical portion of the physician's malpractice insurance, and 
related exclusively to obstetrical services provided--
    (A) In a rural area, primary care HPSA, or an area with 
demonstrated need for the physician's obstetrical services, as 
determined by the Secretary in an advisory opinion issued in accordance 
with section 1877(g)(6) of the Act; or
    (B) In any area, provided that at least 75 percent of the 
physician's obstetrical patients treated in the coverage period (not to 
exceed 1 year) resided in a medically underserved area or were part of 
a medically underserved population.
    (s) Professional courtesy. Professional courtesy (as defined at 
Sec.  411.351) offered by an entity with a formal medical staff to a 
physician or a physician's immediate family member or office staff if 
all of the following conditions are met:
    (1) The professional courtesy is offered to all physicians on the 
entity's bona fide medical staff or in such entity's local community or 
service area, and the offer does not take into account the volume or 
value of referrals or other business generated between the parties;
    (2) The health care items and services provided are of a type 
routinely provided by the entity;
    (3) The entity has a professional courtesy policy that is set out 
in writing and approved in advance by the entity's governing body;
    (4) The professional courtesy is not offered to a physician (or 
immediate family member) who is a Federal health care program 
beneficiary, unless there has been a good faith showing of financial 
need; and
    (t) Retention payments in underserved areas--(1) Bona fide written 
offer. Remuneration provided by a hospital directly to a physician on 
the hospital's medical staff to retain the physician's medical practice 
in the geographic area

[[Page 77677]]

served by the hospital (as defined in paragraph (e)(2) of this 
section), if all of the following conditions are met:
    (i) The physician has a bona fide firm, written recruitment offer 
or offer of employment from a hospital, academic medical center (as 
defined at Sec.  411.355(e)), or physician organization (as defined at 
Sec.  411.351) that is not related to the hospital making the payment, 
and the offer specifies the remuneration being offered and requires the 
physician to move the location of his or her medical practice at least 
25 miles and outside of the geographic area served by the hospital 
making the retention payment.
    (ii) The requirements of paragraphs (e)(1)(i) through (iv) of this 
section are satisfied.
    (iii) Any retention payment is subject to the same obligations and 
restrictions, if any, on repayment or forgiveness of indebtedness as 
the written recruitment offer or offer of employment.
    (iv) The retention payment does not exceed the lower of--
    (A) The amount obtained by subtracting the physician's current 
income from physician and related services from the income the 
physician would receive from comparable physician and related services 
in the written recruitment or employment offer, provided that the 
respective incomes are determined using a reasonable and consistent 
methodology, and that they are calculated uniformly over no more than a 
24-month period; or
    (B) The reasonable costs the hospital would otherwise have to 
expend to recruit a new physician to the geographic area served by the 
hospital to join the medical staff of the hospital to replace the 
retained physician.
    (v) The requirements of paragraph (t)(3) of this setion are 
satisfied.
    (2) Written certification from physician. Remuneration provided by 
a hospital directly to a physician on the hospital's medical staff to 
retain the physician's medical practice in the geographic area served 
by the hospital (as defined in paragraph (e)(2) of this section), if 
all of the following conditions are met:
    (i) The physician furnishes to the hospital before the retention 
payment is made a written certification that the physician has a bona 
fide opportunity for future employment by a hospital, academic medical 
center (as defined at Sec.  411.355(e)), or physician organization (as 
defined at Sec.  411.351) that requires the physician to move the 
location of his or her medical practice at least 25 miles and outside 
the geographic area served by the hospital. The certification contains 
at least the following--
    (A) Details regarding the steps taken by the physician to 
effectuate the employment opportunity;
    (B) Details of the physician's employment opportunity, including 
the identity and location of the physician's future employer or 
employment location or both, and the anticipated income and benefits 
(or a range for income and benefits);
    (C) A statement that the future employer is not related to the 
hospital making the payment;
    (D) The date on which the physician anticipates relocating his or 
her medical practice outside of the geographic area served by the 
hospital; and
    (E) Information sufficient for the hospital to verify the 
information included in the written certification.
    (ii) The hospital takes reasonable steps to verify that the 
physician has a bona fide opportunity for future employment that 
requires the physician to relocate outside the geographic area served 
by the hospital.
    (iii) The requirements of paragraphs (e)(1)(i) through (iv) of this 
section are satisfied.
    (iv) The retention payment does not exceed the lower of--
    (A) An amount equal to 25 percent of the physician's current annual 
income (averaged over the previous 24 months), using a reasonable and 
consistent methodology that is calculated uniformly; or
    (B) The reasonable costs the hospital would otherwise have to 
expend to recruit a new physician to the geographic area served by the 
hospital to join the medical staff of the hospital to replace the 
retained physician.
    (v) The requirements of paragraph (t)(3) of this section are 
satisfied.
    (3) Additional requirements. Remuneration provided under paragraph 
(t)(1) or (2) of this section must meet the following additional 
requirements:
    (i)(A) The physician's current medical practice is located in a 
rural area or HPSA (regardless of the physician's specialty) or is 
located in an area with demonstrated need for the physician as 
determined by the Secretary in an advisory opinion issued in accordance 
with section 1877(g)(6) of the Act; or
    (B) At least 75 percent of the physician's patients reside in a 
medically underserved area or are members of a medically underserved 
population.
    (ii) The hospital does not enter into a retention arrangement with 
a particular referring physician more frequently than once every 5 
years.
    (iii) The amount and terms of the retention payment are not altered 
during the term of the arrangement in any manner that takes into 
account the volume or value of referrals or other business generated by 
the physician.
    (4) Waiver of relocation requirement. The Secretary may waive the 
relocation requirement of paragraphs (t)(1) and (t)(2) of this section 
for payments made to physicians practicing in a HPSA or an area with 
demonstrated need for the physician through an advisory opinion issued 
in accordance with section 1877(g)(6) of the Act, if the retention 
payment arrangement otherwise complies with all of the conditions of 
this paragraph (t).
    (5) Application to other entities. This paragraph (t) applies to 
remuneration provided by a federally qualified health center or a rural 
health clinic in the same manner as it applies to remuneration provided 
by a hospital.
    (u) Community-wide health information systems. Items or services of 
information technology provided by an entity to a physician that allow 
access to, and sharing of, electronic health care records and any 
complementary drug information systems, general health information, 
medical alerts, and related information for patients served by 
community providers and practitioners, in order to enhance the 
community's overall health, provided that--
    (1) The items or services are available as necessary to enable the 
physician to participate in a community-wide health information system, 
are principally used by the physician as part of the community-wide 
health information system, and are not provided to the physician in any 
manner that takes into account the volume or value of referrals or 
other business generated by the physician;
    (2) The community-wide health information systems are available to 
all providers, practitioners, and residents of the community who desire 
to participate; and
    (v) Electronic prescribing items and services. Nonmonetary 
remuneration (consisting of items and services in the form of hardware, 
software, or information technology and training services) necessary 
and used solely to receive and transmit electronic prescription 
information, if all of the following conditions are met:
    (1) The items and services are provided by a--
    (i) Hospital to a physician who is a member of its medical staff;
    (ii) Group practice (as defined at Sec.  411.352) to a physician 
who is a

[[Page 77678]]

member of the group (as defined at Sec.  411.351); or
    (iii) PDP sponsor or MA organization to a prescribing physician.
    (2) The items and services are provided as part of, or are used to 
access, an electronic prescription drug program that meets the 
applicable standards under Medicare Part D at the time the items and 
services are provided.
    (3) The donor (or any person on the donor's behalf) does not take 
any action to limit or restrict the use or compatibility of the items 
or services with other electronic prescribing or electronic health 
records systems.
    (4) For items or services that are of the type that can be used for 
any patient without regard to payer status, the donor does not 
restrict, or take any action to limit, the physician's right or ability 
to use the items or services for any patient.
    (5) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services, or 
the amount or nature of the items or services, a condition of doing 
business with the donor.
    (6) Neither the eligibility of a physician for the items or 
services, nor the amount or nature of the items or services, is 
determined in a manner that takes into account the volume or value of 
referrals or other business generated between the parties.
    (7) The arrangement is set forth in a written agreement that--
    (i) Is signed by the parties;
    (ii) Specifies the items and services being provided and the 
donor's cost of the items and services; and
    (iii) Covers all of the electronic prescribing items and services 
to be provided by the donor. This requirement is met if all separate 
agreements between the donor and the physician (and the donor and any 
family members of the physician) incorporate each other by reference or 
if they cross-reference a master list of agreements that is maintained 
and updated centrally and is available for review by the Secretary upon 
request. The master list must be maintained in a manner that preserves 
the historical record of agreements.
    (8) The donor does not have actual knowledge of, and does not act 
in reckless disregard or deliberate ignorance of, the fact that the 
physician possesses or has obtained items or services equivalent to 
those provided by the donor.
    (w) Electronic health records items and services. Nonmonetary 
remuneration (consisting of items and services in the form of software 
or information technology and training services, including 
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:
    (1) The items and services are provided to a physician by an entity 
(as defined at Sec.  411.351) that is not a laboratory company.
    (2) The software is interoperable (as defined at Sec.  411.351) at 
the time it is provided to the physician. For purposes of this 
paragraph (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 certification criteria identified in the then-applicable 
version of 45 CFR part 170.
    (3) [Reserved]
    (4)(i) Before receipt of the initial donation of items and services 
or the donation of replacement items and services, the physician pays 
15 percent of the donor's cost for the items and services.
    (ii) Except as provided in paragraph (w)(4)(i) of this section, 
with respect to items and services received from the donor after the 
initial donation of items and services or the donation of replacement 
items and services, the physician pays 15 percent of the donor's cost 
for the items and services at reasonable intervals.
    (iii) The donor (or any party related to the donor) does not 
finance the physician's payment or loan funds to be used by the 
physician to pay for the items and services.
    (5) Neither the physician nor the physician's practice (including 
employees and staff members) makes the receipt of items or services, or 
the amount or nature of the items or services, a condition of doing 
business with the donor.
    (6) Neither the eligibility of a physician for the items or 
services, nor the amount or nature of the items or services, is 
determined in 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:
    (i) The determination is based on the total number of prescriptions 
written by the physician (but not the volume or value of prescriptions 
dispensed or paid by the donor or billed to the program);
    (ii) The determination is based on the size of the physician's 
medical practice (for example, total patients, total patient 
encounters, or total relative value units);
    (iii) The determination is based on the total number of hours that 
the physician practices medicine;
    (iv) The determination is based on the physician's overall use of 
automated technology in his or her medical practice (without specific 
reference to the use of technology in connection with referrals made to 
the donor);
    (v) The determination is based on whether the physician is a member 
of the donor's medical staff, if the donor has a formal medical staff;
    (vi) The determination is based on the level of uncompensated care 
provided by the physician; or
    (vii) The determination is made in any reasonable and verifiable 
manner that does not directly take into account the volume or value of 
referrals or other business generated between the parties.
    (7) The arrangement is set forth in a written agreement that--
    (i) Is signed by the parties;
    (ii) Specifies the items and services being provided, the donor's 
cost of the items and services, and the amount of the physician's 
contribution; and
    (iii) Covers all of the electronic health records items and 
services to be provided by the donor. This requirement is met if all 
separate agreements between the donor and the physician (and the donor 
and any family members of the physician) incorporate each other by 
reference or if they cross-reference a master list of agreements that 
is maintained and updated centrally and is available for review by the 
Secretary upon request. The master list must be maintained in a manner 
that preserves the historical record of agreements.
    (8) [Reserved]
    (9) For items or services that are of the type that can be used for 
any patient without regard to payer status, the donor does not 
restrict, or take any action to limit, the physician's right or ability 
to use the items or services for any patient.
    (10) The items and services do not include staffing of physician 
offices and are not used primarily to conduct personal business or 
business unrelated to the physician's medical practice.
    (x) Assistance to compensate a nonphysician practitioner. (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:

[[Page 77679]]

    (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 referrals by--
    (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 
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.
    (2) Records of the actual amount of remuneration provided under 
paragraph (x)(1) of this section by the hospital to the physician, and 
by the physician to the nonphysician practitioner, must be maintained 
for a period of at least 6 years and made available to the Secretary 
upon request.
    (3) For purposes of this paragraph (x), ``nonphysician 
practitioner'' means a physician assistant as defined in section 
1861(aa)(5) of the Act, a nurse practitioner or clinical nurse 
specialist as defined in section 1861(aa)(5) of the Act, a certified 
nurse-midwife as defined in section 1861(gg) of the Act, a clinical 
social worker as defined in section 1861(hh) of the Act, or a clinical 
psychologist as defined at Sec.  410.71(d) of this subchapter.
    (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.
    (5) For purposes of paragraph (x)(1) of this section, ``geographic 
area served by the hospital'' has the meaning set forth in paragraph 
(e)(2) of this section.
    (6) For purposes of paragraph (x)(1) of this section, a 
``compensation arrangement'' between a physician (or the physician 
organization in whose shoes the physician stands under Sec.  
411.354(c)) and a nonphysician practitioner--
    (i) Means an employment, contractual, or other arrangement under 
which remuneration passes between the parties; and
    (ii) Does not include a nonphysician practitioner's ownership or 
investment interest in a physician organization.
    (7)(i) This paragraph (x) may be used by a hospital, federally 
qualified health center, or rural health clinic only once every 3 years 
with respect to the same referring physician.
    (ii) Paragraph (x)(7)(i) of this section does not apply to 
remuneration provided by a hospital, federally qualified health center, 
or rural health clinic to a physician to compensate a nonphysician 
practitioner to provide NPP patient care services if--
    (A) The nonphysician practitioner is replacing a nonphysician 
practitioner who terminated his or her employment or contractual 
arrangement to provide NPP patient care services with the physician (or 
the physician organization in whose shoes the physician stands) within 
1 year of the commencement of the employment or contractual 
arrangement; and
    (B) The remuneration provided to the physician is provided during a 
period that does not exceed 2 consecutive years as measured from the 
commencement of the compensation arrangement between the nonphysician 
practitioner who is being replaced and the physician (or the physician 
organization in whose shoes the physician stands).
    (8)(i) This paragraph (x) 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.
    (ii) The ``geographic area served'' by a federally qualified health 
center or a rural health clinic has the meaning set forth in paragraph 
(e)(6)(ii) of this section.
    (y) Timeshare arrangements. Remuneration provided under an 
arrangement for the use of premises, equipment, personnel, items, 
supplies, or services if the following conditions are met:
    (1) The arrangement is set out in writing, signed by the parties, 
and specifies the premises, equipment, personnel, items, supplies, and 
services covered by the arrangement.
    (2) The arrangement is between a physician (or the physician 
organization

[[Page 77680]]

in whose shoes the physician stands under Sec.  411.354(c)) and--
    (i) A hospital; or
    (ii) Physician organization of which the physician is not an owner, 
employee, or contractor.
    (3) The premises, equipment, personnel, items, supplies, and 
services covered by the arrangement are used--
    (i) Predominantly for the provision of evaluation and management 
services to patients; and
    (ii) On the same schedule.
    (4) The equipment covered by the arrangement is--
    (i) Located in the same building where the evaluation and 
management services are furnished;
    (ii) Not used to furnish designated health services other than 
those incidental to the evaluation and management services furnished at 
the time of the patient's evaluation and management visit; and
    (iii) Not advanced imaging equipment, radiation therapy equipment, 
or clinical or pathology laboratory equipment (other than equipment 
used to perform CLIA-waived laboratory tests).
    (5) The arrangement is not conditioned on the referral of patients 
by the physician who is a party to the arrangement to the hospital or 
physician organization of which the physician is not an owner, 
employee, or contractor.
    (6) The compensation over the term of the arrangement is set in 
advance, consistent with fair market value, and not determined--
    (i) In any manner that takes into account the volume or value of 
referrals or other business generated between the parties; or
    (ii) 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.
    (7) The arrangement would be commercially reasonable even if no 
referrals were made between the parties.
    (8) [Reserved]
    (9) The arrangement does not convey a possessory leasehold interest 
in the office space that is the subject of the arrangement.
    (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 
$5,000 per calendar year, as adjusted for inflation in accordance with 
paragraph (z)(3) 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 would be commercially reasonable even if no 
referrals were made between the parties.
    (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 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 provided while using the 
premises or equipment 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 or equipment covered by 
the arrangement to the party to which the permission is granted.
    (vi) If remuneration to the physician is conditioned on the 
physician's referrals to a particular provider, practitioner, or 
supplier, the arrangement satisfies the conditions of Sec.  
411.354(d)(4).
    (2) A physician may provide items or services through employees 
whom the physician has hired for the purpose of performing the 
services; through a wholly-owned entity; or through locum tenens 
physicians (as defined at Sec.  411.351, except that the regular 
physician need not be a member of a group practice).
    (3) The annual aggregate 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 at 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 12 
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 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.
    (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

[[Page 77681]]

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 at 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.
    (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 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.
    (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 is responsible to repay or 
forgo no less than 10 percent of the total value of the remuneration 
the physician receives under the value-based arrangement.
    (3) Value-based arrangements. Remuneration paid under a value-based 
arrangement, as defined at 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 outcome measures against which the recipient of the 
remuneration is assessed, if any.
    (ii) The outcome measures against which the recipient of the 
remuneration is assessed, if any, are objective, measurable, and 
selected based on clinical evidence or credible medical support.
    (iii) Any changes to the outcome measures against which the 
recipient of the remuneration will be assessed are made prospectively 
and set forth in writing.
    (iv) 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.
    (v) The remuneration is for or results from value-based activities 
undertaken by the recipient of the remuneration for patients in the 
target patient population.
    (vi) The arrangement is commercially reasonable.
    (vii)(A) No less frequently than annually, or at least once during 
the term of the arrangement if the arrangement has a duration of less 
than 1 year, the value-based enterprise or one or more of the parties 
monitor:
    (1) Whether the parties have furnished the value-based activities 
required under the arrangement;
    (2) Whether and how continuation of the value-based activities is 
expected to further the value-based purpose(s) of the value-based 
enterprise; and
    (3) Progress toward attainment of the outcome measure(s), if any, 
against which the recipient of the remuneration is assessed.
    (B) If the monitoring indicates that a value-based activity is not 
expected to further the value-based purpose(s) of the value-based 
enterprise, the parties must terminate the ineffective value-based 
activity. Following completion of monitoring that identifies an 
ineffective value-based activity, the value-based activity is deemed to 
be reasonably designed to achieve at least one value-based purpose of 
the value-based enterprise--
    (1) For 30 consecutive calendar days after completion of the 
monitoring, if the parties terminate the arrangement; or
    (2) For 90 consecutive calendar days after completion of the 
monitoring, if the parties modify the arrangement to terminate the 
ineffective value-based activity.
    (C) If the monitoring indicates that an outcome measure is 
unattainable during the remaining term of the arrangement, the parties 
must terminate or replace the unattainable outcome measure within 90 
consecutive calendar days after completion of the monitoring.
    (viii) The remuneration is not an inducement to reduce or limit 
medically necessary items or services to any patient.
    (ix) 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.
    (x) 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 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.
    (xi) 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.
    (xii) For purposes of this paragraph (aa)(3), ``outcome measure'' 
means a benchmark that quantifies:
    (A) Improvements in or maintenance of the quality of patient care; 
or

[[Page 77682]]

    (B) Reductions in the costs to or reductions in growth in 
expenditures of payors while maintaining or improving the quality of 
patient care.
    (bb) Cybersecurity technology and related services. (1) Nonmonetary 
remuneration (consisting of technology and services) necessary and used 
predominantly to implement, maintain, or reestablish cybersecurity, if 
all of the following conditions are met:
    (i) 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.
    (ii) 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.
    (iii) The arrangement is documented in writing.
    (2) For purposes of this paragraph (bb), ``technology'' means any 
software or other types of information technology.

0
3. Effective January 1, 2022, Sec.  411.352 is further 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 may be paid a share of overall profits that is 
not directly 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 
directly relate 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 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 not 
directly related to the volume or value of the physician's referrals 
(except that the bonus may directly relate to the volume or value of 
the physician's referrals 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.
    (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 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.
    (3) Value-based enterprise participation. Notwithstanding paragraph 
(g) of this section, profits from designated health services that are 
directly attributable to a physician's participation in a value-based 
enterprise, as defined at Sec.  411.351, may be 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.

    Dated: Novemeber 19, 2020.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2020-26140 Filed 11-20-20; 4:15 pm]
 BILLING CODE 4120-01-P